TSO3 reports net loss of $9.2M for fiscal 2009

Highlights of 2009 annual results and subsequent events:

CHANNEL STRATEGY - Reached Global Channel Partner Agreement with 3M Infection Prevention Division for the distribution of new generation product

PRODUCT STRATEGY - Received FDA 510(k) clearance for expanded sterilization claims, supporting superior sterile efficacy of the STERIZONE(R) Dynamic Sterilant Delivery Process(R) - Completed data file for new product, submitted to Health Canada and received approval - Submitted documentation to support export of new product to Europe and the United States

SUBSEQUENT EVENTS TO YEAR END - Received Notice of Conformity to European Medical Device Directive allowing the Use of CE Mark and the sale of new product in the European Union - Closed Bought Deal Financing for CDN $16,000,000 - Received initial purchase commitment from 3M - 3M Introduces the 3M(TM) Optreoz 125-Z(TM) branded Sterilizer

TSO3 Inc. ("TSO3") an innovator in sterilization technology for medical devices in healthcare settings using ozone, posted sales totalling $1.3 million for the fiscal year ended December 31, 2009, compared to $2.2 million one year earlier. During the year, the Company sold five of its first generation STERIZONE(R) sterilizers and accessories, whereas it sold 13 in the preceding fiscal year.

For the year ended December 31, 2009, TSO3 recorded a net loss of $9.2 million compared to $9.6 million one year earlier. While revenues decreased in 2009, versus 2008, expense control contributed to a decrease in the Company's net loss.

Mr. R.M. (Ric) Rumble, President and Chief Executive Officer of TSO3 commented that "In 2009, the downturn in the economy clearly impacted our ability to close business. While we saw an increase in our quoting activities early on, these quotes remained mostly inactive at year end despite efforts to shake loose business with various incentives. Our response was to reallocate our resources to R&D in order to improve our product and be ready with an enhanced product offering that would result in increased business opportunities when the economy showed signs of recovery. I am proud to say that 2009, despite the lack of sales, was a year of great accomplishments for TSO3. It was a year where we set aggressive goals and timelines for ourselves, delivered on our commitments and created significant value for our Shareholders. We approach 2010 stronger than we have ever been, with fast and compatible sterilization cycles and a strong sales channel able to support sequential market role-outs on a global basis".

The plan

At TSO3's 2009 Annual General Meeting, the Company outlined its plans to; increase the utility of its sterilizer though the creation of new cycles; develop relationships leading to a channel partner and increase market opportunities via expansion outside of North America.

Total solution in low temperature sterilization

The Company had successfully developed its original sterilization cycle based on novel technology for low temperature sterilization addressing the need for an efficacious, cost-effective and safe sterilization method. However, customer needs for speed and material compatibility believed to contribute to the lack of traction in the marketplace. As a result, the Company invested resources to make significant improvements to its sterilization platform. In 2009, these efforts led to a new generation sterilizer offering three cycles in a single unit. The new generation STERIZONE(R) Low Temperature Sterilization System offers speed, high throughput, increased instrument compatibility, and cost effective sterilization, while engineered to remain customer safe and eco-friendly. Offering the same superior sterile efficacy, the new generation sterilizer accommodates a much wider range of instruments from general surgical instruments, to short as well as long rigid and flexible endoscopes, including complex multi-channel devices.

Global channel partner

On September 2, 2009, TSO3 entered into an exclusive negotiation period with 3M, for the purpose of signing an agreement for the distribution of the new generation STERIZONE(R) Sterilizer, through 3M's Global Infection Prevention Division. After roughly three months of negotiations and due diligence, TSO3 announced on December 16, 2009, that an agreement had been reached for global distribution of the product to Central Sterilization and OR Departments within acute care facilities, under the 3M(TM) brand Optreoz 125-Z(TM). Geographical roll-out will occur as regulatory clearances are received.

Market clearances on new generation sterilizer

In December 2009, TSO3 filed for regulatory clearances on the new generation product in Canada, Europe and the United States. To date, TSO3 has received authorization from Health Canada and notification from the European Notified Body (CE Mark), allowing the sale of the product in Canada, as well as export to the European Union. United States regulatory clearance is currently under review.

2010 and beyond

In 2010, TSO3 will work methodically with its channel partner to firmly establish themselves in markets, as clearances are received. The Company's goal is to achieve substantial and sustainable market penetration globally in the years to come. TSO3 has received initial purchase commitment from 3M, on units intended for 3M internal use, and expects to start shipping these units in early second quarter.

Early in 2010, TSO3 concluded a bought deal financing round for $16M, which secures TSO3's financial situation. In addition to supporting the transition to 3M for marketing, sales and client support activities, this additional sum of money will support TSO3's product development plans. The Company intends to increase its product portfolio via additional applications of its STERIZONE(R) technology directed at new market segments within acute care facilities, as well as other markets.

Initiatives are also being undertaken in order to reduce costs in the Company's system, while improving overall quality within the organization.

Sales

For the fiscal year ending December 31, 2009, Sales amounted to $1,324,540, compared to $2,235,101 in 2008. During the fiscal year 2009, the Company completed the sale of five sterilizers and related accessories, compared to 13 sterilizers and accessories in 2008.

Operating

For the fiscal year ending December 31, 2009, Operating Expenses amounted to $2,350,190, compared to $2,778,983 in 2008. Operating Expenses are related to the Production and After-Sales Service department as well as the costs of manufacturing the devices. Having sold fewer devices during 2009, the variance between the two periods is explained by a decrease in the cost of goods sold. This variance is also explained by a decrease in salaries related to operating and after-sale service. Conversely, installation charges and inventory write-off experienced an increase between the two periods. In 2009, Operating expenses include a write-down of $446,484 for finished goods and $135,225 for raw materials. This write-off was taken due to the Company's intention of adjusting existing inventory so that all finished goods would be consistent with the new sterilizer including the new cycles. Also at the end of 2009, the Company reviewed its estimates for the provision for obsolescence and a reversal of $135,485 was recorded.

Sales and Marketing

For the fiscal year ending December 31, 2009, sales and marketing amounted to $2,130,329 compared to an amount of $3,681,424 in 2008. The variance between the two periods is mainly the result of a decrease in salaries, bonus, commissions and expenses due to a reorganization of the sales department. Conversely, marketing salaries experienced an increase between the two periods, due to the hiring of a new Global Marketing Vice-President in early 2009. The variation can also be explained by a decrease in the payment of severances and in professional fees.

Research and Development

For the fiscal year 2009, R&D expenses before tax credits amounted to $3,447,302 compared to $2,649,267 in 2008. The difference between the two periods is mainly due to material and instrument purchases in order to accelerate ongoing work on compatibility. The gap between the two periods is also explained by an increase in sub-contracting fees as well as an increase in salaries resulting from the addition of employees in R&D to pursue the development of new cycles and filings with regulatory agencies. Conversely, expenses related to work on the prions decreased between the two periods.

Administrative

For the fiscal year ending December 31, 2009, administration expenses amounted to $3,058,220 compared to $3,691,879 in 2008. The variance between the two periods is explained by a decrease in the payment of severances, in professional fees, in capital tax and in the expenses related to Stock-based Compensation. Conversely, expenses related to salaries, bonuses as well as patent fees, increased between the two periods.

Other Revenues

For the fiscal year ended December 31, 2009, other revenues amounted to $468,103 compared to $955,747 in 2008. The variance between the two periods is due to a decrease in investment revenues due to the Company's use of its liquidity to finance its operation and to lower interest rate on its investment. The variance is also due to an increase in foreign exchange loss. Conversely, R&D tax credits and government grants increased between the two periods.

Net Loss

The Company recorded for the period ending December 31, 2009, a net loss of $9,217,632, or $0.19 per share, compared to a net loss of $9,633,804, or $0.20 per share, in 2008.

Liquid Assets and Financial Situation

The Company preserved an adequate position of liquidity in 2009. As of December 31, 2009, cash and temporary investments amounted to $10,671,845 compared to $17,718,470 as of December 31, 2008.

Accounts Receivable

As of December 31, 2009, accounts receivable amounted to $1,333,178 compared to $820,318 for the same period in 2008. The difference between the two periods is due to an increase in the tax credit receivable and by an amount of $525,500 from a milestone payment for licensing revenue. Conversely, the accounts receivable from customers decreased between the two periods.

Inventories

As of December 31, 2009, current assets showed inventory valued at $1,483,810 compared to $2,548,075 as of December 31, 2008. The variance is explained by a decrease in the inventory of sterilizers resulting from the sale of devices between the two periods. It is also resulting from the transfer of materials and sterilizers to the R&D department in order to accelerate the work we have been conducting on compatibility of medical devices and to pursue the development of the new sterilization cycles. The variance is also explained by the total write-down of $581,709 and the reversal of $135,485.

Deferred Revenues

As of December 31, 2009, the short and long term deferred revenues amounted to $2,052,333 compared to an amount of $388,958 as of December 31, 2008. The item Deferred Revenues reflects financial transactions related to parts, warranties, licensing revenues and service contracts not yet recognized as revenues. The variance between the two periods is mainly explained by the amount of $1,576,500 received from the 3M(TM) Agreement. Starting in 2010, this amount will be amortized and recognized as revenue over the duration of the Agreement on a straight-line basis.