TS03 Inc Trust Units TSTIF

RE:RE:RE:Financing

[Drrwong]

@Vice: let's see if i can help.

The key to understanding the interim agreement is to put it in the context of the original, existing agreement.  Without this new interim agreement, the original agreement would have been in place and enforced. 

Background:  Getinge didn't want to give out its 2018 PO at the end of 2017 as per the original agreement, which gave TSO3 an opening to renegotiate as that was a material breach by Getinge.

Original Agreement:  recall RR talked about US manufacturing expansion in 2018 because the purchase minimum from Getinge under the original contract would have exceeded the 200 units/yr capacity in Quebec.  Let's say Getinge pays $100k for each x 200 units = that is a $20mm PO.  Since Getinge has 200+ units in inventory at YE17, there is no real need for them to buy even more.  Hence they will be "wasting" $20mm to buy stuff to sit in their warehouse.

New Interim Agreement:  TSO3 buys 100 VP4s from Getinge at $33k each.  This means Getinge will lose $67k on each unit, or $6.7mm on the 100 unit.  Remember the interim agreement did not force Getinge to put in a PO for 2018 (hence you don't see that in my projections either in my last post).  Losing $6.7mm is better than losing $20mm, right?  So there is a financial incentive for the new agreement, and there is a very important strategic rationale as well.

Strategically, Getinge wants TSO3 to build out its own commercial team.  We must remember VP4 is only one product within hundreds/thousands of items in a Getinge sales rep's portfolio.  Getinge's sales people will NEVER by as proficient/knowledgeable in the VP4 as a TSO3 sales person, regardless of how many of these training courses that we hear about.  Given VP4 is a disruptive technology in a 10yr life capital equipment, this is a big ticket item (within sterilization) that requires a lot of documentation to sell.  Getinge would have seen this first-hand already, and they know they need/want TSO3's help in their selling process.   This is the reason why they are ok with carving out half the US hospitals (that they don't market to anyway) to TSO3, and this is also the reason why they agree to sell these 100 VP4s at significant loss to TSO3--to get them started in their own commerical operations.  There is also a positive feedback loop here: the more VP4s either TSO3 or Getinge can sell, the more awareness the industry would have on this disruptive product, which makes future sales (for either Getinge or TSO3) easier.   

Assuming either TSO3 or Getinge (or both) started to gain some traction in their selling (due to more focused, more real life documentation or upcoming regulatory changes), and the industry awareness/demand did pick up.  Getinge would be more than happy to pay full price for additional VP4s in the future, where they will still make good profits (majority coming from servicing and consumables) 

Hope this helps, Vice.  As always, I am open to comments either for or against my analysis.