Novacyt : 2021 Management Report

NOVACYT

Public limited company under French law 13 avenue Morane Saulnier

78140 Vélizy-Villacoublay

'Rapport de Gestion'

Management report on the financial statements for the year ended 31 December 2021

NOVACYT

Public limited company under French law (société anonyme) with capital of 4,708,416.54 euros

Registered office: 13 avenue Morane Saulnier - 78140 Velizy-Villacoublay

Versailles Trade and Companies Register 491 062 527

(hereinafter "the Company" or "Novacyt")

MANAGEMENT REPORT ON THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2021

To the shareholders,

We hereby present to you the management report on the activities of Novacyt (hereinafter referred to as "the Company") and its subsidiaries during the financial year beginning on 1 January 2021 and ending on 31 December 2021 in accordance with the provisions of the French Commercial Code.

1.

REVIEW OF THE ANNUAL AND GROUP CONSOLIDATED ACCOUNTS

The annual accounts and consolidated accounts for the year ended 31 December 2021, which we submit to your approval, have been prepared in accordance with the rules of presentation and valuation methods provided for in the current regulations.

1.1 Annual Social Accounts

• • Operating Income:

For the year ended 31 December 2021:

• • Net turnover amounted to €626,738

• • Total operating revenues amounted to €633,863

• • Operating expenses for the year amounted to €2,433,957

• • The operating result therefore is a loss of -€1,800,094

• • Salaries and wages amounted to €0

• • The amount of social security charges amounted to €0

• • Financial result:

  The financial result for the year 2021 is €10,214

• • Exceptional result:

  The exceptional result for the 2021 financial year is -€4,058

• • Net accounting income:

  The year ended 31 December 2021, therefore, resulted in a net accounting loss of -€1,785,821

• • Total balance sheet:

  At 31 December 2021, the Company's balance sheet total amounted to €24,915,260

•
Therefore, the balance of the "Retained Earnings" account, will be debtor for an amount of €52,043,669.
1.2	Annual Group Consolidated Accounts
•	Consolidated Operating Income:

Proposed appropriation of the result:

We propose you to approve the annual accounts (balance sheet, income statement and schedule) as presented to you and to allocate the net accounting loss for the year amounting to -€1,785,821, as follows:

• • the debtor "Retained Earning" account, for an amount of -€1,785,821

For the year ended 31 December 2021:

• • Net consolidated turnover amounted to £95,780,000

• • Total consolidated operating revenues amounted to £95,780,000

• • Consolidated operating expenses for the year amounted to £103,575,000

• • The consolidated operating result therefore is a loss of -£7,795,000

• • Financial consolidated result:

  Net financial income and expense for the year 2021 is - £2,034,000.

• • Net consolidated accounting income:

  The year ended 31 December 2021, therefore, was a consolidated net accounting loss of -£9,728,000.

• • Total consolidated balance sheet:

  At 31 December 2021, the company's consolidated balance sheet assets total amounted to £183,697,000.

• • Approval of consolidated results:

We suggest that you approve the consolidated financial statements (balance sheet, income statement and schedule) as presented to you.

2.

ACTIVITY OF THE COMPANY AND ITS SUBSIDIARIES AND BUSINESS TRENDS DURING THE YEAR ENDED 31

DECEMBER 2021

2.1 Overview of Novacyt's activity

The Novacyt Group is an international diagnostics business generating an increasing portfolio of in vitro and molecular diagnostic tests. Its core strengths lie in diagnostics product development, commercialisation, contract design and manufacturing. The Group's lead business units comprise of Primer Design, and IT-IS International, supplying an extensive range of high-quality assays, reagents and instruments worldwide. The Group directly serves microbiology, haematology and serology markets as do its global partners, which include major corporates.

The following companies make up the Novacyt Group:

Biotec Laboratories Ltd

IT-IS International Ltd Lab21 Healthcare LtdNovacyt US Inc

Novacyt Inc

Microgen Bioproducts Ltd Novacyt SA

Novacyt Asia Ltd Novacyt China Ltd Novacyt UK Holdings Ltd Primer Design Ltd

2.2 Situation and activity / Analysis of business trends

• • Group revenue of £95.8m in 2021 compared with £277.2m in 2020, excluding £40.9m of 2021 DHSC revenue under contractual dispute.

• • Revenue derived from COVID-19 products accounted for 86% in 2021, compared with 95% in 2020.

• • 2021 saw a significant shift away from large, centralised contracts towards independent testing, focused on private laboratories and non-governmental organisations (NGOs):

  • o Private laboratory revenues increased by 98% year-on-year from £28.3m to £55.9m, which includes £10.5m revenue from NGOs.

  • o Private testing accounted for 58% of 2021 revenue at £55.9m, compared with 10% in 2020 at £28.3m.

  • o The UK represented 45% of total revenue in 2021 at £42.7m versus 79% in 2020 at £219.4m.

• • Due to the ongoing commercial dispute with the DHSC, £35.8m exceptional cost of sales have been incurred in 2021 that are one-off in nature. Group results are stated before and after these cost of sales exceptional items to show the performance of the underlying business;

Group results before cost of sales exceptional items

• • Group gross profit was £65.4m resulting in a 68% gross profit, down from £211.5m (76%) in 2020.

• • Group EBITDA was £37.1m compared with £176.1m in 2020. EBITDA margin was 39% compared with 64% in 2020, with lower sales generating less gross profit to cover operating expenditure.

• • Group operating profit was £28.0m in 2021 compared with £167.4m in 2020, driven by lower sales.

• • Group profit after tax was £19.2m in 2021 compared with £132.4m in 2020.

Group results after cost of sales exceptional items

• • Cost of sales exceptional items totalled £35.8m in 2021 compared with £nil in 2020. The two largest items were a £26.1m stock provision, as a result of the Group buying stock to fulfil expected future DHSC orders that did not materialise; and the expensing of £6.9m of stock delivered to the DHSC which has not been paid for as it is now part of the ongoing contract dispute.

• • Group gross profit was £29.7m in 2021, resulting in a 31% gross profit.

• • Group EBITDA was £1.3m in 2021, resulting in a 1% EBITDA margin.

• • Group operating loss was £7.8m in 2021.

• • Group loss after tax was £9.7m in 2021.

• • The Group exited 2021 with cash of £101.8m, compared with £91.8m in 2020.

• • The Group remains debt free.

2.3 Results, progress achieved and difficulties encountered

Overview

The underlying business performed well in a much more challenging and diverse Covid market in 2021, generating sales of £95.8m and an EBITDA of £37.1m excluding the impact of cost of sales exceptional charges. Group EBITDA was positive for the fifth year running both before and after cost of sales exceptional, contributing to the year-on-year cash increase.

Cash at the end of 2021 was £101.8m, providing the Group with a solid foundation for its future strategy.

Operational highlights

• • Managed significant transition from central Government contracts to a much more diverse and fast paced private testing market by developing and delivering relevant products (15 new assays) and innovative workflow solutions (VersaLab™ mobile processing laboratories and VersaLab™ Portable) during the course of 2021.

• • Strengthened R&D function whilst shifting the focus to the post-COVID-19 portfolio and ensuring we are IVDR ready.

• • Integrated IT-IS into the Novacyt group to develop end-to-end testing solutions and drive Instrumentation sales.

• • Cement our position as "global first responder" securing new contracts with WHO and UNICEF for the supply of COVID-19 products.

• • Key contract wins with major customers:

  • o Private test providers, including travel, sport, film, media, and workplace settings

  • o Inclusion in National Framework Agreement, resulting in a new £4.7m contract with the DHSC for the supply of PROmate® COVID-19 tests to the NHS.

• • David Allmond appointed as Chief Executive Officer and strengthened executive team and commercial operations to support future growth.

2.4 Foreseeable change in the Company's position and future prospects Strategy highlights

• • Focus on high growth markets of Infectious diseases, gastro-intestinal (GI) infections, transplant and Insect Borne pathogens.

• • Leverage our competitive advantages to secure successful execution:

  • o Near patient semi-automated instrumentation solutions for smaller laboratory settings

  • o Track record of successful multi-product development

  • o Agility as first responder with historical trading relationships with key NGOs.

• • Maximise existing non-COVID-19 portfolio to minimise impact of new product development timelines:

  • o Relaunch existing RUO in H2 2022

  • o Upgrade and re-focus distributor network and add direct sales in targeted countries

  • o Expand IT-IS instrument sales using reach of Novacyt distribution channels

  • o Prioritise molecular portfolio to drive focus and simplification.

• • Maintain our position as a leading supplier of COVID-19 diagnostics:

  • o Use Bioinformatics expertise to keep portfolio relevant to the rapidly changing phases of the pandemic

  • o Developing "dry" versions of key molecular products to support developing markets

  • o Launching key LFT products to follow the shift towards higher prevalence of antigen testing.