First quarter report

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Serstech Group, First Quarter 2022

Net sales: KSEK 2 054 (11 459)

Profit for the period: KSEK -6 575 (3 024)

Earnings per share SEK -0.08 (0.04)

Earnings per average number of shares: SEK -0.08 (0.04)

Message from the CEO

Throughout 2020 and 2021, our sales pipeline was more or less at a constant level, with many tenders being postponed again and again. Since December 2021, we have seen a dramatic increase in our pipeline and during the first quarter in 2022, several tenders have finally started to proceed towards finalization instead of being postponed. Based on the information we have collected from the market in Q1, we believe that the total demand in 2022 and 2023 will be significantly higher than before the pandemic and dramatically higher than it was in 2020 and 2021. Due to the long sales cycles in the industry, we expect that it will be another few months before orders are placed, but it is evident that the customers are going back to normal operations and that they are getting ready to start buying again.

The first quarter traditionally has a more negative cash flow than other quarters, both due to seasonal effects and more payments, some of which are related to costs for the whole year. Also in Q1 2022, we saw a disproportionally negative cash flow, which was affected by our patent applications and expenses for accounting, stock market listing and similar. There is a risk of running low on cash in Q2 or Q3 and we have therefore put in place preventive measures so that we can continue to build product stock and invest in sales, even if the forecast sales volumes would be delayed to the later parts of the year. Based on the above, the sales forecast and current cost level, we do not expect a need for a rights issue at present.

There are multiple factors that are currently converging to drive up demand to the highest levels we have seen so far;

  • During the pandemic, law enforcement and border control agents had to focus on travel restrictions and similar, putting drug enforcement on the backburner. Any investment not related to the pandemic was postponed, cancelled or reduced in size
  • The above in combination with an increased demand for narcotics during the pandemic, is now forcing law enforcement and border control organizations to invest in new technology at an expedited pace
  • For two years, many of our customer groups have postponed purchasing decision outside the covid area, which means that they have a pent-up demand that needs to be met within the near future. In some cases, purchase departments have been forbidden to buy anything not related to the pandemic, even when budgets had allocations for it
  • Many of the instruments today in use around the world are first-generation Raman devices, which means that they are above ten years old and due to be replaced. Replacements have not been done for two years, but in 2022 this work is resumed
  • The deteriorating security situation in Europe and the world is increasing security and defense budgets in almost every region. Among other things, we see a large increase in the number of requests for identification of chemical warfare agents, something our products are very good at.

One of the many indications that the demand is much stronger than before is that the average size of currently open tenders is several times larger than previous years. During the period 2018-2021, the typical sales opportunity was up to 1-1.5 MSEK, but now a large portion is above 10 MSEK per opportunity. There are also some tenders that are significantly larger than 10 MSEK scheduled to close the coming quarters, but our experience is that such large tenders are normally postponed or reduced in size before they close. In our industry, nothing is certain until the order has been placed and at least partially paid, but chances are that 2022 and 2023 can allow for extraordinary growth.

Not all markets are open for business yet, but several are. We are focusing our marketing and sales efforts on the open markets and will be participating in more than 30 tradeshows during the year. In Q2 alone, we’ll be at 12 tradeshows in Europe, South America, USA and Asia.

In April, we are finally starting the mass-production of our new product, Serstech Arx. The component shortage has made the ramping up of production cumbersome, with several redesigns needed to accommodate for component availability. In May, we even expect to be able to build some stock of products for quick delivery. Due to the high number of sales opportunities the coming year, we have increased our forecasts and are actively working on building component stock. Many critical semiconductor components have 52 weeks delivery time, which means that we need to buy some of the components at significant markups from trading companies that have been hoarding components for some time. Fortunately, the more expensive components in our products are optical and these have not been much affected by the shortage-driven price inflation, so relatively speaking, our cost increase is still moderate, but this can change due to the high volatility on the spot market.

We have now six local salespeople working directly for Serstech. In March, we added one person for the Middle East and North Africa and one for South America. As the markets open up, we want as much local presence as possible to catch every sales opportunity together with our partner network. Both new salespeople have been working with competing products in the past and know the market, the customers and many of our existing partners. We now have local salespeople in USA, China, South-East Asia, India, South America and Middle East.

Throughout 2021, certain units within the US Department of Defense have been testing and evaluating our Serstech Arx product in laboratory settings and the results of their evaluations are positive. As the next step, they will in Q2 buy a few units to do field testing and if also the field testing runs well, we expect to see at least one first order by the end of the year. DoD would then become both an important customer and a very important reference in North America and globally.

In March, I spent two weeks in the Washington, DC area and in south Texas and I met many potential customers, both at their locations and at two tradeshows. Every potential customer I met further reinforced my conviction that Serstech Arx is an excellent fit for our customer groups in law enforcement, border control, certain military units and fire departments. The combination of the decisive return of the market and our ability to mass-produce our new products makes us confident that we will achieve strong growth again already within the coming quarters.

For further information, please contact:

Stefan Sandor,

CEO, Serstech AB Phone: +46 739 606067

Email: ss@serstech.com

or

Thomas Pileby,

Chairman of the Board, Serstech AB Phone: +46 702 072643

Email: tp@serstech.com

or visit: www.serstech.com

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 around 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’s head office is in Sweden and all production is done in Sweden.

Serstech is traded at Nasdaq First North Growth Market and more information about the company can be found at www.serstech.com

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