Ekf Diagnostics Regulatory News (EKF)

EKF Diagnostics Holdings plc

("EKF", the "Company" or the "Group")

Half-year Report

Further upgrade to current year trading

EKF Diagnostics Holdings plc (AIM: EKF), the AIM listed point-of-care business, announces its unaudited interim results for the six months ended 30 June 2021, as well as a further upgrade to current year trading.

The strong trading from the beginning of the year continued into the second quarter of 2021. This continues to reflect improving trading in the core business and ongoing strong demand for EKF's contract manufacturing services for COVID-19 sample collection devices and associated kits. The Board is now very confident that trading for the full year will be comfortably ahead of already materially upgraded management expectations.

Financial Highlights

· Revenue up 46.5% to £38.56m (H1 2020: £26.33m)

· Adjusted EBITDA* up 42.9% to £12.76m (H1 2020: £8.93m)

· Net profit after tax up 122% to £9.19m (H1 2020: £4.14m)

· Net cash generated from operations of £1.13m (H1 2020: £6.94m)

· Net cash of £20.38m (30 June 2020: £16.28m) (31 December 2020: £21.41m)

· Dividend of 1.1p per ordinary share to be paid on 1 December 2021 (record date: 5 November 2021)

* Earnings before interest, tax, depreciation and amortisation adjusted for exceptional items and share-based payments

Operational Highlights

· Core business revenues up £1.21m (6%) in first six months of 2021

· Life Sciences revenues including contract manufacturing for PrimeStore MTM and PBS up 142%to £18.50m

· Signed multi-million dollar global supply contract for phosphate-buffered saline (PBS) withglobal private sector partner, whilst also broadening customer base and reducing reliance on this single customer

· Opened new PrimeStore MTM and PBS manufacturing facilities in Cardiff and Boerne to meet wider customer demand in UK and USA

· Trellus Health admitted to AIM on 28 May 2021

Christopher Mills, Non-Executive Chairman of EKF, commented:

"The Board is very confident that trading for the year ending 31 December 2021 will be comfortably ahead of already upgraded management expectations.

"The Group remains confident that its growth strategy, as outlined to shareholders at the Annual General Meeting in May, and set out above, will create a business which, aside from any COVID-19 related revenues, is capable of generating significant double-digit growth in adjusted EBITDA over the next three to four years."

A copy of the investor presentation is available here: https://www.ekfdiagnostics.com/documents-reports.html

EKF Diagnostics will be hosting a live online presentation open to all investors on Wednesday 15 September 2021 at 5.15 pm (BST), via video conference call. If you would like to register, please contact Walbrook PR on 020 7933 8780 or email ekf@walbrookpr.com. 

BUSINESS REVIEW

The strong trading from 2020 and the beginning of the year continued into the second quarter of 2021. This continues to reflect improving trading in the core business and ongoing strong demand for our contract manufacturing services for COVID-19 sample collection devices and associated kits. The Board is now very confident that trading for the full year will be comfortably ahead of already materially upgraded management expectations.

Revenues for the six months ended 30 June 2021 were £38.56m (H1 2020: £26.33m), an increase of 46.5%. Adjusted EBITDA was up by 42.9% at £12.76m (H1 2020: £8.93m). Earnings per share have increased by 126%.

Strategy

Our aim over the next four years is to use our internally generated resources to:

1. invest in the existing core business to maximise the value of our distribution network and drive aggressive organic growth (including investment in the existing contract fermentation business);

2. continue to maximise value for EKF shareholders from our agreement with Mount Sinai Innovation Partners ("MSIP"), which allows us advanced access to innovative commercial opportunities and where we can build on the ongoing successes of Renalytix plc, Verici Dx plc and the further success that we are confident Trellus Health plc will see;

3. seek out complementary and targeted earnings-enhancing acquisitions with key strategic value to the core business;

4. deliver against these aims and allow us to continue to follow a progressive dividend policy and to generate enhanced shareholder returns; and

5. continue to maximise the opportunity to assist clients to control the impact of COVID-19, and to evolve our new contract manufacturing capabilities in this area to a broader range of diagnostic and other healthcare settings.

We have made good progress against these objectives, as set out below. Discussions are progressing as planned for a number of earnings enhancing acquisitions, and we have identified a number of potential products to expand our existing core business.

Operations

Diabetes

Sales in the diabetes segment have seen good growth in the period, reaching £10.18m, an increase of 8%, with improvements coming across the majority of the diabetes portfolio as our distribution partners saw growth returning. In particular, sales of β-HB (Beta-Hydroxybutyrate) were up 14% year-on-year, including a contribution from an OEM agreement with a leading distributor. Sales of Quo-Test and Quo-Lab are up 24% and 18% respectively, however sales of the STAT-Site product line have reduced following the discontinuation of STAT-Site β-HB due to obsolescence of components.

Hematology

Overall, revenues from our hematology portfolio have been flat. Within this we have seen 12% growth of our DiaSpect Tm product, primarily driven by our OEM agreements with Fresenius and McKesson. Meanwhile, global hematology screening programmes have continued to be affected by the COVID-19 pandemic, although we have seen signs of programmes beginning to come online again in the latter part of the year, and in particular our major customer in Peru has started to significantly increase their orders as the territory opens up and much needed screening programmes are coming back online.

Contract Manufacturing

Infectious disease test kits

We have continued to see strong demand for our contract manufacturing product lines across our manufacturing sites in the US, Germany, and the UK. Due to our direct relationships with major end users, we have switched towards end user customers and away from sales direct to Longhorn to the mutual benefit of Longhorn and EKF. At the same time, we have seen a change in the mix of products we are being requested to manufacture, with emphasis moving from PrimeStore MTM filled tubes towards tubes filled with Phosphate Buffered Saline (PBS) which we have introduced as a low-cost alternative to MTM. However, we continue the production of PrimeStore MTM tubes for public health systems customers in the UK and Ireland, as well as the manufacture and collation of home testing kits that are distributed through the two largest high street pharmacy chains in the UK, and a new contract for supply of PrimeStore MTM to testing labs based at major UK airports.

In addition, we continue to manufacture kits for employee testing purposes as well as home testing kits including PBS and swab for distribution in US and Europe via our major industrial partner.

This business is servicing customers in the US, the UK, and Europe, including public health authorities in the UK and Ireland, universities, and private laboratories, as well as our major industrial partner. Whilst this major industrial partner represented less than half of our contract manufacturing revenues for PrimeStore MTM and PBS for the first half of the year, we have already seen a shift to a wider mix of revenues from a broader customer base. We expect to see the share of revenue contribution from other customers continue to rise as we move through the year.

In addition, with the expectation that sales of these products will continue for the foreseeable future, we are adding two further factory units to our existing site in Cardiff which was opened in January, and have added off-site manufacturing space in Boerne.

It is a measure of our success in creating and servicing this business, which we started from scratch last year, that we are now discussing the supply of products for non-COVID-19 indications, driven by demand from our customers. These products include areas such as in molecular diagnostics for which work has already started in the US. We see this as a significant growth opportunity for EKF.

Central Laboratory & Life Sciences

Our Central laboratory and Life Sciences sector combines revenues derived from Clinical Chemistry, lab analysers, contract fermentation and enzymes. Central Laboratory sales continue to be affected by the pandemic, mainly in the USA.

We continue to see a strong pipeline of opportunities to supply contract manufacturing services from our Elkhart and South Bend sites, and have committed resources to add capacity. The construction of new fermenters is in progress, work having commenced on a new fermentation facility with a total investment of $9.3m, of which $3.4m has already been paid on deposit, and the aim of delivering significant revenues by 2024. These opportunities are arising in the research and molecular enzyme areas as well as food grade fermentation digestive proteins.

Other

This category includes sales of a number of products including our Lactate Scout sports medicine product and other diagnostic tests, the most important of which is for pregnancy. With an end to the shutdown of professional sports in Europe we have seen an improvement in Lactate Scout sales which have grown by 40% year on year.

PartnerShip with Mount Sinai

Our Preferred Partnership Agreement (PPA) with Mount Sinai Innovation Partners (MSIP) provides us with advanced access to innovative commercial opportunities arising from Mount Sinai Health System owned technologies, managed by MSIP, in the field of healthcare technologies. This relationship had already lead to the successful spin-out of Renalytix plc ("Renalytix") and their subsequent spin-out of Verici Dx plc ("Verici"). Our residual holding in Renalytix is valued at £10.8m (as at 30 June), and our holding in Verici, received as a dividend from Renalytix, is valued at 30 June at £1.8m.

In May 2021, Trellus Health plc, which was formed by MSIP, EKF, and its management in 2020, successfully floated on AIM. EKF's investment in Trellus was transferred to relevant EKF shareholders in 2020.

Following the completion of his tenure as CEO of the Group, Julian Baines will take responsibility for the management of our relationship with MSIP. A pipeline of new opportunities has been identified.

Financial review

Revenue

Revenue for the period was £38.56m (H1 2020: £26.33m), an increase of 46.5%.

Gross profit

Gross profit is £18.54m (H1 2020: £14.91m). The gross profit margin is 48% (H1 2020: 57%). The gross margin percentage has reduced mainly as a result of the product mix.

Administrative expenses

In H1 2021, administrative expenses have reduced to £7.02m (H1 2020: £8.25m), representing 18.2% of revenue for the period (H1 2020: 31.3%). The reduction is largely caused by a credit for share-based payments following the ending of the cash-settled share-based payment incentive scheme for two Directors. The scheme for a senior employee remained in place at the period end. Administrative expenses include research and development (R & D) costs of £0.61m (H1 2020: £0.63m). In addition, further R & D costs of £0.32m (H1 2020: £0.31m) have been capitalised. Non-exceptional administrative costs have increased by 3.4% compared to H1 2020 mainly due to increased sales volumes, as well as further expenditure on quality assurance and regulatory costs as a result of the increased regulatory burden in Europe.

To aid understanding, administrative expenses in each period are made up as follows:

The charge for depreciation of fixed assets and for the amortisation of intangibles is £2.83m (H1 2020: £2.32m).

Operating profit and adjusted earnings before interest tax and depreciation

The Group generated an operating profit of £11.56m (H1 2020: £6.72m). We consider a more meaningful measure of underlying performance is obtained by examining adjusted EBITDA, which for H1 2021 was £12.76m (H1 2020: £8.92m). This excludes the effects of a credit for share-based payments of £1.39m (H1 2020: charge of £0.30m) and exceptional profits of £0.23m (H1 2020: £0.41m). The increase in operating profit and adjusted EBITDA is caused by the substantial increase in volumes associated with sales of contract manufacturing products.

Finance costs

Finance costs are £0.16m (H1 2020: £0.47m). The main charge results from an increase in the fair value of deferred consideration, the size of which is determined by the increase in EKF's share price.

Tax

There is a tax charge of £2.24m (H1 2020: £2.11m). The increase partly reflects the increase in profit, but also that expenses relating to the cash-settled share-based payment incentive scheme, accrued in previous years, are now deductible for tax purposes as a result of payments having been made.

Earnings per share

Basic earnings per share has increased to 1.99p (H1 2020: 0.88p), an increase of 126%. Diluted earnings per share are 1.98p (H1 2020: 0.87p)

Balance sheet

Fixed assets

We have capitalised £1.47m (H1 2020: £1.19m) of property plant and equipment. The expenditure includes continuing work on improvements to the facilities in South Bend and Elkhart in the US, further automation in Germany, and the cost of fitting out the first stage of the new manufacturing facility in Cardiff. Further expenditure in South Bend and Elkhart, in Germany, and for the second stage of the Cardiff facility is planned for the second half of the year.

Intangible assets

The value of intangible fixed assets is £35.13m (31 December 2020: £37.05m). The decrease is mainly the result of amortisation plus exchange rate movements. An amount of £0.62m has been capitalised.

Investments

Investments includes our holdings in Renalytix plc and Verici Dx plc. The investments are held at fair value which has been calculated based on the market value of the shares which at 30 June 2021 was £10.80 (31 December 2020: £4.875) per share for Renalytix and £0.685 (31 December 2020: £0.585) per share for Verici. The resulting unrealised gain during H1 2021 of £6.21m is shown as a movement in Other comprehensive income.

Deferred consideration

The remaining deferred consideration relates to the share-based payment to the former owner of EKF-Diagnostic GmbH. Finalisation of the position is expected to conclude shortly.

Cash and working capital

The gross cash position at 30 June 2021 was £20.78m (31 Dec 2020: £16.90m), and the Group had cash net of bank borrowings of £20.38m (31 Dec 2020: £16.28m).

Cash generated from operations in H1 2020 is £1.13m (H1 2020: £6.94m). Inventory levels have increased as a result of the increase in order volume but also to ensure security of component supply. Trade debtors have increased as a result of increased trading activity and because of extended terms granted to certain commercial partners. We have continued to see very little evidence to date of collection difficulties as a result of COVID-19. Payables have reduced because of payments made in relation to the cash-settled share-based payment incentive scheme.

Capital structure

We have not made any share buy backs during the period. Our authorisation to make further share buy backs remains in place and we will make further purchases if considered appropriate.

Dividend

At the Annual General Meeting in May 2021 shareholders approved the payment of a dividend of 1.1p per ordinary share, to be paid on 1 December 2021 to shareholders on the register at close of business on 5 November 2021. As this declaration is irrevocable, the value of £5.005m is shown as a liability with the debit shown in the statement of changes in equity.

Outlook

The Board is very confident that trading for the year ending 31 December 2021 will be comfortably ahead of already materially upgraded management expectations.

The Group remains confident that its growth strategy, as outlined to shareholders at the Annual General Meeting in May, and set out above, will create a business which, aside from any COVID-19 related revenues, is capable of generating significant double-digit growth in adjusted EBITDA over the next three to four years.

Christopher Mills

Non-Executive Chairman

14 September 2021

NOTES FORMING PART OF THE INTERIM FINANCIAL STATEMENTS

1. General information and basis of presentation

EKF Diagnostics Holdings plc is a public limited company incorporated in the United Kingdom (Registration Number 04347937). The address of the registered office is Avon House, 19 Stanwell Road, Penarth, CF64 2EZ.

The Group's principal activity is the development, manufacture, and supply of products into the in-vitro diagnostics (IVD) market place. Within this area, the Group has a growing business in contract manufacturing.

The financial information in these interim results is that of the holding company and all of its subsidiaries. It has been prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006 ("IFRS"). The accounting policies applied by the Group in this financial information are the same as those applied by the Group in its financial statements for the year ended 31 December 2020 and which will form the basis of the 2021 financial statements except for a number of new and amended standards which have become effective since the beginning of the previous financial year. These new and amended standards are not expected to materially affect the Group.

Certain statements in this announcement constitute forward-looking statements. Any statement in this announcement that is not a statement of historical fact including, without limitation, those regarding the Company's future expectations, operations, financial performance, financial condition and business is a forward-looking statement. Such forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially. These risks and uncertainties include, amongst other factors, changing economic, financial, business or other market conditions. These and other factors could adversely affect the outcome and financial effects of the plans and events described in this announcement and the Company undertakes no obligation to update its view of such risks and uncertainties or to update the forward-looking statements contained herein. Nothing in this announcement should be construed as a profit forecast.

The financial information presented herein does not constitute full statutory accounts under Section 434 of the Companies Act 2006 and was not subject to a formal review by the auditors. The financial information in respect of the year ended 31 December 2020 has been extracted from the statutory accounts which have been delivered to the Registrar of Companies. The Group's Independent Auditor's report on those accounts was unqualified, did not include references to any matters to which the auditor drew attention by way of emphasis without qualifying their report and did not contain a statement under section 498(2) or 498(3) of the Companies Act 2006. The financial information for the half years ended 30 June 2021 and 30 June 2020 is unaudited and the twelve months to 31 December 2020 is audited.

These interim accounts have not been prepared in accordance with the UK-adopted International Accounting Standard 34, "Interim Financial Reporting".

2. Significant accounting policies

Going concern

The Group meets its day-to-day working capital requirements through the use of cash reserves and existing bank facilities.

The Directors have considered the applicability of the going concern basis in the preparation of these financial statements. This included the review of internal budgets and financial results which show, taking into account reasonably probable changes in financial performance, that the Group should be able to operate within the level of its current funding arrangements. While we have seen some disruption to our core business as a result of the COVID-19 pandemic, current trading suggests that our base case forecasts are still applicable. In addition, our range of COVID related products has been highly successful, bringing significant benefits to the Group, including higher revenue, profits, and cash balances. We believe the Group is in a strong position, however it is difficult to assess reliably whether there will be any material disruption in the future, and for how long our COVID range will remain relevant. We have modelled a number of scenarios covering reductions in revenue of 10% and 50%, without taking into account the potential benefits of any mitigation strategies such as potential cost savings or insurance claims. While the eventual severity and length of the economic disruption stemming from the pandemic is impossible to forecast these models give the Directors reasonable confidence that the business can survive our worst case scenarios for reductions in revenue for at least the next 12 months.

After making enquiries, the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. For this reason the Group continues to adopt the going concern basis in the preparation of the financial statements.

3. Segmental reporting

Management has determined the Group's operating segments based on the monthly management reports presented to the Chief Operating Decision Maker ('CODM'). The CODM is the Executive Directors and the monthly management reports are used by the Group to make strategic decisions and allocate resources.

The principal activity of the Group is the design, development, manufacture and selling of diagnostic instruments, reagents and certain ancillary items. This activity takes place across various countries, such as the USA, Germany, Russia, and the United Kingdom, and as such the Board considers the business primarily from a geographic perspective. Although not all the segments meet the quantitative thresholds required by IFRS 8, management has concluded that all segments should be maintained and reported.

The reportable segments derive their revenue primarily from the manufacture and sale of medical diagnostic equipment. Other services include the servicing and distribution of third party company products under separate distribution agreements.

Currently the key operating performance measures used by the CODM are Revenue and adjusted EBITDA (earnings before interest, tax, depreciation and amortisation, adjusted for exceptional items and share-based payments).

The segment information provided to the Board for the reportable geographic segments is as follows:

Period ended 30 June 2021 unaudited

Year ended December 2020 audited

Period ended 30 June 2020 unaudited