TS03 Inc Trust Units TSTIF

Remarks by Sara Elford of Canaccord Genuity

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No change to our SPECULATIVE BUY rating and one-year target price of C$1.75. The core tenets of our investment thesis are as follows: (1) technology platform is game-changing and applicable across multiple products and end-markets; (2) business model is excellent (very healthy, high-margin recurring revenue from captive consumable sales based on the in-use installed base); (3) cash balance is now sufficient to fund reduced burn rate through mid-2015; (4) U.S. clearance is still a matter of when and not if, in our opinion; and (5) our view that TSO3 should be an acquisition target following a successful FDA outcome. The overwhelming risk has been and continues to be timing, in our view.

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The good news

• Confirmation that the 510(k) process continues to be the appropriate pathway;
• Confirmation that TSO3’s approach or pathway regarding the biological indicator (a key accessory to the sterilizer and process) is accepted; and
• Confirmation that the data / approach submitted in late 2013 is accepted and understood.

The bad news (timing)

• First, some background: TSO3’s sterilizer is unique in the way that it delivers hydrogen peroxide to the sterilization chamber. It is produced on demand in a dynamic way based on continuous feedback during the cycle. How much is required at any given time or during any given cycle is correlated with the nature of the load (among other variables that have been documented and now accepted) and can be regulated by certain conditions within the chamber.
• What the FDA wants now: When viewed in the context of a continuum between two goalposts, the Agency has requested that TSO3 gather additional data points along the continuum and include this in its filing. It sounds to us like this data will feed into the labeling process.
• The company expects the chemical and biological testing to take roughly a month. The additional data will be summarized and added to the existing 510(k) document, which will then be resubmitted. Timing wise, we expect resubmission to occur sometime in early Q2/14 (possible late Q1/14), but certainly as quickly as possible. It has been generally expected that resubmission would occur, so resubmission is not new news.
• While timing remains very difficult to predict, we now know that approval will not be forthcoming until Q2/14 at the earliest. As noted in our previous research, the current strategic process hinges on this outcome. That being said, TSO3 has confirmed in the past – and we believe this continues to be the case – that there is more than one party at the table. It remains our view that the company will quickly become an acquisition target following clearance, which we still see as a matter of when, not if.