Half-year Report

EKF Diagnostics Holdings plc

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

Half-year Report

EKF Diagnostics Holdings plc (AIM: EKF), the AIM-listed global diagnostics business, announces its unaudited interim results for the six months ended 30 June 2024 ("H1 2024"), a period showing strong improvement in gross margins, earnings growth and cash generation, in-line with management expectations.

Guidance for the full year performance remains unchanged from the 24 July 2024 Trading Update.

In 2023 EKF focussed on simplifying its business around key product lines within its two divisions, Point-of-Care and Life Sciences, as well as reducing and stabilising its cost base. The first half has seen the results of these efforts as the Company successfully focussed on its higher margin product ranges and core operations, with benefits continuing into the second half.

Financial highlights

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

Operational highlights

Julian Baines, Executive Chair of EKF, commented: "The Board remains confident in the outlook for the business overall and with orders already in house for the second half we are very confident that the Point of Care performance in Europe, Middle East and Africa will improve significantly. The actions we've taken are expected to yield further improvements in gross margins, earnings growth and cash generation, and as a result of our efficiency drive we now have a leaner business, with a cost base correctly aligned to a more focussed higher-margin product mix.

"The Company expects the improvement in performance to continue in H2 2024 and remains confident that full year results will be in-line with market expectations."

Copies of the interim results and associated investor presentation are available here:

https://www.ekfdiagnostics.com/documents-reports.html

Investor Presentation

EKF Diagnostics will be hosting a live online presentation open to all existing and potential investors on Wednesday 18 September 2024 at 4.30pm (BST), via the Investor Meet Company platform. Investors can sign up to Investor Meet Company for free and add to meet EKF Diagnostics via:

https://www.investormeetcompany.com/ekf-diagnostics-holdings-plc/register-investor

Investors who already follow EKF on the Investor Meet Company platform will automatically be invited.

A recording of the presentation, a PDF of the slides used, and responses to the Q&A session will be available on the Investor Meet Company platform afterwards.

The persons responsible for arranging the release of this announcement
on behalf of the Company are Julian Baines, Executive Chair, and Stephen Young, CFO.

About EKF Diagnostics Holdings plc (www.ekfdiagnostics.com)

EKF is an AIM-listed global diagnostics business focussed on:

EKF has headquarters in Penarth (near Cardiff) and operates five manufacturing sites across the US and Germany, selling into over 120 countries world-wide.

EXECUTIVE CHAIR'S STATEMENT

In the previous financial year we simplified the business by removing non-core, low-margin products from our portfolio, focussing on key product lines within our Point-of-Care and Life Sciences divisions. At the same time, we also reduced and stabilised our cost base in order to drive further margin improvement and enhance cash generation. I'm delighted to report that these actions are bearing fruit with our half year results showing strong improvement in gross margins, earnings growth and cash generation, in-line with management expectations.

OPERATIONAL OVERVIEW

Total revenues for the six months ended 30 June 2024, from core operations (excluding COVID-related, clinical chemistry and testing revenues), were £24.5m (H1 2023: £24.4m). Gross Margins improved further to 48.1% (H1 2023: 44.0%) and adjusted EBITDA was £5.4m (H1 2023: £4.4m).

Promised efficiencies delivered in H1

For much of last year we focussed on delivering efficiencies across both our operations and within our product portfolio and these have delivered improved gross margins, earnings growth and cash generation. By optimising efficiencies within our operations we were able to reduce the cost base by £1.9m and have established headcount at a sustainable level. We have cancelled low margin contracts, reviewed suppliers, and identified outsourcing opportunities. In terms of our external production needs, we have brought one process in-house at our facility in Magdeburg, Germany and have consolidated all of our liquid chemistry production into our in-house facility in Boerne, Texas. These actions have helped reduce costs, improve margin and allow us to manage raw material costs more effectively. A newly implemented electronic Quality Management System and upgraded IT infrastructure is expected to deliver further efficiencies and support further growth.

Within the portfolio we have discontinued several low margin product lines including the entire Clinical Chemistry range. We had committed to adding new features and functionality to our POC range and we expect to see the benefit of this in H2 as new tender opportunities are now available to us due to the connectivity that EKF Link^TM provides across a number of products. Within Life Sciences we have been able to significantly increase the yield for β-HB production having reviewed processes and run cycles to deliver better value. We have also looked to cancel or renegotiate all non-preferential partner agreements which will have a positive impact on overall product margins as the mix improves.

Further margin improvement expected

We expect that the adjusted EBITDA margin will improve in the second half following the delivery of efficiencies above, change of product mix and the increased weighting of higher margin product sales. Margins should continue to benefit further from the ramp-up in higher margin enzyme fermentation revenues within Life Sciences as utilisation of our additional capacity builds.

These improvements do not come at the expense of investment into capital expenditure, but allows us to focus on a core product range and we have an R&D roadmap in place which will deliver product improvements and cost reductions, as well as new product introductions. Further investment in injection moulding tool requirements and planned upgrades to existing production lines are expected to provide improved efficiencies and additional capacity to support growth. We also expect to benefit from further efficiencies driven by planned investment in automation in production and packing.

The first half shows broadly flat performance from Point-of-Care ("POC"), which is a reflection of the changing of product mix and the timings of a number of tender awards, such that we expect to see performance improve across a number of our POC product lines in the second half. The Life Sciences division has benefitted from continued growth in β-HB sales, and a ramp-up in fermentation revenues.

* POC - other, relating to other diagnostics tests.

** Life Sciences - Other, relating to contract manufacturing.

*** Other revenue relating to shipping and handling recharges, repairs and other sundries.

(1)  Point-of-Care

EKF continues to maintain a strong position within the global market for hematology and diabetes testing, with over 12,000 Point-of-Care analyzers and over 95 million individual test consumables sold in 2023.

·    Hematology

Total sales of our hematology analyzers and consumables were up 4% year-on-year. Our largest contributor to hematology revenues, Hemocontrol, grew by 10% reversing the declines we saw in FY 2023 (down 5%) and driving the overall performance of this product group. We expect this performance to continue into the second half as new tenders are now available to us due to the connectivity that our EKF Link^TM data management platform now provides for this product.

Revenues in our second largest hematology product, Diaspect Tm, were broadly flat year-on-year although the timing of sales related to our ongoing support of Egypt's Vision 2030 programme will deliver an improved performance in the second half, as these orders will be fulfilled entirely using in-house resources.

We continue to grow our presence in the global blood bank market and secured two new contract wins from the Red Cross in Hong Kong and in Thailand post-period end.

·    Diabetes

Our diabetes product portfolio saw an overall 11% decline in year-on-year sales, with all three key product lines (Biosen, Quo-Test and Quo-Lab) down compared to H1 2023. We are also seeing some movement in our user base for glycated haemoglobin (HbA1c) testing products as customers transition away from Quo-Lab to our higher margin Quo-Test; however, we expect to see this positively impact performance in the second half as we see greater consumable pull-through, particularly from a substantial tender in South Africa where analyzers have already been shipped, and many installed, but there has been a delay for diagnostic programmes using this equipment in becoming operational.

Biosen sales, our largest contributor within diabetes, were impacted by the greater effect of sanctions in Russia, and other customers have refrained from ordering new systems ahead of the launch of the new and enhanced Biosen C-Line, which offers improved connectivity and usability. Post-period end this updated product was made available to customers.

Whilst we expect to see a stronger performance from Quo-Test and Biosen in H2 2024, we don't expect overall revenues across the Diabetes product portfolio to exceed those levels seen in 2023.

(2)  Life Sciences

·    β-HB

Sales of our β-HB LiquiColor® reagent rose by 6% year-on-year as we continue to benefit from the White Label ("WL") contract with Thermo Fisher. Thermo Fisher has now depleted its pre-existing EKF-branded stock and regular stock ordering, and replenishment of the inventory with the new WL β-HB reagent has resumed.

Following the discontinuation of our STAT-Site M β-HB, we have been focussing on growing our userbase for our STAT-Site WB Analyzer, a handheld device for the quantitative determination of β-HB in whole blood. The roll-out of this product is continuing to develop well with a 50% increase in total sales year-on-year. We expect further sustained growth in consumables for the STAT-Site WB driven by the heavy push for initial analyzer sales in H2 2023.

·    Fermentation

Having opened the South Bend site in October 2023, we have seen a steady increase in revenues in the first half as we scale up output for our customers. Revenues for H1 2024 are up 41% through sales to new and existing customers compared to a low base in H1 2023 and we continue to aim to operate the site closer to optimal capacity by the beginning of 2026.

Russia and Ukraine

EKF owns 60% of O.O.O. EKF Diagnostika, a distribution subsidiary located in Moscow which sells EKF POC products and other third-party products into Russia and neighbouring states. As expressed earlier, sales continue to be impacted by the increased effect of sanctions in the region, even for essential medical supplies.

Cash held in Russia totalled £2.2m at the period end. Restrictions remain in place regarding the payment of foreign dividends in Russia and so this cash remains partly inaccessible, although £0.3m of further dividends were received from Russia during the period.

Outlook

Life Sciences has seen good growth in fermentation revenues and β-HB sales have continue to perform well. Within Point of Care, Hematology has delivered a robust performance and we expect to see this improve in H2 based on new shipments to Egypt confirmed and a number of additional wins relating to blood bank centres going live since the period-end. We should see improvements with Diabetes in the second half but as highlighted previously, it is unlikely that these products will reach the revenue levels seen in 2023. It is the nature of a business with a wide variety of products to see mixed performances across this portfolio.

The Board remains confident in the outlook for the business overall and with orders already in house for the second half we are very confident that the Point of Care performance in Europe, Middle East and Africa will improve significantly. All of the actions described above are expected to yield further improvements in gross margins, earnings growth and cash generation, and as a result of our efficiency drive we now have a leaner business, with a cost base correctly aligned to a more focussed higher-margin product mix.

The Company expects the improvement in performance to continue in H2 2024 and remains confident that full year results will be in-line with market expectations.

Julian Baines

Executive Chair

17 September 2024

Financial review

Revenue

Revenue for the period was £25.2m (H1 2023: £26.9m). During H1 2023, Advanced Diagnostic Laboratory (ADL), the Group's former testing business, was sold and UK contract manufacturing and testing ceased. These businesses had a combined revenue in H1 2023 of £1.2m. In H2 2023 we announced that we were winding down our Clinical Chemistry business due to its low margins, and had discontinued our STAT-Site M β-HB product line. These had a combined revenue in H1 2023 of £1.4m.

Revenue by Business Unit:

Revenue from core operations (excluding testing, clinical chemistry and STAT-Site M β-HB revenues) increased by 0.4%, with Point-of-care revenues affected by customers holding off on placing orders for the new Biosen product that is being launched in H2 2024.

* Other revenue relating to shipping and handling recharges, repairs and other sundries

Revenue by Geographical Segment:

Revenue in Germany was down, due to the Biosen launch previously highlighted, Quo-Lab, and an element of COVID related product sales.

In the USA, H1 2023 included Testing revenue achieved by ADL, plus higher levels of sales of the low margin products that are being phased out, however growth overall was still achieved.

The Group's Russian subsidiary, which is 60% owned by the Group, is consolidated in full in accordance with accounting standards. The interest of the minority shareholders is included as a separate item in the Consolidated Income statement.

Gross profit

Gross profit was £12.1m (H1 2023: £11.8m). The gross profit margin was 48.1% (H1 2023: 44.0%). The gross profit has increased marginally mainly as a result of the mix of products and services. The gross profit margin on an Adjusted Earnings basis (i.e. excluding depreciation, amortisation, exceptional items and share-based payments included in cost of sales) was 51.5% (H1 2023: 47.8%).

Administrative expenses

In H1 2024, administration expenses (excluding exceptionals) further reduced to £9.2m (H1 2023: £10.9m), representing 36.3% of revenue for the period (H1 2023: 40.7%, FY 2023: 37.4%). The decrease is largely due to cost savings and lower amortisation. The Boards expects that the cost savings and efficiency measures that have been  implemented will continue to benefit in the second half of the year.

The charge for depreciation of fixed assets and for the amortisation of intangibles is £2.4m (H1 2023: £3.3m).

Headcount

The Group had an average of 309 employees during H1 2024 (H1 2023: 345)

Operating profit and adjusted earnings before interest tax and depreciation

The Group generated an operating profit of £3.1m (H1 2023: loss of £0.07m). We continue to consider that adjusted EBITDA gives a more meaningful measure of performance which for H1 2024 was £5.4m (H1 2023: £4.4m).

In H1 2024 adjusted EBITDA excludes an exceptional credit of £0.03m (H1 2023: charge of £1.2m). The exceptional credit relates mainly to the reversal of provisions against inventory originally charged to exceptional items.

Finance income

Net finance cost is £0.01m (H1 2023: income of £0.04m). The charge is largely because of bank interest on loans offset by higher interest income on funds held in Russia. The £3m drawn down on the revolving credit facility has been repaid during the period.

Tax

There is a tax charge of £0.8m (H1 2023: £0.1m). The increase largely reflects the increase in profit. A tax refund relating to the USA of £2.1m has been received during the period.

Earnings per share

Basic earnings per share from continuing operations has increased to 0.46 pence (H1 2023: 0.08 pence loss). There are no dilutive effects.

Balance sheet

Fixed assets

We have capitalised £2.0m (H1 2023: £3.4m) of property, plant and equipment. The expenditure includes continuing work on adding capacity for Life Sciences in South Bend, and the effect of the capitalisation of new operating leases including the renewal of the lease on the Group's headquarters in Penarth. While some further expenditure in Life Sciences to complete the new facility in South Bend is planned for the second half of the year, the bulk of the expenditure has now been completed.

Intangible assets

The value of intangible fixed assets is £29.5m (31 December 2023: £30.2m). The decrease is mainly the result of amortisation. An amount of £0.3m (H1 2023: £0.1m) has been capitalised during the first half, largely for R & D expenses.

Investments

Investments are held at fair value which has been calculated based on the market value of the shares for Verici Dx. The value of the Group's investment in Llusern Scientific was decreased following a further fund raising in which the Group did not participate.

Cash and working capital

The gross cash position at 30 June 2024 was £9.8m (31 Dec 2023: £7.7m), and the Group had cash net of bank borrowings of £9.8m (31 Dec 2023: £4.7m). During the period the loan from HSBC UK which at 31 December 2023 was £3m was repaid in full.

Cash generated from operating activities in H1 2024 is £7.9m (H1 2023: £2.5m). A tax repayment of £2.1m has been received in the USA and there has been further benefit from lower payments on account.

Cash and cash equivalents held by the Russian subsidiary as at 30 June 2024 totalled £2.2m (31 Dec 2023: £1.7m). These deposits are subject to regulatory restrictions, and therefore may not be available for general use by the other entities within the Group. We have been able to organise further dividends from Russia during the period of £0.3m which have limited our exposures.

Share capital

1,200,000 ordinary shares were returned to the Company in April 2023 by the acquirer of ADL. These shares remain in treasury. We have maintained shareholder authority to buy back shares, however we currently have no plans to make any further purchases.

Dividend

In December 2023, the Company paid a final dividend of 1.2p per ordinary share. Based on the need for continued investment in our core areas the Board has decided that it would be prudent to discontinue dividend payments. The Board will however consider recommencing the payment of dividends if and when appropriate.

Going concern

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 plausible changes in financial performance, that the Group will be able to operate within the level of its current funding arrangements.

The Group has revenues from customers in Russia which are serviced by our entity based in Moscow. As a result of the continuing sanctions imposed on Russia by the EU, the USA and other countries, there are enhanced risks in respect of our Russian entity, including regulatory restrictions and credit risk to cash balances, its ability to collect debtors, and EKF's ability to import products into Russia. In addition, while we have been able to make some dividend payments out of Russia, action by the Russian Government continues to restrict the Russian entity's ability to pay dividends to its shareholders. In preparing a downside going concern forecast we have discounted future sales and cash from this region entirely.

The strength of the Group's balance sheet aligned to the continuing performance of the business gives the Directors confidence that the business can continue to meet its obligations as they fall due, even under our worst-case scenarios, for at least the next 12 months. The Group has unutilised facilities of £3m from HSBC UK and a further £3m from the North Atlantic Smaller Companies Investment Trust, both of which are available until 2026, which can be drawn down if necessary. Accordingly, the Directors are satisfied they can prepare the accounts on a going concern basis.

Stephen Young

Chief Financial Officer

17 September 2024

At 30 June 2024 cash and cash equivalents totalling £2.2m (31 Dec 2023: £1.7m) are held by the Group's 60% owned Russian subsidiary. As a result of action by the Russian Government following international sanctions being imposed on Russia, access to this cash is currently restricted.