March 16, 2011 writer

TSO3 Discloses Fourth Quarter and Full Year 2010 Fiscal Results and Updates on Subsequent Activities

Highlights of 2010 events and subsequent months’ activities:

Regulatory:

  • Secured Health Canada commercial authorization and European Notification of Conformity (CE Mark) giving approval to place units in Canada and in the European Union;
  • Progressed towards refiling 510(k) application for US regulatory clearance: face-to-face meeting with the regulators in the upcoming weeks.

Commercial:

  • 3M™ announced rebranding of the sterilizer to the 3M™ Optreoz™ 125-Z using the TSO3 STERIZONE® Technology;
  • Shipped sterilizers to 3M™ worldwide locations for training purposes;
  • Took orders and built backlog in each of the last three quarters of the year for shipment to Canadian customers in 2011;
  • Progressed in reliability testing in order to ship product out to customer locations in cleared markets later this year;
  • Initiated market research for new product development targeted at the Operating Room (OR) market segment.

Quebec City, March 16, 2011 – TSO3 Inc. (“TSO3”) an innovator in sterilization technology for medical devices in healthcare settings using ozone, today reported sales for the fiscal year ending December 31, 2010 totalling $939,285 representing the sale of four new generation sterilizers (3M™ Optreoz™ 125-Z) to 3M™ for training purposes. This compares to $1.3 million the previous year for the sale of the first generation sterilizers sold directly to end-users (TSO3 STERIZONE® 125L).

As a result of the ongoing transition to its new generation sterilizer, which is sold by a channel partner, TSO3’s revenues decreased in 2010. However, expense control contributed to a significant decrease in the Company’s net loss. For the fiscal year ending December 31, 2010, TSO3recorded a net loss of $7.7 million or $0.14 per share, compared to $9.2 million one year earlier or $0.19, a $0.05 decrease.

“2010 was a year of tremendous activity and a year during which we experienced many internal improvements in processes necessary for our growth”, commented Mr. R.M. (Ric) Rumble, President and Chief Executive Officer of TSO3. “Process improvement and reliability testing are continuing while we work towards shipping our backlog, through our channel partner, to meet customer-want dates later this year”, continued Mr. Rumble.

“As most of you are aware, we, as well as many others, are navigating through a changing US regulatory process. After having met face-to-face with the regulators last year, we prepared and submitted a new set of documents and were hoping to meet face to face again earlier this year.  After a short delay, we are happy to say that we were very recently notified of a meeting date planned to take place in the next few weeks. We are pleased to have the opportunity to discuss in person the additional information that has been supplied to the US regulators, and it is our hope that this meeting will clear the way to submitting the amended documentation in the first half of 2011”, added Mr. Rumble.

“Looking towards the future, we will follow our development process for the new OR sterilizer with the expectation of freezing the design in 2011, and holding a commercial event in 2012. We will also be open to opportunities within our market space of healthcare sterile reprocessing that might accelerate our growth, while supporting our intention of enabling better health care”, concluded Mr. Rumble.

2010 Annual Review

Rigorous process adoption and implementation:

After signing a global distribution agreement with 3M™ late in December 2009, for the distribution of its new generation sterilizer (3M™ Optreoz™ 125-Z), offering superior efficacy and throughput, in 2010 TSO3 migrated towards increased internal controls to meet global 3M quality standards.

Regulatory and commercial activities status

In 2010, backlog started to build for deliveries to Canadian customer locations in 2011.

While TSO3 received regulatory clearances from both Health Canada and the European Regulatory Body early in the year, the Company did not make the anticipated progress with the US Regulatory Agency it had hoped for, impacting the global roll-out strategy of 3M™ and the ability to upgrade some of the 24 first-generation sterilizers (TSO3  STERIZONE® 125L) sold to US customers.

Mid-year 2010, the US Regulatory Agency announced it was changing its processes and expectations for products seeking 510(k) clearance and TSO3, like many others, was caught in the midst of these changes. Since then, the Company has had several productive discussions and plans to re-file a new 510(k) shortly. The company remains firm in its belief that the new generation sterilizer will successfully clear the US regulatory process; however, it cannot predict the timing of such an event.

Strategy: 2010 To 2012

Building structure and skills

In its updated strategic plan presented mid-2010, TSO3 addressed requirements for the Company’s organizational structure over the next few years. TSO3 set out timelines and approaches to create fundamental business processes expected to contribute to the Company’s ongoing success.

Along these lines, TSO3 continued its reduction in sales and marketing resources as a result of the commercial agreement with 3M™ and pursued additional talent and skill sets within its R&D and Operations areas, notably welcoming in new senior leadership in both its engineering and supply chain departments.

Moving into 2011, TSO3 is still pursuing the recruitment of a new CFO as well as other defined talents to further strengthen its structure.

Expanding the portfolio of products

TSO3 intends to focus on its core competency, which is rapid research and prototyping of sterilization systems for healthcare settings. The Company plans to expand its portfolio through internal development of new products having significant revenue generating opportunities.

TSO3 technology, combining hydrogen peroxide and ozone, enables terminal sterilization and cost-effective throughput of medical devices that can be favorably applied to multiple segments of the low temperature sterilization market.

In 2010, TSO3 completed the research that is now used to support the next development project: a unit designed for the specific needs of the OR Sub-Sterile Area.  The Company’s assessment supports its belief that this market is substantial in size and looking for the type of solution TSO3 can provide with its enhanced sterilization platform.

Conference call details

TSO3 will host a conference call this morning at 10:30 am (EDST). Analysts and institutional investors are invited to participate. The numbers to dial for access are 514-940-2795 (Montréal area), 416-644-3425 (Toronto area) or the toll-free number 1 877-974-0445. Other interested parties may listen to the live Webcast of the Conference Call accessible via the TSO3 Web site at: www.tso3.com. The Webcast will be archived for 90 days.

Fourth Quarter and Fiscal 2010 Results Disclosure

The 2010 Annual Report is available on the TSO3 Web site at the following address: https://www.tso3.com/en/investors/financial-reports-webcasts.php and full Y10 disclosure will shortly be available on SEDAR (www.sedar.com).

Financial Highlights

Effectively managed financial resources

  • Additional funds secured
    • In March 2010, TSO3 completed a financing round of $16M.
    • TSO3 received an additional $526,250 from 3M™ for milestone achievement (European commercial authorization for the new generation sterilizer).
    • The Company benefited from a Quebec Government R&D tax credit of $371,000.
  • Controlled Expenses 
    • 17% decrease in expenses: $9,176,415 in 2010 compared to $11,010,275 in 2009 amounting to a lower burn rate ($526,292 per month in 2010 compared to $575,861 per month in 2009).
  • Strengthened cash position
    • Cash, cash equivalents and temporary investments were $19,120,007 as of December 31, 2010 compared to $10,671,845 as of December 31, 2009.

Summary Of Operating Results

Years ending December 31

  2010

$ 

2009

$

Sales 939,285 1,324,540
Expenses    
Operating 1,631,383 2,350,190
Sales & Marketing 989,256 2,130,329
Research & Development 3,299,446 3,447,302
Administrative 3,245,913 3,058,220
Financial 10,417 24,234
  9,176,415 11,010,275
Operating Loss 8,237,130 9,685,735
      Other income 563,409 468,103
Net Loss and Comprehensive Loss 7,673,721 9,217,632
Basic and Diluted Net Loss per Share 0.14 0.19
Weighted Average Number of Shares Outstanding 56,281,313 47,863,626

Operating Results Analysis

Sales

For the fiscal year ending December 31, 2010, sales amounted to $939,285 representing the sale of four STERIZONE® 125L+ Sterilizers, accessories and service contracts, compared to $1,324,540 in 2009 representing the sale of five first generation sterilizers (125L), accessories and service contracts, including a large installation contract.

Operating Expenses

For the fiscal year ending December 31, 2010, operating expenses amounted to $1,631,383 compared to $2,350,190 in 2009. Operating expenses are related to manufacturing and after-sales services departments. This decrease between the two periods is due to a write-down of $446,484 for finished goods and $135,225 for raw materials taken in 2009.  The variance is also explained by an adjustment of the provision for service contract costs and a decrease in salaries related to customer service and after-sale service.

Sales and Marketing Expenses

For the fiscal year ending December 31, 2010, sales and marketing amounted to $989,256 compared to $2,130,329 in 2009.  The variance between the two periods is due to a decrease in salaries, commissions and travelling expenses following a reduction in workforce as these expenses are now the responsibility of our channel partner.

Research and Development Expenses

For the fiscal year ending December 31, 2010, R&D expenses before tax credits amounted to $3,299,446 compared to $3,447,302 in 2009.  The variance between the two periods is due to a decrease in material purchases and subcontracting fees.  Conversely, regulatory and professional fees, as well as salaries resulting from the addition of employees in the R&D department, increased between the two periods to pursue the work on patents and the filings of the new generation product with agencies.  Also, the amortization of the sterilizers used for testing and accounted for as property, plant and equipment increased by $95,180.

Administrative Expenses

For the fiscal year ending December 31, 2010, administrative expenses amounted to $3,245,913 compared to $3,058,220 in 2009.  The variance between the two periods is due to a severance payment made, as well as an increase in recruiting fees.

Other Income

For the fiscal year ending December 31, 2010, other income amounted to $563,409 compared to $468,103 in 2009.  The variance between the two periods is due to an increase of $201,504 in the amortization of the deferred revenues resulting from the 3M™ agreement. This is partially offset by a write-down of $110,148 taken at the end of 2010 for equipment and tools for production and R&D given the non-utilization of these assets.

Net Loss

For the fiscal year ending December 31, 2010, the Company recorded a net loss of $7,673,721, or $0.14 per share, compared to $9,217,632, or $0.19 per share in 2009.

Liquid Assets and Financial Situation

As of December 31, 2010, cash, cash equivalents and temporary investments amounted to $19,120,007 compared to an amount of $10,671,845 as of December 31, 2009.  The variance is due to the issue of common shares during the first quarter of 2010 partially offset by the net loss for the fiscal year.

Accounts receivable

As of December 31, 2010, accounts receivable amounted to $437,816 compared to $1,333,178 as of December 31, 2009.  The variance between the two periods is due to a decrease in tax credits receivable and a decrease in the amount receivable from 3M™ ($0 in 2010 compared to $525,500 in 2009) related to the agreement that was signed.

Inventories

As of December 31, 2010, inventories amounted to $1,460,304 compared to $1,483,810 as of December 31, 2009.  The variance between the two periods is explained by a decrease of $95,076 in work in progress inventories slightly offset by an increase of $50,776 in raw materials.

Deferred Revenues

As of December 31, 2010, short and long-term deferred revenues amounted to $2,263,042 compared to $2,052,333 as of December 31, 2009.  The variance between the two periods is due to an additional amount of $526,250 received in 2010 from 3M™ for a milestone achievement according to the agreement and accounted for as deferred revenues. Conversely $201,504 of these 3M™ related deferred revenues was amortized and recognized under “Other income” during 2010.

Operating Activities

For the fiscal year ending December 31, 2010, cash flows applied to operating activities amounted to $5,844,888 compared to $6,192,366 in 2009. The variance between the two periods is due to a lower net loss which was offset by a significant decrease in non-cash working capital items.  This decrease is mostly related to the deferred revenues related to the 3M™ Agreement.

Investing Activities

For the fiscal year ending December 31, 2010, cash flows used for investing activities amounted to $6,563,320 compared to cash flows of $3,732,197 generated in 2009.  The variance between the two periods is due to an increase in the acquisition of short-term investments.  Conversely, the acquisitions of property, plant and equipment and intangible assets decreased by $247,357 between the two periods.

Financing Activities

For the fiscal year ending December 31, 2010, cash flows from financing activities amounted to $14,788,263 compared to $1,055 in 2009.  The variance between the two periods is due to the closing, in March 2010, of a public offering of 10,000,000 common shares for cash proceeds of $16,000,000 ($14,678,538 net of expenses) and a larger volume of options exercised in 2010 for a cash consideration of $109,725.

Fourth Quarter Analysis

Three-month period ending December 31, 2010, compared to the three-month period ending December 31, 2009.

  Fourth Quarter
  2010

$ 

2009

$

Sales 177,945 154,264
Expenses    
Operating 449,760 819,923
Sales & Marketing 114,075   349,960
Research & Development 819,238 1,057,029
Administrative 632,762 817,222
Financial 2,704  7,847
  2,018,539  3,051,981
Operating Loss 1,840,594 2,897,717
      Other income 140,710 218,603
Net Loss and Comprehensive Loss 1,699,884 2,679,114
Basic and Diluted Net Loss per Share 0.03 0.05
Weighted Average Number of Shares Outstanding 58,020,364 47,864,298

About TSO3

TSO3, founded in Québec City in 1998, specializes in the research and development of innovative, high-performance medical instrument sterilization technology with high commercial potential.  TSO3 designs products for sterile processing areas in the hospital environment and offers an advantageous replacement solutions to other low temperature sterilization processes currently used in hospitals.

The statements in this release and oral statements made by representatives of TSO3 relating to matters that are not historical facts (including, without limitation, those regarding the timing or outcome of any financing undertaken by TSO3) are forward-looking statements that involve certain risks, uncertainties and hypotheses, including, but not limited to, general business and economic conditions, the condition of the financial markets, the ability of TSO3 to obtain financing on favourable terms and other risks and uncertainties.

The TSX has neither approved nor disapproved the information contained herein and accepts no responsibility for it.

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