SERSTECH AB: Year-end Report 1 January - 31 December 2018

Prior to 2018, Serstech's sales team sold directly to end-customers but this was changed a year ago by the updated strategy. Selling through partners obviously scales much better and allows us to, through partners, approach new segments of the market. The new strategy paid off already in 2018 and resulted in net sales of 10.6 MSEK, compared to 2.2 MSEK in 2017, adjusted for the deliveries of the 2016 order to Indonesia. We expect the growth to further accelerate in 2019 as the partner network expands and gains more experience.

The importance of a partner network

The security market has long sales cycles and virtually all sales are done through tenders, some of which are made public and some only distributed among local companies with the adequate contacts and experience. Having a partner network in place with local representation is therefore an important first step to build a sustainable business. During 2019, we will continue to grow, refine and prune the partner network in order to build and maintain the necessary access to the market. The partner net­work also lets us scale in terms of providing local support and training to the end-customers.

Most tenders in the security market are written with a certain product in mind and competing products are at a clear disad­vantage in those tenders. Serstech's partners therefore need to educate, inform and influence the end-users to achieve prefer­ential status for future tenders - a process that can take one or several years. Acquiring high-performing partners in all priori­tized markets as quickly as possible remains a top priority for 2019 and onwards, since we intend to take market share from well-established competitors.

We do not offer exclusive partnership agreements for any mar­ket or segment, which means that we can add new partners to a market if the incumbent is underperforming. Our agreements further allow us to cancel them if the partner is not performing or if they behave unethically or not in our best interest.

Serstech today has two OEM agreements in place; one in Europe and one in the US. In 2019 and onwards, Serstech will continue to develop OEM relationships within both security and non-security to gain access to sales channels and markets otherwise inaccessible.

A strong starting point

Serstech has several advantages compared to the traditional Raman instrument manufacturers. Our typical competitor is a skilled instrument maker, with expertise in optics, mechanics and electronics. Serstech possesses these skills as well, but more importantly, we have a fundamentally different approach to the customers and users. Instead of simply providing another, stand-alone instrument, Serstech has developed a solution, based on a highly capable and modern software, that can solve a bigger set of the customers' problems. Serstech's ChemDash, which is available both as a PC-based software and as a cloud-based service, creates a solution that can leverage the technologies that are still relatively new to the security industry, such as con­nectivity, artificial intelligence and cloud-based computational power that no stand-alone instrument can match.

A conservative market ripe for disruption

The security market has always been conserva­tive and typically adopts new technologies years later than other industries. As a com­parison, the surveillance video industry is still dominated by analog devices, rather than the digital cameras, displays and storage solutions that replaced all analog counterparts many years ago in the consumer and broadcasting markets.

Many of the sensor and analysis devices that are sold today were developed up to twenty years ago and are missing many of the capabilities that we are used to taking for granted. Through our newly created partner network and our potential end-customers, we get clear indications that our modern, connected solution is the way of the future, especially in the civilian part of the security industry.

Favorable market conditions

Serstech's solution is one of the most cost-effective on the market, with minimal maintenance costs, no consumables and large potential synergies with other systems through our soft­ware solution. We see that security buyers are increasingly starting to understand the value of connectivity and modern technologies and we expect to see a shift towards solution acquisition rather than the current, uncoordinated buying of non-compatible, stand-alone devices over the next few years.

The price/performance ratio and ease-of-use of hand-held Ra­man instruments make them increasingly attractive alternatives to the more expensive, benchtop laboratory equipment for some applications. We see a demand from pharmaceutical companies, which are primarily interested in using hand-held instruments for validation of incoming goods at their production sites. To be able to meet this demand, Serstech and its products must comply with certain FDA regulations and the work to become compliant is expected to be finished during the summer of 2019. We already have several partners addressing the phar­maceutical market and since sales cycles are considerably shorter in this industry, we expect to see some sales in this segment towards the end of 2019.

Over the last 18 months, two of Serstech's competitors have been acquired and we believe that the consolidation of the market will continue. The merging of competitor sales organiza­tions and partner networks will create opportunities for us and might disrupt some of their ongoing business. We have seen that the distribution partners of the companies being acquired, have shown an increased interest in working with us and we expect to add a number of them to our network in 2019.
The entrance barrier to the Raman spectroscopy market is high and we do not experience or expect any threats from new play­ers in the market for the coming year. There are some new manufacturers from China, but these are still at a clear disad­vantage outside China, due to their considerably lower quality, limited substance libraries and lack of software solutions. Inside China though, they are gaining some traction due to government procurement policies favouring domestic manufacturers.

Geared for the future

Our team evolved rapidly last year - we built a new sales team and strengthened R&D significantly, without increasing the average number of employees compared to 2017. The total number of employees was 13 by the end of the year and we will continue to strengthen the team in 2019.

Serstech is a highly agile player in the security industry and our modern portfolio, our optimized team, strong partner network and our approach to the market are slowly, but securely, starting to change the thinking of this conservative business. 2019 will be a very exciting year and with the considerable achievements of 2018, we have everything we need to reach our goal - achiev­ing a rolling 12-month revenue of 150 MSEK, starting from the end of 2019.

STEFAN SANDOR, CEO

For further information, please contact:

Stefan Sandor,

CEO, Serstech AB

tel: +46 739 606067

email: ss@serstech.com

Sophie Persson,

Chairman of the Board, Serstech AB

tel: +46 733 865660

email: sp@serstech.com

Company website: www.serstech.com

The information in this report is such that Serstech AB (publ.) is required to publish under the EU Market Abuse Regulation. The information was provided by the above contact persons for publication at 8.45 am on February 27, 2019.

Certified advisor to Serstech is Västra Hamnen Corporate Finance AB, phone: 040-20 02 50, e-mail: ca@vhcorp.se.

About Serstech

Serstech delivers solutions for chemical identifications and has customers across the world, mainly in the safety and security industry. Typical customers are customs, police authorities, security organizations and United Nations. The solutions and technology are however not limited to security applications and potentially any industry using chemicals of some kind could be addressed by Serstech's solution. Serstech is traded at Nasdaq First North and you find more information about the company at: www.serstech.com.