Chief Executive's Review

Operations

I am delighted to report that 2016 has been a year of positive transformation which has seen a strong performance across the Group which exceeded market forecasts which themselves had been upgraded throughout the year. We have seen a considerable improvement in revenue growth and profitability, with cash generation strong over the year which coupled with a successful share placing in June 2016 allowed us to move into a net cash position and significantly reduce our borrowings.

This turnaround has been achieved with quite remarkable speed, and all employees can be very proud of these results. Our plans for 2017 are equally as ambitious.

Structural change

Actions taken in 2016 have built upon those started in 2015 and before. Our small remaining presence in Ireland has ended and the biomarker business line has been sold to a third party for a nominal sum. The residual staff who had been located in the former Quotient facility in Walton-on-Thames, UK, have also left the Group, and the building handed back to the landlords. The STI facility in Sanford, Florida was closed in Q3, and all activities transferred to our main US facility in Boerne, Texas. A small number of staff have transferred or are continuing to operate from home offices. As part of this transfer we have taken the opportunity to review and rationalise the STI product range. Finally, the DiaSpect facility in Sailauf, Germany has been closed down. Administrative, sales, and finance functions are now integrated into our main European factory in Barleben in Germany. The manufacturing operations have been transferred to DiaSpect's long term third party sub-contractor, which has also taken occupancy of that part of the Sailauf facility they did not already occupy. We have therefore now concentrated operations on eight sites, a reduction of four. We are continuing to review operations to minimise costs and maximise efficiency.

As a result of the structural changes, the number of employees has reduced from a peak of 403 in early 2015 to 299 by December 2016. Regrettably much of this reduction has had to be achieved through compulsory redundancy, and we offer former employees our best wishes for the future.

Point-of-Care

Our Point-of-Care business has seen a very successful year. EKF's business model is to sell analysers into the market and then benefit from the ongoing revenue stream generated by sales of the dedicated consumables. Over the last four years we have sold almost 70,000 analysers for use worldwide, and in 2016 we supplied almost 70m tests for use on these, an increase of 9.8% over the previous year.

i.     Hematology

Sales of Hematology products have increased by 58% to £11.70m (2015: £7.37m), with revenues benefiting from the return of US HemoPoint H2 sales to EKF control from Alere in June 2016. This has led to improved margin and sales, with US sales of HemoPoint H2 (sold as Hemo Control in the rest of the world) up 101% year-on-year. Sales of DiaSpect Tm are up 53%.

ii.    Diabetes

In Diabetes, revenues were up by 58% year-on-year to £10.20m (2015: £6.46m), with a particularly successful year for Biosen (up 79% year-on-year) and Quo-Test (up 62%). We have continued to supply Quo-Test products to Saudi Arabia under the tender won in 2015, and have been awarded a follow up contract for 2016-17. Registration issues which had caused Biosen sales to China to pause in 2015 have now been solved, which is reflected in the rise in overall unit sales. Sales of STAT-Site M β-HB rose by 143% over the previous year.

iii.   Maternal & Women's Health

Revenues from our products that address aspects of maternal and women's health increased by 17% to £2.88m (2015: £2.46m). This has been driven by an improvement in sales of our Lactate Scout product line which are up by 31%, and pregnancy tests sales have increased by 10%.

Central Laboratory

Our Central laboratory sales show an overall improvement of 39% on the previous year to £12.05m (2015: £8.70m), and have continued to be driven by our β-HB Liquicolor reagent product. β-HB sales were up by 76% and we have continued to sign up additional hospitals in the US, resulting in sales doubling since 2012. We have had some success with our Altair 240 analyser product and are continuing to sign up distributors especially in Asia and the Middle East. As a result, Clinical Chemistry sales, which included our first Altair 240 sales were up 19%. Sales of our enzymes rose by 26% compared to last year. Our efforts in this segment are concentrating on building markets while continuing to increase penetration of our β-HB product.

New products

The new building at Barleben commenced in 2015 has now been completed and operations are beginning to move in. The building will house a number of new and updated production lines where we have determined that highly targeted capital expenditure can improve efficiency and capacity.

We took a conscious decision in early 2016 to concentrate on product development plus the development of technologies already owned by EKF. Not surprisingly this has meant that there has been relatively little movement in developing new products, with the majority of effort being expended on improving the quality of existing products. However our connectivity solutions for point-of-care instruments have been showcased at distributor shows such as Medica. With cash flow much improved we are focussing on the development of our sTNFR biomarker (early detection of end stage renal disease in diabetic patients), SensPoint (maternity care) and the redevelopment of our Lactate Scout for ambulatory care (early indication of Sepsis).

Outlook

The actions taken to turn around the Group in 2016 have had rapid and significant positive effects. We now have a stable platform for further growth based on driving the existing business and continuing to reduce cost.

Julian Baines

Chief Executive Officer

20 March 2017

FINANCE DIRECTOR'S Review

Results

2015 results show Selah Genomics Inc as a discontinued business.

Revenue

Revenue for the year was £38.6m (2015: £30.0m), an increase of 28%. Of the increase, 15.3% was the result of improvements in foreign currency exchange rates, largely because of the fall in the value of sterling against the US dollar and Euro in the second half of the year. The remainder of the increase comes from organic growth.

Revenue by disease state, which is presented for illustration purposes only, is as follows:

Gross profit

Gross profit increased to £18.3m (2015: £14.7m). The gross margin percentage on sales was 47.5% (2015: 48.8%), a further small decrease. This was once again affected by additional provisions taken against older stock balances.

Administration costs and research and development costs

Administration expenses have fallen substantially to £18.7m (2015: £29.2m). While 2015 had seen a sharp rise over the previous year, the reduction shows the effect of the cost saving programmes put in place during the year. Excluding depreciation, amortisation, and exceptional items, administration expenses were £14.0m (2015: £16.3m), a 14.1% reduction. R & D costs included in administration expenses were £2.0m, with a further £0.6m being capitalised as an intangible cost. Gross R & D expenses have therefore reduced from £5.4m in 2015 to £2.6m this year.

The charge for depreciation of fixed assets and amortisation of intangible assets is £5.0m (2015: £8.1m). There have been no impairments during 2016, following the refocusing of the business in late 2015 on our core products.

Exceptional items mainly relate to provisions made and costs incurred in the closures and relocations of the DiaSpect and STI manufacturing sites, offset by the release of an unutilised provision relating to EKF Molecular.

Operating profit and adjusted earnings before interest tax and depreciation

The Group made a small operating loss of £0.3m (2015: £14.3m). While this shows very considerable improvement, it indicates that there remains work to be done on increasing profitability. We continue to consider that adjusted earnings before interest, tax, depreciation and amortisation, share based payments and exceptional items (adjusted EBITDA) is a better measure of progress because the Board believes it gives clearer comparability of operating performance between periods. In 2016 we achieved adjusted EBITDA of £6.1m (2015: loss of £0.3m). The calculation of this non-GAAP measure is shown on the face of the income statement. It excludes the effect of share-based payment charges of £1.0m (2015: £0.2m) and exceptional losses of £0.5m (2015: £5.7m). Of the increase in adjusted EBITDA of £6.4m, £1.1m is attributable to the effect of more favourable exchange rates, with the remainder being attributable to improved underlying performance.

Finance costs

Finance costs have continued to fall, to £0.7m in 2016 (2015: £1.4m). This is largely as a result of lower charges relating to the discounting of deferred consideration than in previous years. External debt has been reduced during 2016 which should lead to lower debt interest in 2017 and beyond.

Tax

There is an income tax credit of £1.2m (2015: £2.2m). This is largely because of a tax refund received in the USA relating to the carry back of losses against previous years.

Balance sheet

Property, plant and equipment

Additions to fixed assets were £1.3m (2016: £2.3m) of which £0.6m related to the completion of the new building at Barleben.

Intangible assets

The increase in value of intangible assets from £42.9m to £46.5m is almost entirely attributable to foreign exchange movements as intangibles on consolidation are denominated in the functional currency of the underlying businesses, offset by the annual amortisation charge. 

Deferred consideration

The remaining deferred consideration relates to the share-based payment to the former owner of EKF-Diagnostic GmbH. Finalisation of the contracts to conclude the position is expected to take place in 2017.

Cash and working capital

At 31 December 2015, borrowings included a secured convertible loan of £3.0m from Zwanziger Family Ventures LLC (ZFV), a company associated with the Zwanziger family. This was repaid in April 2016 from the proceeds of a new loan of £3.0m from North Atlantic Smaller Companies Investment Trust PLC, a company associated with Christopher Mills. This in turn was repaid from the proceeds of a share placing which took place in June 2016, and raised £4.5m net of expenses. Gross cash rose in the year from £2.0m to £7.9m, and at the same time borrowings decreased from £10.8m to £5.7m. As a result the Group moved from having net debt of £8.8m to having net cash of £2.2m by the 2016 year end. Of the improvement in net debt, £6.5m has been generated internally.

Inventory has reduced to £6.0m (2015: £8.2m). Some of the reduction has come from efforts made to reduce inventory during the year and the remainder from increased inventory provisions.

Both receivables and payables have increased, reflecting increased activity during the year.

Richard Evans

Finance Director and Chief Operating Officer

20 March 2017 

Consolidated Income Statement