TSO3 continues to increase its revenue as it looks to take market share from competitors offering established sterilization methods for surgical instruments. But its losses worsened in the most recent quarter.

TSO3 INC. (symbol TOS on Toronto; www.tso3.com) has developed a sterilization process that uses ozone, a gas made up of three atoms of oxygen. That gas is also an effective killer of most drug-resistant bacteria and pathogens.

What gives TS03’s process special appeal is that it can kill even the most stubborn organisms, including the prion proteins that cause mad-cow disease. Prions survive the normal washing and sterilization used in hospitals.

The company’s first product was its 125L ozone sterilizer; hospitals and medical clinics use it to clean surgical and diagnostic instruments that cannot be sterilized by heating. As part of TS03’s process, ozone gas is created in an enclosed ozone generator by passing oxygen through an electrical field. That converts the gas to ozone. At the end of the sterilization cycle, the 125L ozone sterilizer discharges only oxygen and water vapour.

The company’s revenue fell from $3.4 million in 2011 to just $254,370 in 2013. That’s because in 2012 it terminated its distribution deal with 3M Company, symbol MMM on New York. As a result, it had to pay 3M a $2.0 million U.S. break-up fee.

Revenue improved to $432,987 in 2014, and jumped to $1.6 million in 2015. The more-recent gain was because Health Canada, the U.S. Food and Drug Administration and European regulators approved the company’s new Sterizone VP4 sterilizer. TSO3 also signed a new exclusive distribution deal with Sweden’s Getinge Group.

The company’s losses improved from $0.13 a share (or a total of $7.7 million) in 2011 to $0.09 a share (or $5.8 million) in 2012. Due to the break-up payment to 3M, losses expanded to $0.13 a share (or $9.3 million) in 2013. Losses then improved to $0.08 a share (or $5.9 million) in 2014, but worsened to $0.10 a share (or $8.1 million) in 2015.

Penny Stocks: 97% of sales from U.S.

TSO3 now gets 97% of its sales from the U.S., so it switched its reporting currency to U.S. dollars at the start of 2016.

In the three months ended June 30, 2016, the company’s revenue jumped to $3.0 million U.S. from $111,000 U.S. a year earlier. Losses worsened to $1.5 million from $1.4 million; per-share losses were unchanged at $0.02.

TS03 spent $804,000 (or 27.0% of its revenue) on research in the latest quarter. It has no long-term debt, and held cash and investments of $21.3 million as of June 30, 2016.

The company will continue to face difficulty, and considerable marketing expenses, as it tries to penetrate markets where ethylene-oxide sterilization systems dominate.

TS0’s major competitors include industry giants such as Johnson & Johnson and 3M. It also faces the risk of operating in an area where equipment failure could lead to safety problems and related lawsuits.

The company believes its sterilizers can save hospitals and clinics money. They also operate without some of the environmental and safety concerns associated with traditional chemical sterilization. The stock is up about 45% since the end of July 2016. However, the company needs a lot of growth to justify its current stock price of $3.27, let alone move higher.

We don’t recommend TSO3.

For our advice on getting an edge with penny stocks, read 7 tips for making money with top penny stock picks.

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