Highlights of 2012 activities
Commercial / Finance:
Completed program to upgrade the 125L Ozone Sterilizer to the new generation product (STERIZONE® 125L+ Sterilizer) for Canadian users with 90% success rate;
Changed commercial partner status;
– Terminated channel agreement with 3M;
– Entered into non-exclusive negotiations with Getinge Infection Control (GETINGE AB) for a potential distribution agreement;
Closed private placement bought deal for net proceeds to TSO3 of $8.2M.
Following a filing to the United States (US) Regulatory Agency in April 2012, the Company subsequently modified its approach in December by submitting to the Agency a single cycle sterilizer with increased claims (the simplified submission was filed in January, 2013).
In the second half of year, slowed STERIZONE® 80L Sterilizer development activities (also called OR product) to redirect efforts to support US filing activities for STERIZONE® 125L+ Sterilizer.
Quebec City, March 20, 2013 – TSO3 Inc. (“TSO3”) an innovator in sterilization technology for medical devices in healthcare settings, today reported sales for the fiscal year ending December 31, 2012 totalling $1,162,922 compared to $3,145,162 in 2011. Most of the sales in 2012, or $1,037,545, were made during the first semester while, in 2011, most of the sales or $2,357,745 were made in the second semester. The end of shipments under the upgrade program and a decrease in orders placed by the 3M Company created a sharp contraction in sales in Q2-2012. Sales to the 3M Company during the first semester of 2012 were 69% lower than in the last semester of 2011.
On June 15, 2012, TSO3 terminated the distribution agreement with the 3M Company. This explains the significant decrease in revenues starting in Q2 2012, as sales were then limited to services delivered to support the original 125L Ozone Sterilizer and comprised of consumables for the already installed STERIZONE® 125L+ Sterilizers (3M™ Optreoz™ 125-Z). Meanwhile, the Company opened discussions on a non-exclusive basis with a third party to establish a new distribution agreement.
In 2012, TSO3 recognized licensing revenue of $1,690,971, as compared to $210,275 for the same period in 2011. The increase from 2011 to 2012 is due to the recognition as income, in June 2012, of the $1,585,833 unamortized deferred licensing revenue from 3M.
In summary, for the fiscal year 2012, the Company experienced a loss of $5,795,598 ($0.09 per share), as compared to $7,655,421 ($0.13 per share) in 2011. This decrease in the net loss is primarily due to the recognition as income of the unamortized deferred license revenue.
“In 2012, we made critical decisions to protect shareholder value and prepare our steps forward”, commented Mr. R.M. (Ric) Rumble, President and Chief Executive Officer of TSO3. “Consistent with our interactions with the US regulatory agency, towards the end of the year we modified our approach for clearance, by simplifying our filing without impacting the value proposition for the users. As previously announced, we submitted our cleaned-up and simplified filing in January of 2013. We believe that this approach improves the opportunity for a rapid and successful outcome”, added Mr. Rumble.
“Now that our file is back in the hands of the Agency, we have reprioritized our efforts on the STERIZONE® 80L Sterilizer, our smaller product targeted at the OR Sub-Sterile market segment as well as lower price point product for Central Sterilization Departments in foreign markets. Once finalized, our strategy is to file this new product for clearance in the US and international markets after US clearance for the STERIZONE® 125L+ Sterilizer has been obtained”, commented Mr. Rumble.
“In the third quarter of 2012, we also opened discussions with Getinge Infection Control for the global distribution and service of our product line to the healthcare and life science market. While the dialogue between our companies has been productive, we have not yet been able to agree on certain terms which remain open for discussion. To be clear, TSO3 is not looking for a “quick agreement”, but rather for the “right agreement”: one that reflects the value of not only the current product, but also of the technology and opportunities for future developments”, he concluded.
Conference call details
TSO3 will host a conference call this morning at 10:30 a.m. (EDT). Analysts and institutional investors are invited to participate. The numbers to dial for access are 514-807-9895 (Montréal area), 647-427-7450 (Toronto area) or the toll-free number 1-888-231-8191. Other interested parties may listen to the live Webcast of the Conference Call accessible via the TSO3 Web site at: http://www.newswire.ca/en/webcast/detail/1124979/1227019. The Webcast will be archived for 90 days.
Fourth Quarter and Fiscal 2012 Results Disclosure
The 2012 Annual Report is available on the TSO3 Web site at the following address: https://www.tso3.com/en/investors/financial_reporting/annual_reports/ and full Y12 disclosure will be available shortly on SEDAR (www.sedar.com).
In the following paragraphs, the Company discusses the variations of certain accounts within the 12-month periods ended December 31, 2012 and 2011.
In fiscal 2012, sales amounted to $1,162,922, as compared to $3,145,162 in 2011. Most of the sales in 2012, or $1,037,545, were made during the first semester while, in 2011, most of the sales or $2,357,745 were made in the second semester. In 2012, 54% of the sales were to the 3M Company (69% in 2011) that had initiated, in June 2011, marketing the STERIZONE® 125L+ Sterilizer under the brand 3M™ Optreoz™ 125-Z Sterilizer (STERIZONE® 125L+ Sterilizer). Having not received US regulatory clearance within two years of the original filing date, and after it had experienced a large reduction in orders from 3M in Q2-2012, the Company terminated its Distribution Agreement, The lower sales in the second semester of 2012 are the result of a virtual elimination of sales to the 3M Company since the middle of the second quarter of 2012.
In September 2011, the Company launched an upgrade program whereby users of the 125L Ozone Sterilizers could trade-in their sterilizers to acquire, at a discounted price, 3M™ Optreoz™ 125-Z Sterilizers (STERIZONE® 125L+ Sterilizer). Most of the Q4-2011 and Q1-2012 sales made to clients other than 3M were made under that upgrade program. Beginning in Q2-2012, after the program had ended, the smaller installed base of 125L Ozone Sterilizers generated fewer consumables and service revenues to TSO3 with the consequence that sales to clients other than 3M decreased to minimal levels.
Subsequent to termination of the distribution agreement with the 3M Company, TSO3 had other non-exclusive discussions to secure an alternative partnership and signed a non binding letter of intent with Getinge Infection Control, a division of the Getinge AB. The Company’s strategy has not been to invest resources in developing its own sales organization and, as a result of the foregoing, its sales have been reduced to minimum levels.
Until June 2012, TSO3 was recognizing revenue over the expected initial term of its agreement with the 3M Company by amortizing the payments it had received under that agreement. In June 2012, as a result of the termination of the 3M agreement, all unamortized license payments were recognized as revenue. Therefore, in the second half of 2012, there was no license revenue.
For the twelve-month period ended December 31, 2012, license revenue amounted to $1,690,971, as compared to $210,275 for the same period in 2011. The increase from 2011 to 2012 is due to the recognition as income, in June 2012, of the $1,585,833 unamortized deferred license revenue from 3M.
Supply Chain expenses include all of the expenses incurred in connection with (1) the outsourcing of products and services for all departments, (2) production, (3) related quality control and assurance, and (4) shipping.
For the fiscal year ended December 31, 2012, the Supply Chain expenses amounted to $1,801,735, as compared to $2,934,597 in 2011. The variation is due to the reduction in sales which has led to reduced sourcing activities and staff reductions. Staff has been reallocated to other departments.
Customer Support and Communications
Beginning in 2012, TSO3 has regrouped all activities related to corporate communications, customer service and technical assistance, including support to a former partner in its customer support and communication activities.
For the fiscal year ended December 31, 2012, the customer support and communication expenses amounted to $639,766, as compared to $769,862 in 2011. The cost of customer support activities and corporate communications was lower in 2012 than in 2011 due to smaller technical assistance expenses.
Research and Development
Starting in Q2-2012, there has been a reallocation of research and development resources away from new product development and towards work related to the filings with the US regulatory agency.
For the fiscal year ended December 31, 2012, the research and development expenses amounted to $2,877,203, as compared to $3,999,794 in 2011. During the first three quarters, the R&D expenses were similar in 2012 and in 2011. Lower expenses for the entire year 2012 are primarily the result of (1) $603,521 related to the collection and the recording of unbooked R&D tax credits for the years 2008 to 2011 and (2) a decrease in expenses during the fourth quarter. The unbooked investment tax credits are the result of additional claims made by the Company for years 2008 to 2010 and the company’s policy to provision no more than 80% of the amounts claimed as well as. The lower expenses in Q4-2012 were due to several items, including (1) lower maintenance costs for medical devices, (2) fewer compatibility studies, and (3) lower payroll expenses as a result of attrition.
For the fiscal year 2012, the administrative expenses amounted to $3,476,843, as compared to $3,473,215 in 2011. These variations were offsetting each other, the largest ones being a reduction in incentive-based compensation and an increase in professional fees and in stock exchange listing fees.
As of December 31, 2012, cash, cash equivalents and short-term investments amounted to $12,807,190, as compared to $11,384,373 in 2011.
From their level of $1,893,470 on December 31, 2011, the accounts receivable decreased to $1,029,265 on December 31, 2012. Most of the decrease is due to a reduction in trade receivables as a result of lower sales in Q2, Q3 and Q4 of 2012.
As at December 31, 2011, the receivable amount includes a $589,200 provision for R&D tax credits, which was increased to $893,066 as at December 31, 2012.
As at December 31, 2012, inventories amounted to $1,216,721, as compared with $1,120,482 on December 31, 2011.
Raw materials inventory has increased primarily in the fourth quarter of 2012 as a result of the Company receiving raw materials and components ordered prior to the termination of the 3M Agreement and on the basis of a production plan reflecting market penetration in those markets where regulatory clearance had been obtained.
In spite of interrupting the production due to an unplanned lack of orders from the 3M Company in the second quarter of 2012, TSO3 has been able to postpone certain deliveries of raw materials, thereby delaying the corresponding increase in inventories. A certain amount of similar deliveries are still pending, but nothing that would materially change the Company’s financial position.
The combined level of work-in-progress and finished goods inventories has decreased by $47,931 from December 31, 2011 to December 31, 2012. The sterilizers that were in inventory at the end of 2011 were shipped in 2012, but partly replaced by units manufactured prior to the termination of the 3M Agreement. Such inventories at the end of 2012 primarily consist of 3M™ Optreoz™ 125-Z Sterilizers (STERIZONE® 125L+ Sterilizer) and branded related accessories but which could easily be rebranded under the TSO3 trademark STERIZONE®.
As at December 31, 2012, current and non-current deferred revenues amounted to $103,035, as compared to $1,906,520 as at December 31, 2011.
The variation in deferred revenues in 2012 is explained by the recognition, in June 2012, of the unamortized balance of the license revenue for an amount of $1,585,833.
Any remaining deferred revenues stem from the prepaid portion of service contracts on the 125L Ozone Sterilizers commercialized by the Company up to the beginning of 2010.
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. For more information about TSO3, visit the Company’s Web site at www.tso3.com
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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