Chief Executive's Review

With organic revenue growth of 22%, and significant improvements to operating profit and adjusted earnings before interest, tax, depreciation, and amortisation, 2013 has seen EKF Diagnostics make excellent progress. This has been driven by a professional approach to sales and marketing and improved support and service to our distributors and end user customers. Additionally we have continued to integrate the businesses and focus on driving down costs and improving efficiencies.

Operations

Point-of-care

The year started and ended well with significant sales to Mexico. In January we supplied the remainder of the 2012 order for Hemo Control (sold in the USA as HemoPoint H2) cuvettes to the Instituto Mexicano del Seguro Social ("IMSS"), through our local distributor. Then in December we supplied a further 250 instruments and 52,000 boxes of cuvettes to Mexico through a number of targeted distributors. A further tender for IMSS is now expected to fall into 2014. Alere has continued to drive their HemoPoint H2 sales in the US and we are growing our market share as we see higher levels of pull-though of cuvette sales on an ever increasing installed device base. As a result overall Hemo Control revenues increased by 42%. Strategically during 2014 we will continue to look to grow our market share.

Quo-Test and Quo-Lab performed extremely well in 2013 growing turnover by 75%. During the year we sold 537 Quo-Test analysers and 1,426 Quo-Lab analysers. These products are now becoming fully established in the diabetes market. Quo-Lab has successfully achieved International Federation of Clinical Chemistry and Laboratory Medicine (IFCC) certification, adding to the NGSP certification already held. The IFCC reference measurement procedure is accepted worldwide as the analytical control for traceability of HbA1c measurement. Additionally Quo-Lab recently received registration approval in Mexico opening up another new market for the product.

With the exceptional performance of Quo-Lab and Quo-Test we have invested in an automated manufacturing line in Barleben for the manufacture of Quo-Lab cartridges which we expect to result in significantly reduced costs per test. This automated line will give us the opportunity to compete in emerging markets where NycoCard is the current market leader. We will now be entering new markets during 2014. Additionally an automated manufacturing line for Quo-Test cartridges should be completed by the end of Q3 enabling us to increase our margins on this platform too.

We have seen remarkably strong sales for our Biosen range of Glucose and Lactate analysers. These are used in clinical settings as well as by professional sports teams. Overall sales for Biosen products has increased by 20% year-on-year, with demand particularly strong in Russia and China. We are currently undertaking market research to evaluate new territories and markets for Biosen.

Strategically throughout 2014 we will be looking to build our diabetes brand. We have reached the stage where we can offer our customers a broad range of diabetes products with Quo-Lab, Quo-Test, Beta-Hydroxybutyrate (βHB) and Biosen. In 2014 we will be aiming to offer a comprehensive diabetes portfolio targeted at Point-of-care and small laboratories.

Central laboratory

In 2012 we saw sales of our βHB liquid reagent grow significantly. Despite the main competitor product returning to the market in 2013, sales of our βHB reagent have held up well, increasing 8%. Our other central laboratory products include fermentation produced enzyme products, which are sold to a number of high profile customers. Overall sales from our central laboratory products excluding βHB rose 26%. Whilst it is generally accepted that this is the smallest growth opportunity in our portfolio we will still be investing time and effort in launching a clinical chemistry analyser during 2014. This will enable our sales force to not only sell the reagents but the analysers as well, therefore offering a better overall service to our established customer base.

Molecular diagnostics

EKF Molecular Diagnostics was established at the beginning of 2013, and gained traction with the acquisition in March of the PointMan technology contained within 360 Genomics Limited. Since then EKF Molecular has launched seven kits for Research use only.  We will aim to have the kits registered for diagnostic use in Q3 when we expect to see sales increase in volume. Additionally we are speaking with a number of parties who have expressed an interest in licensing the products.

Our Xtract product is still undergoing external validation and the Company is working closely with both Arcis and third parties to bring a novel molecular product to market.

Strategically during 2014 the board will continue to seek to increase our presence in molecular diagnostics. This is the fastest growing area of diagnostics and EKF will strive to be at the forefront of the molecular diagnostics revolution.

New products

In July we launched the Group's new strip based tests using the STAT-Site M platform developed in the USA by Stanbio Laboratory. The new tests are for βHB, a ketone test which provides a quick and easy assessment of diabetic ketoacidosis; and Hgb (haemoglobin), for the rapid Point-of-care analysis of haemoglobin for anaemia determination.

Earlier in the year, we introduced a novel test to identify diabetic patients at high risk of progression to end stage renal disease up to 10 years in advance, which is well above the capabilities of currently available tests. Our new sTNFr1 test is an ELISA assay that has the potential to significantly improve diabetic patient management and outcomes. This test is the first output from the licence agreement with the Joslin Diabetes Center. This unique product will be a valuable addition to our diabetes portfolio. The relationship with Joslin is extremely important to EKF. It will give us a unique insight into further developments within diabetes and we are looking forward to developing a new and exciting portfolio of diabetes products through this relationship.

In November we launched the new version of our Lactate Scout+ analyser. Additional features and functionality such as haematocrit compensation, now mean the device can be used in new medical applications, such as obstetrics. As a world-leader in lactate, EKF has been closely involved in research projects investigating applications of lactate in obstetric medicine such as cord blood lactate analysis and foetal scalp lactate which can be used to confirm the need for immediate intervention in complicated births where there may be risk of insufficient foetal oxygen supply.  The Board feels that obstetrics alongside anaemia testing can be a major growth area for EKF. By combining our Hemo Control device with the new lactate monitor we aim to offer a significant service to every maternity ward globally.

We have a number of programmes building on our specialism in acute kidney injury (AKI).  We recently announced that we will start testing on clinical samples in collaboration with a subsidiary of Carclo plc to produce a novel Point-of-care device for detecting AKI, based on EKF's AKI marker and Carclo's micropoc-pro device. We are also continuing to develop our RenaStat AKI test, which has entered clinical trials at a hospital in Dublin.

Our development pipeline remains strong with a combination of projects to support our existing products in the marketplace together with new projects primarily in Point-of-care which will offer improved patient care in new disease areas.

Acquisition

On 8 March 2013 the Group acquired 360 Genomics Limited ("360"), whose main technology is PointMan. The initial consideration of £1.6m was satisfied through the issue of 5,649,717 new ordinary shares in EKF at an issue price of 28.32 pence per share. In addition, deferred contingent consideration of up to £8.0m is payable, depending mainly on the sales performance of the technologies acquired in the period up to 31 December 2019. 360 forms part of the Group's Molecular Diagnostics division.

Results

Revenue

Revenue for the year was £31.8m (2012: £26.1m), an increase of 22%, all of which comes from organic growth. 360 Genomics, which was acquired during the year, does not contribute directly to revenue.

Gross profit

Gross profit has increased to £16.3m (2012: £14.3m), which is an increase over the prior year of 14%. Gross profit as a percentage of revenue has reduced to 51.4% from 54.9% in 2012. This is largely as a result of a change in product mix.

Administration costs and research and development costs

Despite the 22% rise in revenue, administration costs have fallen by 1.4%. This is also despite the investment made this year in our molecular diagnostics division of £0.8m. It also reflects the inclusion of a number of exceptional items, discussed below. Included within administration expenses are research and development costs charged to the consolidated income statement of £1.2m (2012: £0.1m). The increase is partly as a result of a change in reporting this year. In 2012 only third party costs were included, in 2013 this has been expanded to include internal costs. In addition, the Group capitalised expenditure on development of £1.1m (2012: £0.9m). The Group capitalises development expenditure only when a successful product launch is probable, and otherwise charges expenditure to the income statement immediately.

The charge for depreciation and the amortisation of intangibles was £3.6m (2012: £3.1m).

Operating profit and adjusted earnings before interest tax and depreciation

The group has made an operating profit of £2.4m (2012: £0.2m). Earnings before interest, tax, depreciation and amortisation (EBITDA) for the year was £6.7m (2012: £3.3m). A more meaningful measure is considered to be Adjusted EBITDA which for 2013 was £4.8m (2012: £3.2m) which excludes the effects of share based payments (£0.7m (2012: £ 0.5m)) and exceptional profits of £1.8m (2012: £0.6m). Exceptional items include the estimated benefit from the tax related warranty claim against the former owner of EKF-diagnostic GmbH and some related provision releases, releases of deferred consideration provisions associated with the acquisitions of Quotient Diagnostics and Stanbio, an impairment charge relating to our Irish unit, and transaction costs associated with the acquisition of 360 Genomics Limited.

Finance costs

Finance costs have increased to £1.8m (2012: £0.4m). The increase is mainly as a result of a fair value adjustment to the outstanding deferred consideration payable in respect of the acquisition of EKF-diagnostic GmbH of £0.7m, and an increased charge for unwinding the fair value discount applied to deferred consideration of £0.7m (2012: £0.3m).

Tax

As outlined in the Admission Document published on 15 June 2010, part of the outstanding deferred consideration for the acquisition of EKF-diagnostic GmbH would be reduced to the extent that there have been any claims under the warranties in the acquisition agreement. The Company has been advised by its German tax advisers that there is a potential tax and associated interest liability associated with the EKF-diagnostic GmbH business prior to acquisition, estimated at €1.44m (£1.24m). Under the warranties of the acquisition agreement EKF has already withheld payment of part of the deferred consideration to cover this liability. The warranty claim effect of this £1.24m is included as a deduction from administration costs and has also been disclosed as an exceptional item. The tax liability effect is shown in corporation tax.

Balance sheet

Property, plant and equipment

We have invested £1.2m (2012: £1.0m) in property plant and equipment. The major projects have been the part completion of a new building for manufacturing and distribution at our factory in Barleben and the completion of the cuvette capacity upgrade there.

Intangible assets

The increase in intangible assets is due to the acquisition of 360 Genomics Limited, and the capitalisation of development costs. The development process for our Renastat AKI test has been longer and more complex than anticipated at the time EKF Diagnostics Limited (formerly Argutus Medical Limited) was purchased in 2010. Many of the issues have now been resolved and the product has now entered clinical trials in Dublin. However as a result of these delays the associated anticipated income stream has been pushed back resulting in the goodwill associated with this unit being impaired by £0.75m. The charge to the consolidated income statement has been included in exceptional items.

Deferred consideration

Payments in cash of deferred consideration have been made in respect of the acquisitions of Quotient Diagnostics Limited (£0.6m) and Stanbio Laboratory (£0.8m), in accordance with agreements made at the time of purchase.

The maximum deferred consideration payable in respect of the acquisition of Quotient Diagnostics Limited has been re-assessed, and as a result the provision has been reduced by £0.85m. Following the payment of deferred consideration in respect of certain tax indemnities relating to the acquisition of  Stanbio, the balance of the provision which is no longer required of £0.26m has been credited to income. The credits to the consolidated income statement have been shown as exceptional profits.

Cash and working capital

The Group has generated £3.1m (2012: £2.5m) of cash from operations during the year. Cash has reduced as a result of the investment in property, plant and machinery (£1.2m), in capitalised development costs (£1.1m), and in the payment of deferred consideration (£1.4m). In addition, working capital at the end of the year is significantly higher than normal as a result of the high sales level achieved in December.

Outlook

2014 is set to be a very exciting and rewarding year as we seek to expand our presence in diagnostics worldwide. With an installed base of c. 50,000 analysers globally and the Company manufacturing nearly 50 million tests we have a very strong infrastructure on which we can build a leading global diagnostic business.  Our trading in the period to date is in line with our expectations and due to timing of tenders we anticipate the weighting to be skewed further to the second-half of the year than previously.

We will be making every effort to increase our market share in haemoglobin testing, diabetes and molecular.  To that end we have a number of specific objectives in the current year including:

- Establishing a business in China to spearhead our expansion in the Asia Pacific Region

- Increasing the distribution footprint of our Stanbio products in Europe, the Middle East, and Africa

- Building upon our excellent existing OEM relationships and looking to expand upon these and secure new OEM contracts.

Our cost base remains under tight control but as we continue to expand we need to ensure that we attract the right calibre of people and that management is not overstretched. I anticipate adding to our management team as we continue to expand. We are also reviewing areas whereby we can increase margin by streamlining production and I will update you further on this shortly.

We anticipate a number of product launches throughout the year and our pipeline remains robust as we look to bolster our existing product offerings and introduce new ones which we believe can meet unmet clinical need.

We continue to review acquisition opportunities that we believe can add strategic value in our key areas of haemoglobin, diabetes and molecular. We also continue to review joint-venture opportunities in the areas of new product development, health economics and health education which we see as important drivers going forward.

With our goal to be one of the emerging leaders in diagnostic testing in a multi-disciplinary way we will aim to strengthen our presence in the US market.

I look forward to 2014 as EKF continues to build its name and reputation in the diagnostics arena and thank you for your continued support.

Julian Baines

Chief Executive Officer