Rapidly Expanding Partner Network and Market Access

 Third Quarter 2018                                                      Period 1 January - 30 September, 2018

Since January this year, my primary focus is to build a distribution partner network. We started the year without any written partner agreements and expect to have at least 20 by the end of the year. Some of our partners have started to generate recurring orders and we will see a continuous increase in revenue as more partners get trained and start participating in tenders.

Since most security tenders are not made fully public, it is often a necessity to have resellers with memberships in local defense and security supplier networks. To make sure as many of these tenders as possible are available to us, we have initiated or finalized discussions with potential partners in almost all prioritized markets around the world. We have signed three new partner agreements the last month and we expect to sign several new ones every month over the coming year. Typically, there is gap in time between a new partner and the first order and we use both sticks and carrots to help the partners shorten this gap.

We participated in several tradeshows in the third quarter and met numerous potential partners, whereof several have chosen to visit our offices in Sweden. The feedback is that our offering is very attractive - we provide one of the best, the smallest and the lowest priced Raman instrument on the market. The challenges have been and continue to be our lack of distribution and that we are still relatively unknown, but our aggressive partner growth strategy is changing this in market after market.

Serstech currently has two OEM partners, both of which are active on a global scale. We have discussions with four additional, potential OEM partners and we believe that we should be able to add several more, spread across different industry segments and geographical regions. The agreements take longer to negotiate and can require significant R&D resources, but provide scalability and market access far beyond what other channels can offer.

The industry is continuing to show significant consolidation with two manufacturers being acquired during the quarter. In July, Cobalt was acquired by the US company Agilent and our direct competitor B&W Tek was acquired by Swiss company Metrohm. Most of our competition is now multinationals unwilling to partner with other companies, which provides interesting opportunities for us in both OEM partnerships and product partnerships, such as the one with Environics. The competition is also increasingly selling directly to end-customers, which allows us to sign reseller agreements with highly competent and experienced partners that were previously inaccessible to us. We expect that our end-user pricing will still be very competitive, even as some of the competition increasingly choose to go direct.

In September, five new team members joined Serstech and we now have a strong and highly competent team with an open and collaborative corporate culture. The average number of employees will be lower in 2018 than in 2017, but the performance and output are dramatically better in both R&D and sales. The sales team now consists of two full-time members in addition to myself and we will add one more person by the end of the year.

The write-off of customer liabilities has affected the result negatively by 2.5 MSEK during the quarter and most of this was related to the cancelled agreement in Indonesia. Several agreements with poorly performing partners have been cancelled and all exclusive distribution agreements have been renegotiated as non-exclusive, which allows a more rapid expansion of the partner network and dramatically reduces the risk of having poorly performing partners blocking a market.

We remain convinced that our current strategy is the right way forward and Q3 meant a further acceleration of the implementation. With a high-performance team, a quickly growing distribution network and favorably changing market conditions, we are optimistic and confident about our continued growth and that we soon reach profitability.

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