TSO3 announces financial results for second quarter 2014

QUEBEC CITY, Aug. 5, 2014  - TSO₃ Inc. ("TSO₃") (TSX:TOS.TO) an innovator in low temperature sterilization technology for medical devices in healthcare settings, today reported its financial results for the second quarter (Q2) ended June 30, 2014.

In Q2-2014, sales amounted to $132,179, as compared to $37,255 in the second quarter in 2013. For the six-month period ended June 30, 2014, sales were $213,936, as compared to $113,314 for the same period in 2013. The higher sales in 2014 reflect a higher utilization by the users of the installed base of sterilizers leading to increased sales of consumables, as well as an increase in maintenance and compatibility testing services.

"As previously communicated, the Company submitted its most recent file to the US Regulatory Authorities on May 2^nd of this year. After reviewing the file for a number of weeks, consistent with their guidance, the regulators requested additional information (AI) on selected aspects of the file. Since receiving the AI request, the Company and the regulators have been actively conferring on selected topics," stated R.M. (Ric) Rumble, president and CEO. "Together with the Agency, we are working on how best to document the sterilizer performance for US customers," continued Mr. Rumble.

"The Company has continued its discussions with targeted candidates towards structuring the right channel partner agreement. These discussions are now occurring at an accelerated pace, in part we believe due to progress on the regulatory front. The second quarter showed movement towards meeting our stated goals; I expect continued success in the upcoming quarters." concluded Mr. Rumble.

Q2 2014 Conference Call

TSO₃ will host a telephone Conference Call today, August 5, 2014 at 10:30 a.m. (EDT). Analysts and Institutional Investors are invited to participate in the call. 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. Please dial-in with the following identification number to join the conference call: 74091908. Other interested parties may listen to the live Webcast of the Conference Call accessible via CNW's Website at: http://www.newswire.ca/en/webcast/detail/1385899/1537465.

The Webcast will be archived for 90 days.

SUMMARY OF RESULTS
Periods ended June 30 (Unaudited, IFRS Basis)

 

RESULTS ANALYSIS

In the following paragraphs, the Company discusses the variations of certain accounts within the second quarter of 2014 and 2013 and within the six-month period ended June 30, 2014 and June 30, 2013.

SALES

As of June 2013, when TSO₃ terminated its distribution agreement with the 3M Company, TSO₃ has concentrated its efforts on securing the required regulatory clearance to market its products in the United States and has delayed developing sales until that clearance is obtained. Since June 2013, sales have primarily consisted of consumables and services and were made mostly in connection with the STERIZONE^® 125L+ Sterilizers. 

In Q2-2014, sales amounted to $132,179, as compared to $37,255 in the second quarter in 2013. For the six-month period ended June 30, 2014, sales were $213,936, as compared to $113,314 for the same period in 2013. The higher sales in 2014 reflect a higher utilization by the users of the installed base of sterilizers leading to increased sales of consumables, as well as an increase in maintenance and compatibility testing services.

The increase in the revenue from maintenance services is the result of the assumption by the Company, as of June 30, 2013, of multi-year service contracts that 3M Company had signed with hospitals prior to the settlement of the dispute over the termination rights of the 3M distribution agreement. 

On a year-to-year basis, the increase in revenue mostly occurred in the second quarter due to a contract for compatibility testing services and because the Company was beginning to be entitled to the revenue from service contracts at their annual renewal dates.

NET LOSS

In the second quarter of 2014, the Company experienced a loss of $1,324,517 ($0.02 per share), as compared to $3,805,874 ($0.05 per share) in Q2-2013. For the six-month period ended June 30, 2014, the net loss was $2,885,521 ($0.04 per share), as compared to $5,905,746 ($0.08 per share) for the same period in 2013. The year-to-year variations are reflecting operating issues as well as onetime items related to R&D tax credits and the Settlement Cost incurred to eliminate litigation risks in connection with the termination of the distribution agreement with the 3M Company.

When adjusting the results to eliminate the impact of variations in R&D tax credits and the Settlement Cost with the 3M Company, the net loss in the second quarter of 2014 was $1,465,718 ($0.02 per share), as compared to $1,988,416 ($0.03 per share) for the same period in 2013.  Similarly, the adjusted loss in the first half of 2014 was $3,282,127 ($0.04 per share), as compared to $4,088,288 ($0.06 per share) in the first half of 2013.  Most of the reduction in the loss in 2014 occurred in Q2-2014 and was primarily due to the cost savings resulting from the collective dismissal announced on January 15, 2014. This cost reduction measure entailed severance payments and lay-offs spread until the end of the first quarter of 2014 and, hence, started to have a material impact on the expenses only during the second quarter of 2014.

Supply Chain

Supply Chain expenses include all expenses incurred in connection with (1) the outsourcing services provided by the Supply Chain Department to all departments, (2) the production costs, (3) the related quality control and assurance expenses, and (4) the shipping expenses.

For the three-month period ended June 30, 2014, the Supply Chain expenses amounted to $209,994, as compared to $276,760 for the same period in 2013. For the six-month period ended June 30, 2014, these expenses amounted to $460,963, as compared to $531,451 for the same period in 2013.

The reduction in expenses for both periods was primarily due to a reduction in overhead which was partially offset by an increase in the cost of servicing the installed base of sterilizers. The reduction in overhead is mostly the result of a lower headcount due to the collective dismissal announced in January 2014. The higher cost incurred to service the installed base of sterilizers is due to the assumption by the Company, since July 2013, of service contracts that the 3M Company had signed prior to the June 2013 settlement.

Customer Support and Communications

For the quarter ended June 30, 2014, the Customer Support and Communications expenses amounted to $71,807, as compared to $133,821 for the same period in 2013. For the six-month period ended June 30, 2014, these expenses amounted to $172,439, as compared to $258,492 for the same period in 2013. For both periods, the smaller amount in 2014 is due to (1) a reduction in headcount further to the collective dismissal of January 2014, and (2) a decrease in the unallocated customer technical support costs as a result of a higher volume of maintenance services as they were reallocated to Supply Chain.

Research and Development

For the quarter ended June 30, 2014, Research and Development expenses were $524,779, as compared to $833,117 for the same period in 2013. For the six-month period ended June 30, 2014, these expenses were $1,122,537, as compared to $1,844,060 for the same period in 2013. However, the year-to-year basis comparisons are being distorted by the discontinuity of the recognition of R&D tax credits.

When R&D tax credits are being excluded, the R&D expenses have decreased from $1,950,000 in the first semester of 2013 to $1,519,143 in the first semester of 2014, or a year-to-year decrease of $430,857. Most of that decrease occurred in the second quarter of 2014. The bulk of the reduction occurred in salaries and benefits and is a direct result of the collective dismissal of January 2014 which started generating cost savings in Q2-2014.

Administrative

For the quarter ended June 30, 2014, the administrative expenses amounted to $666,380, as compared to $736,638 for the second quarter of 2013. For the six-month period ended June 30, 2014, these expenses amounted to $1,398,273, as compared to $1,553,806 in the same period in 2013. Several items were smaller in 2014 as a result of general compressions of expenses, but the largest variations were the decrease in salaries and benefits and in professional fees, the latter largely due to the settlement of the dispute with the 3M Company in June 2013.

Settlement Cost

In the quarter ended June 30, 2013, the Company recorded a $1,923,398 cost in connection with the settlement that it reached with the 3M Company over the termination rights of the distribution agreement signed in December 2009. TSO₃ has always maintained, and still maintains, that both parties had the right to terminate that distribution agreement. However, the 3M Company was disputing that right and a protracted litigation may have caused the Company to incur legal expenses and may have impacted its ability to obtain the right terms with a potential strategic partner. Therefore, the Company decided to incur the Settlement Cost in order to achieve a definitive conclusion of any dispute over the terminated agreement.

The Settlement Cost was a one-time payment of USD$2,000,000 (C$2,110,000) partially offset by the return of inventory held by the 3M Company valued $202,797 and increased by the write-off of certain receivables in the amount of $16,195.

Liquid Assets

As at June 30, 2014, cash, cash equivalents and short-term investments amounted to $7,566,271, as compared to $9,608,531 as at December 31, 2013.  The variation is due to the cash absorbed by operations during the first two quarters of fiscal 2014.

Second Quarter Disclosure

The 2014 Second Quarter Report is available on TSO₃'s website at the following address http://www.tso3.com/en/investors/financial_reporting/quarterly_reports/ and full Q2 disclosure will shortly be available on SEDAR (www.sedar.com).

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.

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.

SOURCE TSO3 Inc.