Year-end report 1 January - 31 December

Fourth Quarter 2021
Net sales: KSEK 2 910 (5 954)
Profit for the period: KSEK -2 894 (1 095)
Earnings per share SEK -0.03 (0.02)
Earnings per average number of shares: SEK -0.03 (0.02)

Period 1 January – 31 December 2021
Net sales: KSEK 18 650 (20 488)
Profit for the period: KSEK -10 251 (-6 730)
Earnings per share SEK -0.12 (-0.09)
Earnings per average number of shares: : SEK -0.13 (-0.10)

MESSAGE FROM THE CEO
2021 was another year when most of our customer groups were forced to focus on the pandemic rather than their normal responsibilities. The effects were the same as in 2020 – our sales numbers were lower than would otherwise be expected and the high growth we saw in 2018 and 2019 is yet to return. There are however multiple indications that our customer groups are starting to move back towards normal operations. We believe that the pent-up demand that has been aggregating for two years will need to be met the coming 12-24 months. Since several countries are reducing the pandemic lockdowns, rather than introducing new ones, our sales activities should be back to normal latest the coming summer.

As always, we have kept a very close eye on our cash balance and cashflow over the last year. Excluding everything that is not related to our own operations, e.g. government grants and the rights issue, our cashflow in 2021 was -4.6 MSEK per quarter. When we started 2022, we had approximately 21 MSEK in cash, 3 MSEK in product inventory and incoming payments of around 2.5 MSEK. For 2022, the conditions are more favorable, with expected higher sales and a product mix that will improve the average gross margin.

THE IMMINENT RETURN OF THE MARKET
We define our sales pipeline as the sum of the sales opportunities that any of our partners either are actively bidding on or are soon to bid on. The latter means that the partner is actively working with the end-customer to try to ensure that the tender specification is written in favor of Serstech’s products. We have seen a rather high and stable pipeline throughout the pandemic and the common behavior among customers has been to continuously postpone tenders. This has meant that the number of new, large tenders has been rather limited for two years and those that have been available have been postponed one or more times.

In the second half of Q4 the sales pipeline started to behave differently than it has for some time. Our partners were able to find several new sales opportunities, something that has been rare during the pandemic. The volume of new opportunities, which we expect to close within a year from now, grew our total sales pipeline by 200% in just a couple of months. Most of the new opportunities have emerged in North America and EMEA, while South-East Asia, our traditionally strongest region, is still dormant due to the lockdowns imposed by the pandemic. We have a strong and successful partner network in South-East Asia, and once the lockdowns are removed, we expect this region to further add multiple opportunities, in both 2022 and 2023.

GREAT PROGRESS IN THE US
2021 had many positive highlights, among them our fast progress in the US market. Serstech initially focused on South- East Asia when our commercial phase started in 2018 and that is also were we have been the most successful. In 2020 we shifted our business development focus westward and hired a local salesperson in the US. Since then, we have worked on both finding sales partners in the most important states and getting our foot in the door of the large government procurement programs. The large three-letter agencies, such as DOD (Department of Defense), DEA (Drug Enforcement Agency), DHS (Department of Homeland Security), CBP (Customs and Border Protection) and their likes, typically set up multi-year frame agreements with select suppliers and then place orders as needed, a setup that is completely hidden from the outside world. Our estimation is that the US market for handheld Raman instruments is worth somewhere between 600 and 1000 MSEK per year and we are now getting in position to tap into this market. The procurement programs are very hard to access and require deep connections, long personal relationships, a well-known and reputable brand and the products need to go through tough evaluations and field tests over several months. Most of these programs require manufacturer direct participation, rather than through partners, and our US salesperson has been very successful at navigating this complex process with each of the agencies. After two years of focused work, we expect to start seeing the results of these efforts during the second half of 2022.

In Q4, we signed an agreement with JGW Group, an expert industry consultancy firm with all necessary connections in government agencies in the US. JGW has more than 40 years of experience helping international brands enter the US market, including UK giant Smiths Detection and several other now very successful companies. We also signed a consultancy agreement with an industry expert, who was previously responsible for the US military chemical threats efforts and one of the experts that helped the UK authorities identify the classified Novichok agents that were used in the Salisbury incident in 2018. With these expert consultants onboard, our ability to set up meetings with the right people in government organizations and getting access to the highly secretive community will further accelerate our progress.

PRODUCT DEVELOPMENT
Our new product Serstech Arx was launched on March 31 and throughout the year, we have worked on adding features and enhancing its performance further. Our production volume has been limited by the component shortage that most industries are suffering from, and we have only been able to deliver some 40 units. We expect Arx to be available in volumes by the end of April 2022 and that we have enough components to satisfy the demand for the rest of the year. All-in-all, we now have components in stock corresponding to a product sales value of more than 50 MSEK.

Our coming product platform is in its research phase, and we have managed to overcome several of the challenges and problems that have set the limits for handheld Raman instruments since they were first introduced some 20 years ago. The work has among other things resulted in nine patents being filed in December, which is quite a high number, considering that we so far only have three previous patents. The reasons for ramping up our IPR efforts are our increased visibility in the market and that we expect our coming product platform to have a considerable impact once it is launched.

We have seen over the year that the competition has started to copy our solutions and our business models. This is a clear indication that we are moving away from the newcomer position that is hardly worth noticing and towards being a serious player that can compete for the larger customers. Our patented autofocus solution has not been copied yet, but our rental program, our warranty offer and parts of our industry leading usability design have all found their way into the offerings of our competitors. Being small and agile has several advantages and we believe that we move quicker than our much larger competitors. We know that our instrument portfolio has gone from being at industry average in 2019 to being among the best in the market in 2021.

After considerable effort in 2021, we have secured the components we need for at least the expected sales in 2022. In addition, we do know that many of the components our competitors are using have between 8 and 12 months delivery time at the moment, which could mean that our ability to deliver quickly could be a distinct advantage in 2022. We also believe that the increased component prices we are now seeing will have some positive effect on the product pricing the coming year. We have seen a decline in average end-user prices for Raman instruments for a few years, but we expect prices to stabilize the coming year due to the widespread awareness of rising component costs across industries. Our component costs have only increased slightly, so it could mean that our already high gross margins could go up somewhat or at least stabilize during 2022.

HEALTHY PARTNER NETWORK DESPITE PANDEMIC
Most of the efforts of our sales team in 2021 have been focused on building, pruning and maintaining our partner network. Our partners participated in the relatively few tenders published in 2021 and in parallel, we aimed at filling the blank spots we had in some market segments in some geographical areas. We now have more than 130 partners, and we can see that our sales pipeline keeps growing, i.e. we are able to find and access a larger percentage of the world market and place bids on more and more tenders. Since most tenders and frame agreements are not made public, local expertise and local contacts are needed to find them. We clearly see an increase in our pipeline as we add more partners to cover more of the world market and we will continue to do so.

During the pandemic we canceled some partner agreements, e.g. when the partners refocused their business permanently or started behaving in a manner inconsistent with our partner agreement. Some partners have gone into bankruptcy, but the majority have been able to continue doing business, often with pandemic-related products as their main revenue generators in 2020 and 2021.

We are confident that our partner network is in a good shape, especially given the circumstances, and we are together in a good position to resume business fast as soon as the customers shift back to their normal operation. As mentioned, we expect this to happen in 2022.

During most quarters throughout the pandemic, we have supported our partners from a distance, with customer webinars and virtual trainings and with frequent follow-ups. We have set up a remote demo room in our head office and started doing trainings and sales meetings in a way that closely resembles an in-person session. Since narcotics are local and end-customers always want to test their own narcotics before purchasing, the virtual demo sessions cannot completely replace the physical meetings, but they get rather close.

NEW TYPES OF COLLABORATIONS
In 2018, we set up a few OEM agreements to tap into the sales networks of larger and more experienced companies. This was successful and the majority of our sales in 2018 and 2019 were through OEM partners, selling our instruments under their own brand. As we have become better at sales ourselves, surpassing our former OEM partners, we have now canceled most of our OEM agreements. Our local presence in important markets and our vast partner network allow us to serve customers in virtually all relevant countries in the world. By selling under our own brand, we control a greater part of the value chain and improve our brand recognition around the world.

Our ChemDash software was designed from the beginning to connect to multiple types of instruments and sensors. Getting other manufacturers to agree with our vision of connected solutions has not been hard, but getting them to assign resources to allow integration with our software has been harder. Many companies in our industry have a single successful product and many do not dare to spend any resources anywhere else. This is now finally starting to change, and the first product collaboration was initiated in 2021, with UK company 3DX-Ray, a maker of portable X-ray scanners. The combination of products – theirs can find suspect material but not identify it and ours can identify, but not find it – is excellent and the integration point is our ChemDash software.

We have a few other similar collaborations under discussion, and we are convinced that the combination of products, when integrated, provides a higher customer value than each product separately. For us and our product partners, we create a larger software market, more upsell opportunities and a much stronger lock-in of the customers.

A BRIGHT FUTURE WITH SOME REMAINING UNCERTAINTY
After four years of selling handheld Raman instruments, we are convinced beyond any doubt that our target groups demand small, inexpensive, easy-to-use instruments that can quickly identify narcotics, explosives and other chemical hazards. There is currently nothing available from any company that can meet this demand in a better way than handheld Raman devices can. Quite the opposite – Raman is the de-facto standard equipment that narcotics police, bomb squads, hazardous material teams and others prefer and use.

Serstech provides the smallest, lightest and most cost-effective solution in the Raman market. Our brand and products are starting to be visible and considered, even in countries and by customers who have always bought their instruments from our much larger US competitors. The first handheld Raman device was introduced some 20 years ago and conservative customers are hard to convince to change to a new brand and a new instrument. For four years, we have been struggling in an uphill battle against the incumbents. 2022 will be the year when we start to reap the rewards of our struggle – with new, competitive products ready for shipment, with a well- established partner network and a world class team.

For further information, please contact:

Stefan Sandor,

CEO, Serstech AB

Phone: +46 739 606067

Email: ss@serstech.com

Thomas Pileby,

Chairman of the Board, Serstech AB

Phone: +46 702 072643

Email: tp@serstech.com

or visit: www.serstech.com

This is information that Serstech AB (publ.) is obliged to make public pursuant to the EU Market Abuse Regulation. The information was submitted for publication, through the agency of the contact person set out above at 08:45 CET on Feb 24, 2022.

Certified advisor to Serstech is Svensk Kapitalmarknadsgranskning AB (SKMG), phone: +46 11 323 07 32, e-mail: ca@skmg.se.

About Serstech

Serstech delivers solutions for chemical identification and has customers across the world, mainly in the safety and security industry. Typical customers are customs, police authorities, security organizations and first responders. 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 Growth Market and more information about the company can be found at www.serstech.com

Attachment

• Serstech Year-End Report January-December 2021