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Edited Transcript of TOS.TO earnings conference call or presentation 7-May-19 12:00pm GMT

Q1 2019 TSO3 Inc Earnings Call

Ste-Foy Jun 7, 2019 (Thomson StreetEvents) -- Edited Transcript of TSO3 Inc earnings conference call or presentation Tuesday, May 7, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Glen Kayll

TSO3 Inc. - CFO

* Richard M. Rumble

TSO3 Inc. - President, CEO & Director

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Conference Call Participants

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* Douglas W. Loe

Echelon Wealth Partners Inc., Research Division - Analyst of Healthcare and Biotech

* Frederic Tremblay

Desjardins Securities Inc., Research Division - Analyst

* Nick Agostino

Laurentian Bank Securities, Inc., Research Division - MD, Head of Research & Diversified Technology Analyst

* Richard Wong

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Presentation

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Operator [1]

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(foreign language) Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the TSO3 2019 First Quarter Financial Results Conference Call. The English will follow right after the French.

(foreign language) Some of the statements that will be made during this call may be forward-looking in nature. Such statements involve known and unknown risks and uncertainties that may cause actual results of TSO3 to be materially different from those expressed or implied by such forward-looking statements.

The risks, uncertainties and other factors that could influence actual results are described in TSO3's quarterly report and part of the SEDAR filing. (foreign language) (Operator Instructions)

Mr. Ric Rumble, President and CEO of TSO3; and Mr. Glen Kayll, CFO, will participate in this conference call.

I would like to remind everyone that this conference call is being recorded. And we will now turn the conference over to Mr. Ric Rumble. Please go ahead, sir.

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Richard M. Rumble, TSO3 Inc. - President, CEO & Director [2]

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Well, thank you, Jazz, and welcome, everyone, to TSO3's first quarter 2019 conference call to discuss the financial and operational results for the 3-month period ended March 31, 2019. Again, my name is Ric Rumble, I am the President and CEO of TSO3. And joining me on today's call is Glen Kayll, TSO3's Chief Financial Officer.

At this time, I would normally hand the call over to Glen to review the financial details from the quarter. These data is all available in the Q1 report and the management discussion and analysis published yesterday. But because today we are scheduled to hold our Annual General Meeting in just a little under an hour, I'm going to quickly review the quarter and then open the call for questions for Glen and I, this should maximize our use of available time.

Now as stated, the company entered this year with a focus on selling sterilizers, developing our own positive direct customer relationships and maintaining readiness position to start -- or restart operations all while managing our cash position.

In the second half of 2018, we had initiated significant hiring and training activities while reducing our spend in both R&D and operations. These changes are reflected in the numbers. And our results at the end of first quarter, we had 10 sales territories filled with trained individuals, all with an average time in position each of about 6 months covering -- and this is all now covering the North American market.

Now each of these individuals have a capital equipment sales experience and each has direct selling experience, basically selling devices that were used in the reprocessing of medical devices in their past. This team assumed 200-plus leads in August of 2018 and have, in their first 6 months, either discarded or revalidated these leads as well as added directly to their own pipeline. Now prior to adding the leads that have yet to be qualified from the recent successful trade show activity, this team is working on opportunities now in excess of 500 sterilizers.

In the first quarter, the company received orders and commitments for 14 sterilizers. This compares to 21 in the prior quarter. While down, on a quarter-over-quarter basis, these results are encouraging given the extreme seasonality of the purchase pattern for hospital capital equipment. So we have sold 35 sterilizers in the past 6 months. These orders were generated by 6 of the 10 representatives. Now all sales representatives are expected to have orders prior to the end of this first half. In the first quarter, the company shipped 9 sterilizers and installed a record 12 sterilizers. These new installations are directly contributing to sales of our high-margin recurring revenue activity.

I'm extremely proud of our service organization. We're quickly earning a reputation for delivering service levels at industry-leading abilities. To date, the team has signed more than 750,000 contracts. And this is a really impressive start, I just need to point that out.

Sales of our sterilizers, as you know, are impacted by brand, brand recognition, product claims, pricing, regulatory trends, seasonality and access to group purchasing contracts, amongst other things. Now the company has been developing its brand in part through general advertising but has focused its primary spend on trade show presence both at national and regional levels. Now to that end, the company has recently attended 3 trade shows with plans to attend 2 additional national shows by the end of the year. The trade shows attended include the AORN, the SGNA and the IAHCSMM meetings representing the operating room, the GI, and lastly, the targeted customer group, Central Sterilization. This was the second year for our direct attendance and the traffic at these shows has exceeded our expectations than that of last year.

Now as a company, we have also been investing in our contracting efforts, recognizing that formal relationships with integrated delivery networks or IDNs and group purchasing organizations or GPOs provides increased access and creditability to our product line. The company has received news that we are making positive progress with a number of our GPO-contracted entities. We are now, in fact, in negotiations having passed critical acceptance requirements, which means we are actively in the process of exchanging iterations of contracts. Now if completed successfully, the company will gain significant access to the market.

Now remember a contract is a license to sell. A contract is not sell the product for us. We still need to do that. But it does give us access. This we feel is great news and evidence of the importance of our technology and the efforts -- that our efforts are being appropriately conducted and rewarded.

We are equally pleased with the developing discussions with selected IDNs who do purchase directly for their own health care groups. Those activities continue, and we look forward to updating as we sign -- we believe that we will be signing additional contracts. This said, as indicated earlier, the company continues to be aggressive with our pricing and placement programs in order to drive rapid installations of our technology.

In the past few months, there's been significant discussions and movement involving industry standard-setting bodies concerning proposed new practices and approaches to mitigating patient-to-patient contamination caused by ineffectively treated complex medical devices. Regulators have recently gone so far stating that the existing processes are insufficient and "improvements are necessary." And that in the case of a particular device such as the duodenoscopes, additional measures such as sterilization should be considered.

As you know, TSO3 supports terminal sterilization of all surgical and diagnostic instrumentation that might enter the bloodstream. And our ability to effectively and efficiently sterilize short, flexible, compatible scopes measures favorably with competitive temperature sterilization systems. We remain, however, the only, on-label claim device for the terminal stabilization of long, complex multichannel devices. And as a company and in collaboration with health care institutions, selected flexible endoscope OEMs and third-party repair facilities, we continue to work to increase the use life of long, multichannel flexible devices. We believe that we are seeing the initial signs of change in the health care practice as we are aware of 10 facilities that have now adopted at least the practice of sterilizing their known and suspected high-risk cases using our innovative technology, and we know the interest is growing.

So we're seeing increased evidence of product adoption. As a company, we are directly contributing to the dialogue of improved standards of care and work practices in sterile reprocessing. We are measuring and monitoring our progress and the work that we are doing. And what works, we do more of. And what doesn't work, we do -- we stop doing altogether. We are working with other organizations who can assist us and our mutual customers gather the greatest benefit when using our technology.

And with that, I'd like to open up the call for a limited number of questions based on our time for Glen and I. Thank you.

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Questions and Answers

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Operator [1]

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(foreign language) (Operator Instructions) Your first question comes from the line of Frederic Tremblay from Desjardins.

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Frederic Tremblay, Desjardins Securities Inc., Research Division - Analyst [2]

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So looking at the notes from the financials, we see that consumables generated revenue of $400,000; services, $200,000; accessories, $100,000 leaving you $250,000 in revenue from sterilizers. So with that in mind, I was just curious how many of the 9 sterilizers shipped were $0 shipments, when you call them that? And how many generated actual revenue upon delivery?

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Glen Kayll, TSO3 Inc. - CFO [3]

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Yes. I mean we disclosed -- it's roughly half were shipped at $0, but you've got to understand that sometimes in our promotions when we ship at $0, that we record revenue at $0, that in the future in the event that those units are purchased, we will actually record revenue in the future. We just -- we're conservative with our revenue recognition, so we make sure we don't record it until all of the steps are complete.

These promotions are really directed at getting units in place quickly. We have very, very good data now on our consumables revenue stream that shows the consistency of that consumables revenue stream for installations and so there's a vested interest in us taking the inventory that we've already paid for, that is sitting in a warehouse right now and putting it in end-user locations where we can start generating that service and consumables revenue stream.

The service revenue streams are coming along well as well. We've been getting -- we assumed not that many service contracts when we transitioned from our distributor, and now we're starting to see real good return and action on the service contracts. And so you start to see the revenue associated with that as we go along. And those are at -- that's at good pricing compared to what we were originally anticipating.

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Frederic Tremblay, Desjardins Securities Inc., Research Division - Analyst [4]

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Yes. Okay, that makes sense. It looks like the sales team went from 11 people to 10. Can you just provide some color on as it relates to sales close, retention and things like that?

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Richard M. Rumble, TSO3 Inc. - President, CEO & Director [5]

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Sure. I'm not going to get into our HR policies, I don't think it'll be appropriate. But as you can imagine, when you start to build any size organization, there is natural turnover, some that is created by the organization and some that is created by the individual. So this is normal course adjustment of an individual. I suspect that over the course of the year, you will see a little bit of that and -- which is just the natural ebb and flow.

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Frederic Tremblay, Desjardins Securities Inc., Research Division - Analyst [6]

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Okay. And on the trade show that you recently attended, can you speak on the leads that those trade shows generated? Are you satisfied with the leads? Could we see perhaps an acceleration in purchase order activity as soon as Q2?

And related to that, what are some of your key expectations for Q2 as it relates to purchase order shipments?

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Richard M. Rumble, TSO3 Inc. - President, CEO & Director [7]

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All right. Well, I'm going to answer the first -- the last question first, and that is we've never given an indication of what the next quarter might look like. So I'm going to stay with that practice.

When you look at the 3 trade shows that we've attended, as I mentioned, they're all -- all of those leads are now going through our evaluation process to put them into our tracking system again. By the time we start talking about an opportunity, it is a qualified lead that has moved down the process. And that process is very rigorous. For it to be an existing opportunity in our pipeline, it must have a target individual in a target hospital with a targeted budget with a targeted evaluation team. In other words, the hospital is committed to a low-temperature sterilization system and our low-temperature sterilization system is consistent with their needs. So that's how we get to that.

Your question around, am I satisfied with the lead that came, the biggest I think difference this year for TSO3 was the number of individuals that came proactively to our booth, seeking us out, having either heard of us through the written media or seeing our advertising or word-of-mouth. While at our booth, they not only would see our product, but we took the steps to have current customers, at least one in our booth at all times, so that prospective customer could talk to current customer. Nothing like a customer -- satisfied customer helping a new potential customer understand the benefits of the product in their facility.

So all in all, very, very pleased with our show presence. It had doubled up from where it was last year. And last year where we had a 10x10, we would've had a 10x20 booth this year at the IAHCSMM show, which is the International Society of Central Service Management (sic) [International Association of Healthcare Central Service Materiel Management] show, and we had a 20x20 and we could have been much larger because we had that type of traffic.

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Frederic Tremblay, Desjardins Securities Inc., Research Division - Analyst [8]

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Okay. And last question for me. Rick, I think you mentioned over 500 leads, I think, that's -- sorry?

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Richard M. Rumble, TSO3 Inc. - President, CEO & Director [9]

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Yes. Those are the qualified opportunities. That's correct.

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Frederic Tremblay, Desjardins Securities Inc., Research Division - Analyst [10]

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Qualified opportunities. Yes. Do those any -- does that include any from IDNs and GPOs? Or is that entirely a new set of potential opportunities?

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Richard M. Rumble, TSO3 Inc. - President, CEO & Director [11]

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In the United States, Frederic, I would -- I don't think I'm exaggerating when I say that virtually every acute care hospital and ambulatory surgery center has an affiliation with a GPO. Typically, 1, 2, 3, sometimes 4 GPOs. So the opportunities are identified by hospital address and that would relate to the number of sterilizers they're looking at.

When I look at GPOs, when we are dealing with our GPOs and assuming that we are successful, as we go through the contracting period with them, that would give us the hunting license for that group of facilities that look to that GPO for their sterilizer purchases. It doesn't guarantee that we'll get an order, but it does suggest that when they state they want to look for a low-temperature sterilizer that up on their computer screens, will come at least our sterilizer, maybe another one, maybe 2 others. But we will always be referenced at the beginning of the process, which is something we don't have available now.

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Operator [12]

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Your next question comes from the line of Richard Wong from Altema Asset Management.

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Richard Wong, [13]

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So it's more like a computation question. If I add up all the placed units between Q4 and Q1, for Q1 I have 110, and in Q4, 102, doesn't quite estimate for repeating order this quarter can you reconcile those 2 numbers, please?

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Glen Kayll, TSO3 Inc. - CFO [14]

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Yes. We had a few that had been uninstalled over the course. These are sterilizers that we -- that were installed and we'd assumed and also a couple of POs that got canceled that were really quite old POs from the pre- -- or from the distributor days.

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Richard Wong, [15]

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So along the same line, if I add up even the inventory let's say, for sale, the total number, I know you transferred 2 from inventory to PP&E this quarter, but even adding that back there are some slight discrepancies between this quarter and last quarter. The total I got in this quarter is 304; last quarter, 307. Again, any kind of color on those numbers?

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Glen Kayll, TSO3 Inc. - CFO [16]

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I'm sorry, Richard. Off the top of my head, I don't -- I can't pinpoint those 3. But happy to follow up with you later on.

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Richard Wong, [17]

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Okay. Perfect. And I guess you talked about, Ric, you talked about extreme seasonality in terms of the underlying low-temp market. Maybe give us some color like typically for the underlying market itself, what percentage of sales is done in Q1 versus Q2, Q3, Q4 so we can put some context around what we did?

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Richard M. Rumble, TSO3 Inc. - President, CEO & Director [18]

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Easiest way to look at that and to confirm, what I'm about to say is look at our competitors, and look at -- which are driven by capital equipment sales and look at their quarterly performance, which is driven by their capital equipment sales. So you'll see the sterilizer performance typically drives towards fourth quarter.

We -- and it depends on when the fourth quarter is, not only is this a hospital budget, but it's also a sales compensation-driven phenomenon. So you will see, in our case, the majority -- the largest, not the majority, the largest sales quarter should be anticipated in the fourth quarter. Everything stacks up towards the end where you see slippage from Q1 to Q2 and then Q2 to Q3. Everybody's doing their damnedest to close it in the year because money disappears, and sales quotas are met or not met by the fourth quarter. That's the driver that shows you this intensity with the seasonality.

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Richard Wong, [19]

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Okay. Fair enough. Last one for me and maybe even two. I guess for the service revenue, the $750,000 isn't that just for 2019? Or are those multiyear agreements in there as well?

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Richard M. Rumble, TSO3 Inc. - President, CEO & Director [20]

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A couple of those go beyond 1 year, which is really nice. And just a little color, people have asked that question of us in the past. Are we challenged by not having a large organization? I think a competent organization is the key. We do a lot of travel to make sure that we attend the hospitals, and we get there when they need us to be there. But their fast response at giving us multiyear contracts is excellent. And I will go on the line and say since that $750,000, we've gotten a few more contracts. And the team, they need to be congratulated. They're doing a great job.

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Richard Wong, [21]

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That's good to hear. Last question for me for the GPO, any type of timing for you to win contracting stage? Should we start hearing something in 2Q or Q3?

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Richard M. Rumble, TSO3 Inc. - President, CEO & Director [22]

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I guarantee the second that we get something in writing with signatures on it, it will take less than 12 hours to make a press release.

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Operator [23]

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(foreign language) Your next question comes from Nick Agostino from Laurentian Bank.

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Nick Agostino, Laurentian Bank Securities, Inc., Research Division - MD, Head of Research & Diversified Technology Analyst [24]

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So just to start, I guess, at the top level here. Ric, you spoke about seasonality. Obviously, your sales force, I think this is the second quarter you've reported with a direct sales force. You were at 3 trade shows. You've got 2 more lined up for the year. You've got a growing list of leads. I just wanted your thoughts on -- I know that target is about 200 POs for 2019 to essentially clear the backlog. Given where we are today, how comfortable -- I know you're not going to provide any formal guidance. But how close you think you can get to that number just given the visibility?

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Richard M. Rumble, TSO3 Inc. - President, CEO & Director [25]

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I'm told it's a Herculean task. Everybody I talked to says, my God, that's a huge task. That was a target that we set for ourselves. We're not giving up on our target. The sales team is incentivized to make that number. We're not giving up on that target. Whether we miss it by something, I'm not focused on that as much as I'm focused on getting every piece of business that we possibly can between now and the close of the year.

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Nick Agostino, Laurentian Bank Securities, Inc., Research Division - MD, Head of Research & Diversified Technology Analyst [26]

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Okay. And then you talked about having other people assist you. I think in the past, you talked about third-party sales teams or some form of that. Can you talk about what those efforts are looking like?

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Richard M. Rumble, TSO3 Inc. - President, CEO & Director [27]

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Sure. We have, right now, I believe 5 organizations that are directly assisting -- and they are -- this is more for contact generation, basically being -- we talk about the ushered-in approach where local organizations having long-standing relationships with decision-makers who don't have a low-temperature sterilizer but are working on a project with a hospital. They search us out. They see our technology. They see us as a differentiator. Obviously, they are motivated not to use the existing competitors that are out there, both ours and theirs. And so it's a natural collaboration.

We use them if we get an actual lead that we start working on, and we will share a commission with that organization. So like I say, we have 5 right now, we've got some additional organizations who will assist us in service in remote locations, so that our customers are never without adequate support. And again, we're small, flexible, nimble. And we're just sort of looking for customer satisfaction.

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Nick Agostino, Laurentian Bank Securities, Inc., Research Division - MD, Head of Research & Diversified Technology Analyst [28]

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Okay. And then last question, can you just look at where your consumables number was for this quarter? Can you talk about I guess the longer-term people that have been using the sterilizer, what -- how many processes do they go through per day? And maybe some of the experiences that you're hearing or the feedback you're getting from the more recent installs that you've got as far as ramping up on their consumables on a day-to-day basis?

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Richard M. Rumble, TSO3 Inc. - President, CEO & Director [29]

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In general, we are definitely, in the United States, maintaining our expected rate of 3 cycles per day per sterilizer. Are we aware of some locations that go significantly beyond that? The answer to that is yes. In Canada, a little bit more lumpy. Again, the surgical volume -- intensity of surgical volume not as high. Glen, any more that you can go with that?

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Glen Kayll, TSO3 Inc. - CFO [30]

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No, other than we've seen it to be very, very consistent. I mean when you look at the number of installations and the revenue in the quarter, and you've got a pretty consistent $20,000 to $30,000 rate. And frankly, you're -- that's nice to see because we always kind of have a very good idea that, that was the way it was going to be and it's nice to see that it's playing out that way.

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Richard M. Rumble, TSO3 Inc. - President, CEO & Director [31]

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Three cycles and us, we've done to our -- how we would educate a hospital to sterilize is 7 -- 6, 7 cycles in a competitive device. So good economic benefit to hospital with those 3 cycles.

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Operator [32]

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(foreign language) (Operator Instructions) Your next question comes from the line of [William Hamilton] from [Dr. William Hamilton's Holding Company].

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Unidentified Analyst, [33]

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Just wondering, first of all, can you give us an idea of what sales you might've done in April that has just passed?

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Richard M. Rumble, TSO3 Inc. - President, CEO & Director [34]

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No. And I don't mean to be coy. We've decided let's -- because it is a quarter and we know that the sales are even seasonal within the quarter, whatever number that I might give is probably not going to be representative of what it's going to look like for the quarter. So we don't -- we're not going to give you weekly/monthly updates and I think that's the way to go, and I look forward to giving you the number as soon as we can at the end of the quarter.

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Unidentified Analyst, [35]

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Okay. Now you were discussing -- there is an upcoming meeting here in May 16, 17 of this Health Infection Control Practices Advisory Committee (sic) [Healthcare Infection Control Practices Advisory Committee] with CDC and FDA specifically to discuss endoscope sterilization. Do you -- can you make any comments about that, your place at that meeting? Have you been invited to that meeting is my understanding?

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Richard M. Rumble, TSO3 Inc. - President, CEO & Director [36]

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Well, all stakeholders. [Dr. Hamilton], as you know, all stakeholders in the flexible endoscope reprocessing area were actively involved. In my prepared comments, I did say that we are -- I think we're contributing greatly to the dialogue right now with reprocessing and the effectiveness of reprocessing in complex medical devices.

This is -- what you're referring to, if everyone is not aware, is the fact that recently the comments from the FDA have been very, very clear that existing reprocessing methods just don't get the job done. Now that means that we have to start looking at new technologies and terminal sterilization is one of those technologies. But terminal sterilization, when it applies to large, more flexible instrumentation, is damaging to the instrumentation. I've been saying that for years now. And if you read the OEMs, the medical device OEMs, they say the same thing. Short or flexible scopes, not damaging. Larger, more flexible scopes, you see reduced life. And so this meeting, amongst other things, will not only be talking about the efficiency of the process but how to make the process more compatible.

Now compatibility is a combination not only of the sterilizer, but is also the responsibility of the OEM manufacturer. And hopefully, as a result of this meeting, we'll start to see encouraged collaboration from not only end-users, which are writing OEMs on our behalf and saying make the devices as compatible as your short flex scopes, so that we can get the benefit of sterilization. Hopefully, this new meeting coming up will put appropriate pressure and time lines in place to see a constantly changing industry. It'll be an interesting meeting.

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Unidentified Analyst, [37]

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And that dovetails into the upcoming new AAMI standards that they have allowed or they have put in the latest draft that hopefully will become public as some are information about the IFUs, that sterilizer manufacturers can now do their own IFUs. And also that they have changed the wording from sterilization should be used for critical procedures to sterilization shall be used for critical procedures and considered for noncritical procedures. Now that should increase the utilization on the scope side, should it not?

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Richard M. Rumble, TSO3 Inc. - President, CEO & Director [38]

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[Dr. Hamilton], you are probably one of the best-read of all the people that hold our stock, and so I compliment you on the level of your awareness of what's going on in the industry. Everything you just said is probably true. We did not give comment on open documents before they're publicized. So at this time, I'm going to agree with what you're saying conceptually, but I can't make a comment on behalf of the company. And I need to go to the next question.

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Operator [39]

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Your next question comes from the line of Doug Loe from Echelon Wealth Partners.

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Douglas W. Loe, Echelon Wealth Partners Inc., Research Division - Analyst of Healthcare and Biotech [40]

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Yes, but my questions have been answered. Thanks.

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Operator [41]

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(foreign language) Mr. Rumble, there are no further questions at this time. So I will let you conclude.

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Richard M. Rumble, TSO3 Inc. - President, CEO & Director [42]

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Fantastic. Again, 2019 continues to shape up to be a new year in which actions deliver results and results create sustainable change. I'd like to thank you for your participation in today's call and look forward to updating you again next quarter. Thank you.

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Operator [43]

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(foreign language) Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect your lines.