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Edited Transcript of TOS.TO earnings conference call or presentation 9-May-18 12:00pm GMT

Thomson Reuters StreetEvents

Q1 2018 TSO3 Inc Earnings Call

Ste-Foy May 10, 2018 (Thomson StreetEvents) -- Edited Transcript of TSO3 Inc earnings conference call or presentation Wednesday, May 9, 2018 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. - CEO, President & Director

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Conference Call Participants

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* Endri Leno

National Bank Financial, Inc., Research Division - Associate

* Frederic Tremblay

Desjardins Securities Inc., Research Division - Analyst

* Nick Agostino

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

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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 2018 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 the 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.

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

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And thank you, Sylvia, and welcome, everyone, to TSO3's first quarter 2018 conference call for the period ended March 31, 2018. My name is Ric Rumble, and I am President and CEO of TSO3, and joining me on today's call is Glen Kayll, TSO3's Chief Financial Officer.

Now this morning, Glen will conduct a brief review of the financials, which have been published for the first quarter. And then we will go into a discussion with regards to recent activities for the quarter and recent events.

Glen, please go ahead.

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Glen Kayll, TSO3 Inc. - CFO [3]

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Thanks, Ric. To begin, all dollar figures are stated in U.S. dollars, unless I indicate otherwise.

Revenue equaled $0.3 million for the first quarter of 2018 as compared to $5.8 million in the fourth quarter of 2017 and $4.2 million in the first quarter of 2017. During the first quarter of 2018, we did not ship any STERIZONE VP4 Sterilizers to the Getinge Group, our nonexclusive distributor. The recorded revenues from sales of consumables and service parts, this compares to the 50 sterilizers we shipped to Getinge in the fourth quarter of 2017 and 36 in the first quarter of 2017. We did not record license fee revenue in the first quarter of 2018, as opposed to the $0.3 million we recorded in the fourth quarter of 2017 and $0.2 million recorded in the first quarter of 2017. We expect to recognize this deferred license revenue in the future in a manner which reflects the outcome of our negotiations with Getinge.

Gross profit was negative by $0.3 million in the first quarter of 2018 as opposed to a positive $2.3 million or 40% of revenues in the fourth quarter of 2017 and $1.6 million or 37% of revenues in the first quarter of 2017. Gross profit declined as we did not record revenue from sterilizer sales to Getinge or from the amortization of deferred license fees as compared to prior periods. Gross profit was negative, as the contribution to gross profit from consumables and service parts did not exceed manufacturing overhead and other costs incurred by the company.

Our research and development expenses declined to $1.7 million in the first quarter of fiscal 2018, which is a slight decrease from the $1.8 million we incurred in the fourth quarter of 2017, in comparison to the $1.4 million we incurred in the first quarter of 2017. R&D expenses grew in the first quarter relative to last year, as we incurred additional expenses related to operation of the laboratory in Myrtle Beach and for extended endoscope regulatory claims along with other endoscope and medical device compatibility studies. We also incurred a modest increase in our project development and laboratory expenses in the first quarter of 2018 as compared to the same period last year.

Our SG&A expenses, sales, general and administrative expense, increased to $2.6 million in the first quarter of 2018 from $2 million in the fourth quarter of 2017 and $2.2 million in the first quarter of [the year]. During the first quarter of 2018, we incurred additional sales and marketing expenses, as we created and launched our commercialization team. Contrarily, general and administrative expenses declined sequentially and on a year-over-year basis, with the latter decline being (technical difficulty).

In the first quarter of 2018, total expenses denominated in Canadian dollars were CAD2.3 million as compared to CAD4.4 million in the fourth quarter of 2017 and CAD4.1 million in the first quarter of 2017. This is relevant because the average U.S. dollar to the Canadian dollar foreign exchange rate in the first quarter of 2018 resulted in the increase of expenses of 5% on a year-over-year basis due to changes in the exchange rate. But from a quarterly sequential perspective, the impact was less so. Fluctuations in the exchange rate resulted in increase in (technical difficulty) quarter-over-quarter.

Our Q1 2018 net loss was $4.5 million or $0.05 a share which compares to a loss of $1.4 million in the fourth quarter of 2017 and a loss of $2 million or $0.02 a share in the first quarter of 2017.

Regarding cash, we ended the first quarter of 2018 with $10 million of cash, cash equivalents and investments and no debt. This compares to $14.8 million and no debt at the end of 2017. In the first quarter of 2018, we consumed $3.8 million for operations, excluding noncash working capital and $0.9 million in noncash working capital adjustments. In the first quarter of 2018, we reduced our capital expenditures to only $0.1 million as compared to (technical difficulty) million in the same quarter last year and $0.6 in the fourth quarter of 2017.

With respect to 2018, Ric will provide more color on where we stand from a commercialization perspective. In the meantime, we plan to continue to redirect our research and development and general and administration expense [unintelligible] sales and marketing, continue to apply our resources in a focused manner.

Additionally, with respect to access to capital, the remaining number of options available to us, which we are working on, our technology, business model and clearances are very valuable. We are looking at these options to find the right approach, rather than just any approach. And we will be able to update the market in the future when we have finalized it.

With that, I'd like to turn the call over to Ric.

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Richard M. Rumble, TSO3 Inc. - CEO, President & Director [4]

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Thank you, Glen. And with that review completed, let's talk about where we are today. Now during the quarter, TSO3 completed the hiring of its first customer -- direct customer-facing sales team. This team was hired and trained early in the year in their role to support Getinge, as well as well as support customers currently not covered by Getinge. During their first (inaudible) quarter, as you would expect, the TSO3 sales team did not take any orders for the STERIZONE VP4 Sterilizer. In that same period, Getinge continued to take orders, but our understanding is that they captured less than 10 new orders in the quarter. And for the first time in some time, they did not experience quarter-over-quarter growth. This was below our expectation and theirs. And that said, we are aware of significant order intake since the quarter's end, and we are continuing to work with them to both make the Q2 members and then some. In other words, we want to make it up.

So in January, we initiated our direct sales activity. We initially targeted a select number of accounts. Calls have now been made on more than 531 targets. These hospitals have been further segmented based on their [paying] points, meaning what problem does our technology solve and how large is their problem. Said differently, how fast can we positively effect change in those hospitals? End users conducting large amounts of robotic procedures or heavy users of orthopedic caseloads, or have just general heavy use are very, very prone to purchase our sterilizer and see significant benefits. In these cases, we have seen savings of up to 2/3 of what they are currently experiencing with other low-temperature systems.

These newly developed leads have led to millions of dollars of new business being quoted. To date, more than 40 sterilizers have been quoted [indirectly] by TSO3. Within the capital equipment sales process, it is customary to start with a budgetary quote and massage these numbers on the way down to securing an order. But I can report that our sales team is actively attempting to close 6 or 7 devices at this time, and we're hopeful that we shall capture our own first indirect POs this quarter. This would mean a 4-month sales process from introduction to purchase.

This is a statistic that must be measured over time, but we are attempting to stay transparent with our activities as we measure this and other metrics in our sales process. During the first quarter, TSO3 actively supported a number of installations in Europe, placements taking place in Spain, Switzerland, the Netherlands and others. Additional placements in Europe is planned.

And during the quarter, we began to push the awareness of our sterilizer and its benefits through selected advertisements and trade show presence. Again, this is TSO3 direct, not through a distributor. This year-to-date, we have attended the AORN and the International Society for Central Service Material Management Personnel, this location recently in Phoenix. During the recent meeting, the company took innovative steps to actually raffle off a sterilizer. Yes, we actually gave one away. What a great promotion. More than 220 individuals stood in line to register their hospital to win a sterilizer. While in line, we collected excellent marketing intelligence on each location and what they needed and when. As you know, it cost TSO3 $33,000 to purchase the sterilizer from Getinge, and the marketing value that we obtained from that purchase was well in excess of the $33,000 paid.

The show has resulted in a number of new requests for quotes and a number of new follow-up meetings. While in Phoenix, we held our first customer appreciation dinner, where current customers and end-users had the opportunity to talk with each other about their experiences. Included in this dinner were a number of select prospects who had yet to purchase, but wanted to hear and meet with existing customers. Happy customers are always the best form of advertising and I expect great things to come from this activity.

Lastly, while in Phoenix, the company sponsored a session on best practices for endoscope reprocessing hosted by our own Chief Science Officer, Dr. Brad Catalone. The panelists for this presentation included customers from leading institutions, including [Altra] Healthcare Systems, University of Colorado, and Vancouver General Hospital. Keeping the panel grounded in the reality of what we do as an industry and why, was [Carla Warner], a patient advocate who spoke on the reality of how an infection can tragically lead to death, and the heartbreak that a preventable infection can cause. The presentation was impactful; it was well attended, and we expect to continue in this type of activity. The company is now planning to attend the SG&A and the APAC Shows, which focus on gastroenterology and infection control societies.

During the quarter, the company and Getinge have continued our dialogue towards developing a new agreement. I believe strong progress is being made, but at this time, we are still in the middle of these discussions. I think it is simple to say that we both agree that there is a need and an opportunity to place a large number of devices in a much shorter time frame, and we're working actively on these claims now. We don't need a contract to improve performance. We just need to move and get action started. Our short-term results will indicate how we finish in the final agreement. We're actually -- actively involved in a collaborative agreement right now with regards to a specific corporate account of Getinge's and we expect to be able to update on this shortly.

During the quarter, we released that after considerable time and expense, TSO3 had received from our European contracted laboratory, the data to support Prion claims, all in vivo and in vitro testing supports these so the STERIZONE VP4 Sterilizer for Prion in activation. This is another positive step for our product and our technology and we expect Getinge to use this data in support of their sales efforts in France and the U.K.

Lastly, I understand the desire to make that the demand for faster responses when we discuss important issues like the current submission that is currently in the hands of U.S. regulators. I want everyone to know that we want to give the complete answer, but we must have them before we give them. We can only report what we know and we no longer attempt to interpret the science that we think we might be given and we're communicating with the agency. We have disclosed that we have supplied our final response to the additional information request.

We have said that we believe that we have met all the requirements for substantial equivalents, and are confident that we will obtain the clearance, albeit probably with the final adjustments to labeling that typically occurs in these cases. I can say that we have been expecting this final notification for some time now, and we are looking at our emails daily in order to make sure that we don't miss anything. The second that we get the information, we will be passing that along.

Now with that discussed, I'd like to open up the call for questions.

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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 Endri Leno of National Bank.

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Endri Leno, National Bank Financial, Inc., Research Division - Associate [2]

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Just a couple from me. First, what -- how much or where do you think you could cut costs further in 2018, or do you think you can cut cost further in 2018, as you're focusing to build up sales in the pipeline?

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Glen Kayll, TSO3 Inc. - CFO [3]

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Yes, it really -- we think that we have an opportunity to redirect some of our costs from G&A and the R&D side of things into our SG&A efforts. We have to make sure that we have sufficient resources and capabilities to support sales, support our customers and all the other activities. But depending on how things go with clearances, for instance, we may not need as many consultants to help us with those kinds of things. Does that help [at all]?

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Endri Leno, National Bank Financial, Inc., Research Division - Associate [4]

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Yes, no, for sure. The question I want -- the second one is a bit more on strategic kind of situations. Like I was wondering, you're talking to Getinge, you're trying to come up with a new agreement. There is a possibility that things might not necessarily work out the way everybody is envisioning. What is the contingency plan that you are looking at in the meantime?

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

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Well, I think, Endri, that's a good question. First of all, I want to state and restate that our discussions with Getinge continue to go on, they're positive. We're working together as if from the agreements and will continue. We don't expect major changes at this time, but we do expect better performance. So that being said, that's the very first and I think if you were communicating with the Getinge organization, they would say the identical thing.

Secondly, there are a number of people, a number of organizations, that see value in our technology, that would like to have that in. Obviously, we don't want to have all of our eggs in one basket. We have a partner; it's in their name, Getinge. We intend to honor that partnership, but we cannot be blind and not look around and see what else is available. So without going into details, other people have communicated with us and we communicate with them, in case there is need for a backup plan, if you will, as you call it, your plan B.

The other, we are adding to our sales team in order to make sure that we know how to sell this product and at the fastest possible rate at the highest possible price. And I can say that after the first 8, 10 weeks now, we're liking what we see and we're liking how our customers are responding to us, not only from our sales perspective, but also from our service perspective, the after-sales service, which is very important. And again, this gives us a direct indication of what a dedicated organization can do and how fast they can be successful. Putting all three together, we have the options. We continue to have the discussions and we're not looking like we're out of options in any way, shape or form.

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Operator [6]

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Your next question comes from the line of Nick Agostino of Laurentian Bank Securities.

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Nick Agostino, Laurentian Bank Securities, Inc., Research Division - Head of Research, Special Situations Analyst & Diversified Technology Analyst [7]

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Just a couple of questions on my part. If I heard you guys correctly, just to verify, you said that Getinge placed less than 10 I guess new orders, and by that, I mean I guess installs in Q1. Is that -- did I hear that correctly, that momentum or sold ...

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Richard M. Rumble, TSO3 Inc. - CEO, President & Director [8]

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Yes, we…

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Nick Agostino, Laurentian Bank Securities, Inc., Research Division - Head of Research, Special Situations Analyst & Diversified Technology Analyst [9]

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Less than 10 in Q1?

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Richard M. Rumble, TSO3 Inc. - CEO, President & Director [10]

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We were trying to provide the information as best we can about progress in the field.

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Nick Agostino, Laurentian Bank Securities, Inc., Research Division - Head of Research, Special Situations Analyst & Diversified Technology Analyst [11]

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Yes, and ...

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Richard M. Rumble, TSO3 Inc. - CEO, President & Director [12]

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And a comment has been made in the past and we want -- I think the real issue is that we were trying to get to the following. We have said that there has been a quarter-over-quarter growth in a number of our last communications, which has been true. This time, this did not appear to be the case and we wanted to make sure that we told people that we saw that change and we are responding to it.

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Nick Agostino, Laurentian Bank Securities, Inc., Research Division - Head of Research, Special Situations Analyst & Diversified Technology Analyst [13]

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Okay. And then you said that, if I heard correctly, momentum did pick up post-Q1?

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Richard M. Rumble, TSO3 Inc. - CEO, President & Director [14]

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That is correct.

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Nick Agostino, Laurentian Bank Securities, Inc., Research Division - Head of Research, Special Situations Analyst & Diversified Technology Analyst [15]

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Okay.

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Richard M. Rumble, TSO3 Inc. - CEO, President & Director [16]

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So again, trying to be transparent and making sure that everybody knows what's happening, in Q1, they seemed to be down. We seem to be seeing a pickup in the second half. Again, it could be just a timing issue, but we're also jumping -- we've jumped in with both legs with our sales team to assist whenever we can. We intend to help make them as successful as they possibly can be.

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Nick Agostino, Laurentian Bank Securities, Inc., Research Division - Head of Research, Special Situations Analyst & Diversified Technology Analyst [17]

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Okay. And then the other thing is a confirmation. You said that you quoted 40 sterilizers as of, I guess, now. In your press release, you mentioned 30, and which I would assume is as of Q1. And I believe on the last call for the Q4 call, I think the number was somewhere on the order of 12. Does that sound about right?

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

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Yes, and I'm going to apologize. I'm going to -- I'm mixing units and quotes.

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Nick Agostino, Laurentian Bank Securities, Inc., Research Division - Head of Research, Special Situations Analyst & Diversified Technology Analyst [19]

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Oh.

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

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40 units, 30 quotes.

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Nick Agostino, Laurentian Bank Securities, Inc., Research Division - Head of Research, Special Situations Analyst & Diversified Technology Analyst [21]

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Okay.

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

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So we're seeing that kind of a mix, and again, we're bringing that through. Our quoting activity is -- on a month-to-month basis, is ramping very, very aggressively, and the most recent trade-through activity is really driving a lot of that as well. We have a lot of requests for budgetary quotes, which basically the start in the process, so that's where we really see a lot of activity starting.

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Nick Agostino, Laurentian Bank Securities, Inc., Research Division - Head of Research, Special Situations Analyst & Diversified Technology Analyst [23]

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Okay. And then I guess just two questions really. You alluded to you think there's a possibility that you directly sell 6 to 7 sterilizers. I'm assuming that's a Q2 potential. And more importantly ...

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Richard M. Rumble, TSO3 Inc. - CEO, President & Director [24]

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I want to stop you right there, Nick.

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Nick Agostino, Laurentian Bank Securities, Inc., Research Division - Head of Research, Special Situations Analyst & Diversified Technology Analyst [25]

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Sorry.

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Richard M. Rumble, TSO3 Inc. - CEO, President & Director [26]

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We've said that we are attempting right now to close those. We are 6 weeks away from the end of the quarter. Yes, I'm going to go out on a limb here and say that my team is being challenged to close business, whether or not it's those -- just those 6 or 7, or whether or not they'll all happen in this quarter, but it's time we closed business. Q2 is a very good time to do it. I've gotten very good indications from my sales team that they're going to be able to do some, but the real issue is that I want to celebrate the first direct order from TSO3 in Q2. I want to celebrate the first shipments and I say shipments, plural, in the second half of 2018.

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Glen Kayll, TSO3 Inc. - CFO [27]

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And Nick, important to note that the purchase order is not revenue. Revenue is upon delivery.

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

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Okay. Okay. The question becomes have you placed -- just to kind of give me a sense of confidence on maybe getting some orders, POs and deliveries through the door for Q2. Have you placed an order with Getinge as of now? When I look at your inventory, it is up $400,000, but it is all for raw materials, so I'm going to assume that's for equipment upgrade. Have you placed an order with Getinge yet?

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

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The answer to that is no. We've got -- based on the terms of our agreement to repurchase from Getinge, we will take the order from the end-user and then place the order, do an upgrade. All of our product will be upgraded that we sell to the end-user, and then ship. And we can do that all in a pattern that would minimize our cash requirements.

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Nick Agostino, Laurentian Bank Securities, Inc., Research Division - Head of Research, Special Situations Analyst & Diversified Technology Analyst [30]

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Okay. And then the second question is on the consumable side, it looks like all the revenue this quarter was all consumables and services related, $250,000 or so. That looks to me like it's a slowing of momentum, if I read that correctly. Any color, commentary there, if that is the way it should be interpreted? And if so, does it -- would it appear that your customers are using your devices less so in Q1 versus prior quarters and why?

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Glen Kayll, TSO3 Inc. - CFO [31]

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Nick, we don't have any evidence of that. We've indicated in prior calls that this is flowing through a distributor as multiple [pipes] that they carry the consumables in. So we will be subject to ups and downs relating to the change in inventory levels. We've also got a distributor who's being very focused on our working capital right now, so I think it is more that. I wouldn't read into it that much. We do have some fluctuations; the trend is definitely up and to the right. We don't have any evidence that -- of what you're indicating there.

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Operator [32]

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Your next question comes from the line of [William Hamilton] of [Dr. William Hamilton Holding Company].

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Unidentified Analyst, [33]

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Yes, I have a couple of questions. I'm wondering about the revenue for the quarter, the upgrades for Getinge. That will be part of the second quarter?

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

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Yes, I think we can get a good-size chunk, if not all, of the backlog for the upgrade revenue that would be in the second quarter.

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Richard M. Rumble, TSO3 Inc. - CEO, President & Director [35]

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As indicated in the release, we have taken the purchase order from Getinge; all of that would be done in the second quarter.

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Glen Kayll, TSO3 Inc. - CFO [36]

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Yes.

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Richard M. Rumble, TSO3 Inc. - CEO, President & Director [37]

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We did not get the PO until late in the first quarter, so we could not act on it.

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Glen Kayll, TSO3 Inc. - CFO [38]

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That had...

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Unidentified Analyst, [39]

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Okay. What?

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Glen Kayll, TSO3 Inc. - CFO [40]

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A little bit of impact on our inventory as well, so you'll see that we had a bump in inventory, but that was just to supply the upgrades.

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Unidentified Analyst, [41]

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Okay. I've got another question. I know some people are wondering about the possibility of financing, given the present sort of burn rate. And what are your comments regarding that as a possibility, which I think has certainly adversely affected the share price over the last months?

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Glen Kayll, TSO3 Inc. - CFO [42]

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Well, I think I tried to say it in my opening remarks, which is we do have a number of options available to us. We have an industry-leading technology, industry-leading clearances, a great business model, and so we have a number of different options available to us. And we're looking at them. We are not -- we are trying to not run into anything that is immediate; we're trying to get a great deal and a great opportunity for our shareholders. And as soon as we've done or completed that, I'll be happy to discuss it. Until then I can't.

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Unidentified Analyst, [43]

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So yes, so I think people being afraid of you doing -- or going to the market for an equity raise, which would be very negative, and I think is actually, at the present time, being accounted for, to some degree, in the share price. But you have no plans on doing anything like that?

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Richard M. Rumble, TSO3 Inc. - CEO, President & Director [44]

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I think we have to keep our options open. That's the first thing that needs to always be said, but I think it's very, very important that everyone understand that we recognize that these pricing levels, that we want to be very, very careful with what we do on how it affects our shareholders.

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Unidentified Analyst, [45]

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Yes.

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Richard M. Rumble, TSO3 Inc. - CEO, President & Director [46]

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Options exist and I've said this before and I'll say it again and again and again. We believe that the FDA will be a positive event for us. We believe that it will help with the trajectory and we'd like to give ourselves a little bit of time to make sure that we can handle that event, which we believe is imminent. And we'll make decisions shortly thereafter if they're required.

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Unidentified Analyst, [47]

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Okay. And in terms of the Getinge contract -- or is it possible that you might even continue to work with Getinge even after the August the 1st without making any changes in your arrangement with them could even simply continue open-ended as it is right now?

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Richard M. Rumble, TSO3 Inc. - CEO, President & Director [48]

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There's -- the answer is yes, there is a clause in the document that we've signed that says with mutual agreement, we can extend. Again, I think the real thing that both -- I'm really thrilled about that's recently occurred with the U.S. getting organization, we're much, much closer in our communication than we have been in previous quarters, years if you will, negotiating with them as well as, if you will, the European leadership. We are meeting on a much more regular cadence, targeting specific opportunities ever since the beginning of the second quarter. We believe that we can mutually make that needle move substantially.

Obviously, it's great to have that organization as far as the team. They're good to work with and we want them to do better, obviously, and we think that the market is definitely there, and we demonstrated that. But we're not rushing to an exit. I think we are rushing to improvement and that's the big difference.

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Unidentified Analyst, [49]

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What excuse has Getinge given you? Because I'm certain they tried to give you excuses for their poor performance, especially in this first quarter.

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Richard M. Rumble, TSO3 Inc. - CEO, President & Director [50]

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There's a lot of things that happen in a quarter. Again, we're trying to be transparent. We're trying to give people information, even when the information is not all that favorable. But I think you have to also recognize that in the capital equipment process, again, it's lumpy, quarter-by-quarter activity, seasonality.

I believe that they had a reasonably good fourth quarter; did that buy into some of their Q1. I think some of the activity that we're seeing in Q2 just pushed back from Q1. Let's give it a little bit longer time, but at the same time, I want to be very clear that we want to make every quarter. We want to help them make every one of their quarters. We love it when they're successful; we want to make them successful.

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Unidentified Analyst, [51]

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Yes, well, first quarter is often the quarter where the salespeople are not as motivated because their year-end has already happened. Has there been any change that you're aware of at Getinge in terms of compensation of their salespeople or how they're going about their sales, that might encourage them in further quarters?

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Richard M. Rumble, TSO3 Inc. - CEO, President & Director [52]

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Only in what we received at the end of last year where their compensation, they applied additional incentive on our product line. So again, that's been previously communicated and I believe it is still intact. And when I talk to the people that I'm talking to these days, I think they are very happy with what's going on. These salespeople seem to be highly motivated and I'm -- again, I was witness to their booth and their selling activity last week. I was pleased with their level of competency, how they held themselves in front of the customer, where our product was placed in their booth. So I think that was well done and we're looking to support them. Again, it's their business; we need them to be successful. We support them as much as we can.

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Unidentified Analyst, [53]

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Okay. But a couple -- little questions regarding FDA -- well, not very little, I suppose. One is one of the interpretations that I have been trying to get straight is, for example, you have approval for colonoscopes and for bronchoscopes and for gastroscopes, which your gastroscopes and the colonoscopes are complex scopes, similar to the duodenoscopes. And they are not, in my understanding, substantially different other than perhaps not having the same elevator mechanism. And yet, the FDA seems to be dragging its feet in terms of giving approval to TSO3 or the complex duodenoscopes, which TSO3 didn't seem to have difficulty obtaining for the colonoscopes.

Now why would the FDA be doing that? Is that simply a political thing? Does that suggest simply something that they realize that the duodenoscopes are the ones that have the problems, whereas colonoscopies tend to be contaminated anyway. But with recent studies showing the ineffectiveness of other processing such as high-level disinfection plus high-level disinfection, or high-level disinfection plus ethylene oxide being shown repeatedly to be ineffective in eliminating bacteria from these scopes, why is the FDA being so sort of -- can you give any color to why they're so slow in giving their approval, even though Canada and Europe have recognized that the VP4 sterilizes these things?

What happens when sometimes the data crosses the border and all of a sudden, it's no longer valid data? That just doesn't make sense because you're able to ...

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Richard M. Rumble, TSO3 Inc. - CEO, President & Director [54]

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[Dr. Hamilton], I'll stop you there because I think I know the gist of your question. I first want to compliment you on always being up-to-date with the technology and the science, and it's greatly appreciated that you take the time to look at that. I do want to say, one, we do have a clearance for gastroscopes and colonoscopes. These are 3.5-meter long devices. We are able to sterilize devices that are that length and have 4 channels, 4 working channels or fewer. And when you begin to look at that very description and you look at a duodenoscope, you begin to the similarities. So again, I think that you are accurate.

I think that as we communication back and forth with the agency, and we do, around our filings, that we look at that similarity and we are looking at how to leverage that existing clearance towards what we're currently working on. That being said, I will say that the FDA is not being slow; at least, they are not slow as of this week. And the reason I say that is because there is a clock that is regarded by both the manufacturer, the candidate, the petitioner, if you will, and the agency. And the agency is just coming right to the end of their clock right now. So I won't say that they've shortened the process in any way, but they're still within their time frame.

Third, this is probably -- and when TSO3 goes after these types of claims, as we've done in the past, we do things that no one else has ever done before. And so we are a pioneer and we are exploring new grounds, and so they -- it tends to get more review because again, it is a claim that has never been held before. I stress TSO3 is looking to have a claim for these complex devices, gastroscopes, colonoscopes, duodenoscopes alike, that no other manufacturer of a sterilizer, [internal] sterilization device, has ever made a claim to before.

And this is going to be the first that will be what we use in a very aggressive way to differentiate ourselves from our competition. So there is a natural tendency, I think, to look at the new and be more conservative when you are reviewing the files.

The final point I will make is that this is a very contentious, hotly debated item in the industry, based on all the results in the science that you just alluded to. We'll talk more about that at the AGM. I've got some slides to help people understand the complexity of the issue, but I think that we're navigating it well. I think that we will be successful and I think the information will be available shortly.

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Unidentified Analyst, [55]

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Can you comment on the possibility of the FDA -- I've maintained in the past that getting FDA approval for these new -- these other complex scopes, including duodenoscopes, should be a separate issue from the development of IFUs, for example, for the individual companies. And I say that because my impression has certainly been -- so has many other people's -- that some of the manufacturers, particularly Olympus, have been obstructionist, or have not been forthcoming in terms of ...

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Richard M. Rumble, TSO3 Inc. - CEO, President & Director [56]

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[Dr. Hamilton], again, I'm going to jump in on you there and just say everybody runs their business in, I'm sure, the way that they see appropriate.

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Unidentified Analyst, [57]

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Sure.

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Richard M. Rumble, TSO3 Inc. - CEO, President & Director [58]

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I don't want to get into who's calling who names or whatever; that's inappropriate.

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Unidentified Analyst, [59]

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No, no, I'm not trying to call anyone names.

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Richard M. Rumble, TSO3 Inc. - CEO, President & Director [60]

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But at this point, we -- I think that you'll see shortly, as we develop our materials, how we address compatibility. I'm very pleased with the work that TSO3 conducted in the fourth quarter of 2017 in which we conducted thorough surveys on individual hospital use practices around duodenoscopes, whether that be single disinfection, multiple, high-level disinfection steps or high-level disinfection followed by sterilization and the impact that it had on the compatibility of the device with the process.

I will share some of that information today at the AGM because that's more of a general discussion, not necessarily suited for the conference call. But that information will all be available on our website shortly.

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Unidentified Analyst, [61]

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Okay. So but you're hoping that the FDA will allow you to put out your own IFUs for these individual scopes over and above.

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Richard M. Rumble, TSO3 Inc. - CEO, President & Director [62]

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So to be clear, [Dr. Hamilton], when the FDA gives clearance, it is within a use statement, so that the whole -- the reason for the clearance is to provide the manufacturer and the consumer with an understanding as what the product is labeled to do. And of course, we're going with a multi-channel flexible endoscope, which would have multiple characteristics, including the characteristics that would be part of the duodenoscope.

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Unidentified Analyst, [63]

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All right. Well, because as soon as you get this, it's going to be a huge differentiator between you and everyone else in the field, including ethylene oxide.

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Richard M. Rumble, TSO3 Inc. - CEO, President & Director [64]

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That's -- we believe that our technology will, once again, be a required review by everyone that's looking at this issue. We think it'll be favorable, obviously. That's why we spent the time and the money to do this and a real differentiator, which impacts our overall market position. And [Dr. Hamilton], with that, I'm going to ask if there's anybody --

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Glen Kayll, TSO3 Inc. - CFO [65]

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(inaudible).

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Richard M. Rumble, TSO3 Inc. - CEO, President & Director [66]

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I appreciate your questions, but I'm going to ask, maybe you could give -- we could take some other questions, and then come back if we don't address them.

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Unidentified Analyst, [67]

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Sure.

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Richard M. Rumble, TSO3 Inc. - CEO, President & Director [68]

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Excellent, thank you.

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Operator [69]

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Your next question comes from the line of Frederic Tremblay of Desjardins Capital Markets.

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Frederic Tremblay, Desjardins Securities Inc., Research Division - Analyst [70]

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I'm just wondering if the 30 [liquidations] for over 30 sterilizers that you mentioned, does that include all of the 6 quotations representing a dozen sterilizers that you mentioned in your last conference call; or did you get answers on some of those 6 original quotations?

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Richard M. Rumble, TSO3 Inc. - CEO, President & Director [71]

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No, that -- you could almost take a linear measurement there and say some of those early ones are now the ones that are being worked through towards close. So our win-loss funnel, something that we measure as a part of every equipment sales process, we now have a funnel. We measure win-loss. This will be the only time that I can say that we haven't lost anything yet, but because it's just not practical to think that we're going to win everything. But some of the early quotes are now in the stages of hopefully closing, and we'll be able to give some color on that. Our metrics around sales are quite extensive. Again, we are going to try to be sharing those metrics with everyone, so we can see what we're doing, how we're spending the money.

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Frederic Tremblay, Desjardins Securities Inc., Research Division - Analyst [72]

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Okay, great. And just on the PO for 40 upgrades from Getinge, is 40 the number that they are budgeting to sell/install for the balance of the year?

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Richard M. Rumble, TSO3 Inc. - CEO, President & Director [73]

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No, we have an initial PO for 40; we have a commitment for another 40, but again, commitments don't turn into orders. So orders are something that we can book. So we thought the number that we're looking at is greater than that.

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Frederic Tremblay, Desjardins Securities Inc., Research Division - Analyst [74]

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Okay. And can you just remind me the [effective] revenue per upgrade?

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Glen Kayll, TSO3 Inc. - CFO [75]

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Oh, it can range depending on the nature of the upgrade. So we haven't disclosed what that number is but -- in our disclosure, but it'll range. It's not a -- it's -- you've got to keep it in line with what would be a reasonable dollar amount relative to the overall cost of the sterilizer, not an enormous amount of money, but it is -- it's still [activity].

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Frederic Tremblay, Desjardins Securities Inc., Research Division - Analyst [76]

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Okay. And on the repurchase of units, if I remember correctly, there was mention of the 100 that you've committed to repurchase. And there was an initial order of 30. Is that -- does that mean that you do have to purchase 30 initially, or can you go on a unit-per-unit basis as you get orders from end customers?

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Richard M. Rumble, TSO3 Inc. - CEO, President & Director [77]

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Under the agreement, Frederic, 30 had to be made available for our ability to inspect and upgrade (inaudible). We're putting together marketing programs, activities, to help some of those units get out in the field. So there's no absolute day in which we need to purchase it, but again, we put that in the agreement to make sure that they would be available; there was no misunderstanding as to availability, if you will. The last thing we want to do is take POs from end-users and not have product to ship to them.

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Operator [78]

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(foreign language) (Operator Instructions) Your next question comes from the line of [Jeff Gilbert] of (inaudible).

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Unidentified Analyst, [79]

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Thank you very much for the transparency and appreciate that very much. Also, congratulations on the progress you're making in the sales channels. Again, the transparency is welcomed. A couple of questions, just clarification on the financing options. Hopefully, I just want -- like to hear this, but is debt or some sort of revolver also an option that you're considering?

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Glen Kayll, TSO3 Inc. - CFO [80]

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We're -- you never want to say what you're doing until you've done it, but yes, all options are available on the table.

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Unidentified Analyst, [81]

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Okay. Appreciate that. A clarification -- if there were any open market purchases by management in the last quarter?

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Glen Kayll, TSO3 Inc. - CFO [82]

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Yes, we did. That's available on our [SEDAR] filings. The senior managers all purchased stock.

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Unidentified Analyst, [83]

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And finally, just in your conversations with Getinge and others, which you said there are -- your eyes are open to other arrangements. Is there potential that any other arrangement might have -- obviously, all options could be on the table, but is there a discussion of an upfront cash payment similar to the Getinge arrangement that might be considered?

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Richard M. Rumble, TSO3 Inc. - CEO, President & Director [84]

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At this point, everyone knows the situation that we're in. We look to both our Getinge partnership now and in the future; as well as anyone else that we would be talking with, they need to understand our circumstances. And being a viable business means there needs to be available resources to run that business. So we expect those people to pony up.

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Unidentified Analyst, [85]

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Great. One more follow-up -- with the repurchase from Getinge on the 30 units, et cetera, are there financing terms, or is that going to be a cash transaction?

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Glen Kayll, TSO3 Inc. - CFO [86]

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It's net 45 days, which is part of the arrangement, but we're in discussions as well. So you never know how it'll all play out. We're in discussions with Getinge right now, so you don't know how that'll play out.

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Unidentified Analyst, [87]

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Okay.

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Glen Kayll, TSO3 Inc. - CFO [88]

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But yes, those are the terms right now.

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Operator [89]

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

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Richard M. Rumble, TSO3 Inc. - CEO, President & Director [90]

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Thank you, Sylvia. I appreciate the questions that came in today. We look forward to updating you on a frequent basis. As we have news, we will get it to you. And Glen and I are now heading off to the Annual General Meeting of Shareholders, where we'll conduct some corporate business, and also continue to discuss some of the topics that were presented today. Have a great day.

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Operator [91]

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(foreign language) Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect your line from old rules that ruled that often.