UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2011
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number: 333-159402
OXYSURE SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware | 71-0960725 |
(State or other jurisdiction of | (IRS Employer |
incorporation or organization) | Identification No.) |
10880 John W. Elliott Drive, Suite 600, Frisco, TX 75033
(Address of principal executive offices)
(972) 294-6450
(Registrant’s telephone number)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ¨ No þ
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ | Accelerated filer ¨ |
Non-accelerated filer ¨ | Smaller reporting company þ |
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
As of November 21, 2011, the number of shares of common stock outstanding was 15,967,563.
INDEX
Page | ||
Number | ||
PART I - FINANCIAL INFORMATION | ||
Item 1. | Financial Statements (Unaudited) | 1 |
Condensed Balance Sheet – September 30, 2011 and 2010 | 1 | |
Condensed Statement of Operations – | ||
For the three and nine months ended September 30, 2011 and 2010 | 2 | |
Condensed Statements of Cash Flows – | ||
For the nine months ended September 30, 2011 and 2010 | 3 | |
Condensed Notes to Financial Statements | 5 | |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 33 |
Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 42 |
Item 4. | Controls and Procedures | 42 |
Item 1. | Legal Proceedings | 43 |
Item 3. | Defaults upon Senior Securities | 43 |
Item 4. | (Removed and reserved) | 43 |
Item 5. | Other Information | 43 |
Item 6. | Exhibits | 43 |
SIGNATURES | 45 |
PART I - FINANCIAL INFORMATION
OXYSURE SYSTEMS INC. |
BALANCE SHEETS |
September 30, 2011 | December 31, 2010 (Restated) | |||||||
Unaudited | ||||||||
ASSETS | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 761 | $ | 39,887 | ||||
Accounts receivable, net of allowances for sales returns and allowance for doubtful accounts | 16,859 | 349 | ||||||
Inventories | 254,281 | 227,692 | ||||||
Prepaid expenses and other current assets | 91,098 | 40,666 | ||||||
Total current assets | 362,999 | 308,594 | ||||||
Property and equipment, net | 173,572 | 304,737 | ||||||
Intangible assets, net | 452,610 | 473,703 | ||||||
Other assets | 13,132 | 13,132 | ||||||
TOTAL ASSETS | $ | 1,002,312 | $ | 1,100,166 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities | ||||||||
Accounts payable and accrued expenses | $ | 372,817 | $ | 388,937 | ||||
Capital leases - current | 307,989 | 332,640 | ||||||
Notes payable - current | 2,722,734 | 908,514 | ||||||
Deferred revenue | 294,835 | 255,655 | ||||||
Total current liabilities | 3,698,375 | 1,885,745 | ||||||
Long-term liabilities | ||||||||
Capital leases | $ | 25,741 | $ | 25,741 | ||||
Notes payable | 245,887 | 1,514,646 | ||||||
Total long-term liabilities | 271,628 | 1,540,387 | ||||||
TOTAL LIABILITIES | 3,970,003 | 3,426,132 | ||||||
COMMITMENTS AND CONTINGENCY (NOTE 9) | ||||||||
STOCKHOLDERS’ EQUITY | ||||||||
Preferred stock, par value $0.0005 per share; 25,000,000 shares authorized; | ||||||||
3,126,434 Series A convertible preferred shares issued and outstanding as of September 30, 2011 and December 31, 2010. | 1,563 | 1,563 | ||||||
Common stock, par value $0.0004 per share; 100,000,000 shares authorized; | ||||||||
15,967,563 Shares of voting common stock issued and outstanding as of September 30, 2011 and 15,724,816 shares issued and outstanding as of December 31, 2010. | 6,427 | 6,290 | ||||||
Additional Paid-in Capital | 10,121,696 | 9,564,440 | ||||||
Accumulated deficit | (13,097,377 | ) | (11,898,260 | ) | ||||
TOTAL STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME | (2,967,691 | ) | (2,325,967 | ) | ||||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 1,002,312 | $ | 1,100,166 |
The accompanying notes are an integral part of these Financial Statements.
1
OXYSURE SYSTEMS INC.
STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
(Unaudited)
For the three months ended September 30, | For the nine months ended September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Revenues, net | $ | 21,505 | $ | 53,835 | $ | 120,055 | $ | 329,919 | ||||||||
Cost of goods sold | 10,312 | 29,869 | 69,811 | 55,327 | ||||||||||||
Gross profit | 11,194 | 23,966 | 50,244 | 274,593 | ||||||||||||
Operating expenses | ||||||||||||||||
Selling, general and administrative | 320,659 | 440,297 | 871,204 | 1,286,652 | ||||||||||||
Loss from operating expenses | (309,465 | ) | (416,331 | ) | (820,960 | ) | (1,012,060 | ) | ||||||||
Other income (expenses) | ||||||||||||||||
Other income (expense) | 85,111 | 2,999 | 118,861 | 6,046 | ||||||||||||
Interest expense | (137,309 | ) | (106,770 | ) | (497,019 | ) | (290,961 | ) | ||||||||
Total other income (expenses) | (52,198 | ) | (103,770 | ) | (378,158 | ) | (284,915 | ) | ||||||||
Net loss | (361,663 | ) | (520,101 | ) | (1,199,117 | ) | (1,296,974 | ) | ||||||||
Accumulated deficit - beginning of the period | $ | (12,735,715 | ) | $ | (11,096,176 | ) | $ | (11,898,260 | ) | $ | (10,319,303 | ) | ||||
Prior period adjustments | - | - | - | - | ||||||||||||
Accumulated deficit - end of the period | $ | (13,097,377 | ) | $ | (11,616,277 | ) | $ | (13,097,377 | ) | $ | (11,616,277 | ) | ||||
Basic net income (loss) per common share | $ | (0.02 | ) | $ | (0.03 | ) | $ | (0.08 | ) | $ | (0.08 | ) | ||||
Diluted net income (loss) per common share | $ | (0.02 | ) | $ | (0.03 | ) | $ | (0.08 | ) | $ | (0.08 | ) | ||||
Weighted average common shares outstanding: | ||||||||||||||||
Basic | 15,846,347 | 15,724,816 | 15,775,403 | 15,724,816 | ||||||||||||
Diluted | 15,846,347 | 15,724,816 | 15,775,403 | 15,724,816 |
The accompanying notes are an integral part of these Financial Statements.
2
OXYSURE SYSTEMS INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30, | ||||||||
2011 | 2010 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net loss | $ | (1,199,117 | ) | $ | (1,296,974 | ) | ||
Adjustments to reconcile net income to net cash used in operating activities | ||||||||
Depreciation | 132,693 | 169,670 | ||||||
Amortization of intangible assets | 22,324 | 22,174 | ||||||
Impairment of intangible assets | - | - | ||||||
Amortization of debt discount and warrant fair values related to convertible notes | 443,652 | 243,691 | ||||||
Amortization of other assets | 6,620 | - | ||||||
Prior period adjustment | - | - | ||||||
Changes in Deferred Rent | (13,072 | ) | (10,036 | ) | ||||
Issuance of common stock options to employees as compensation | 72,944 | 77,213 | ||||||
Issuance of common stock options and warrants in exchange for services | 32,023 | - | ||||||
Changes in current assets and liabilities | ||||||||
Accounts receivable | (16,510 | ) | 10,994 | |||||
Inventory | (26,589 | ) | (75,604 | ) | ||||
Prepaid expenses and other current assets | (50,488 | ) | 56 | |||||
Accounts payable and accrued liabilities | (15,130 | ) | 216,071 | |||||
Deferred revenue | 39,180 | 140,791 | ||||||
NET CASH USED IN OPERATING ACTIVITIES | (571,470 | ) | (501,954 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Purchases of intangible assets | (1,231 | ) | (645 | ) | ||||
Other assets | - | (65 | ) | |||||
Purchases of property and equipment | (1,528 | ) | (2,390 | ) | ||||
NET CASH USED IN INVESTING ACTIVITIES | (2,759 | ) | (3,100 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Loan proceeds | 538,844 | 213,536 | ||||||
Payment of capital leases | (24,651 | ) | (35,423 | ) | ||||
Notes issued for customer incentives | - | 270,000 | ||||||
Issuance of Common Stock | - | - | ||||||
Proceeds from exercise of common stock options and warrants | 20,910 | - | ||||||
NET CASH PROVIDED BY FINANCING ACTIVITIES | 535,103 | 448,113 | ||||||
Net increase (decrease) in cash and cash equivalents | (39,126 | ) | (56,940 | ) | ||||
Cash and cash equivalents, at beginning of period | 39,887 | 73,077 | ||||||
Cash and cash equivalents, at end of period | $ | 761 | $ | 16,137 | ||||
Supplemental disclosure of cash flow information: | ||||||||
Cash paid during the period for: | ||||||||
Interest | $ | 2,347 | $ | 8,529 | ||||
Income taxes | $ | - | $ | - | ||||
Supplemental non-cash investing and financing activities: | ||||||||
Promissory subordinated convertible notes issued in connection with rent satisfaction agreements | $ | 200,100 | $ | - | ||||
Promissory subordinated convertible note issued in connection with distribution agreement and licensing agreement | $ | - | $ | 270,000 | ||||
Issuance of common stock warrants in connection with convertible loans | $ | 431,516 | $ | 150,119 |
The accompanying notes are an integral part of these Financial Statements.
3
OXYSURE® SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 2011
(Unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of significant accounting policies of OxySure® Systems, Inc. (“OxySure” or the “Company”) is presented to assist in understanding the Company’s financial statements. The accounting policies presented in these footnotes conform to accounting principles generally accepted in the United States of America and have been consistently applied in the preparation of the accompanying financial statements. These financial statements and notes are representations of the Company’s management who are responsible for their integrity and objectivity.
OxySure® Systems, Inc. (the “Company” or “OSI”) was incorporated on January 15, 2004 as a Delaware corporation. The Company is located in Frisco, Texas and is a medical technology company focused on the design, manufacture and distribution of specialty respiratory products. The Company and its founder have developed a unique catalytic process and methodology to generate medically pure (USP) oxygen instantly from two dry, inert powders. To date, the Company has been issued nine patents on this technology, and it has several additional patents pending. On December 9, 2005, the Company received approval from the Food and Drug Administration (510K, Class II) for its first product utilizing this technology. This product is referred to as the OxySure® Portable Emergency Oxygen System, Model 615, (or Model 615 for short) and the FDA approval is for over-the-counter purchase (without the need of a prescription).
The Company has, at the present time, not paid any dividends and any dividends that may be paid in the future will depend upon the financial requirements of the Company and other relevant factors.
On July 19, 2004, the Company conducted a 1-for-5 reverse stock split of the Company’s common stock. All share numbers and common stock numbers, including stock options and warrants, have been retroactively adjusted to reflect the reverse stock split.
While the Company has effectively managed its working capital deficit, the going concern risk remains an issue for the Company to manage. The Company has implemented, and plans to further implement several different strategies in order to help the Company ease the going concern issue. Refer to Note 15, “Going Concern.”
Basis of Presentation - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported period. Actual results could differ from those estimates. Management further acknowledges that it is solely responsible for adopting sound accounting practices, establishing and maintaining a system of internal accounting control and preventing and detecting fraud. The Company’s system of internal accounting control is designed to assure, among other items, that (1) recorded transactions are valid; (2) all valid transactions are recorded; and (3) transactions are recorded in the period in a timely manner to produce financial statements which present fairly the financial condition of the Company. The interim financial statements include all adjustments which, in the opinion of management, are necessary in order to make the financial statements not misleading.
4
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Use of estimates- The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amount of revenues and expenses during the reported period. Actual results could differ from those estimated.
Revenue Recognition - The Company recognizes revenue when persuasive evidence of an arrangement exists, shipment has occurred, the price is fixed or determinable, and collectability is reasonably assured. Revenues are recognized from product sales, net of discounts and rebates. This revenue recognition policy is applied to both customers and distributors.
Fees from licensees desiring to manufacture and distribute the Company’s products or derivative products using the Company’s intellectual property include initial license fees and royalties. Initial license fees are generally recognized upon granting of the license to the licensee. Royalties are recognized in the period earned.
Deferred Revenue and Income - The Company defers revenue and income when the Company invoices a customer or a customer makes a payment and the requirements of revenue recognition have not been met (i.e. persuasive evidence of an arrangement exists, shipment from a company warehouse has occurred, the price is fixed or determinable and collectability is reasonably assured). Deferred Revenue was $294,835 and $140,791 for the three month periods ended September 30, 2011 and 2010, respectively.
Cash and Cash Equivalents - Cash consists of all highly liquid investments purchased with maturity of three months or less to be cash equivalents. Cash and cash equivalents may at times exceed Federally-insured limits. To minimize this risk, the Company places its cash and cash equivalents with high credit quality institutions.
Inventory – The Company’s inventory consists of raw material and components for its portable oxygen systems as well as completed products and accessories. Inventories are computed using the lower of cost or market, which approximates actual cost on a first-in first-out basis. Inventory components are parts, work-in-process and finished goods. Finished goods are reported as inventories until the point of title transfer to the customer. The Company writes down its inventory value for estimated obsolescence equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. These factors are impacted by market and economic conditions, technology changes, new product introductions and changes in strategic direction and require estimates that may include uncertain elements. Actual demand may differ from forecasted demand, and such differences may have a material effect on recorded inventory values. Management has established inventory reserves to cover estimated inventory losses for all work-in-process and finished goods related to products manufactured, as well as raw material and components for those products that had no potential use in products to be manufactured in the future. Management was required to make judgments about the future benefit of raw materials and components. Actual reserve requirements could differ significantly from management’s estimates, which could have a significant unfavorable impact on our future gross margins.
Concentration of Credit Risk – The Company sells all of its products throughout North America. Sales to its recurring customers are generally granted on net 30-day credit terms. The Company performs periodic credit evaluations of its recurring customers and generally do not require collateral. An allowance for doubtful accounts is maintained for potential credit losses, which losses historically have not been significant.
5
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company invests its cash in deposits and money market funds with major financial institutions. The Company places it cash investments in instruments that meet high credit quality standards, as specified in its investment policy guidelines. These guidelines also limit the amount of credit exposure to any one issue, issuer or type of instrument.
Fair Value of Financial Instruments - The Company’s financial instruments consist principally of cash and cash equivalents, accounts receivable and accounts payable. The Company believes that the recorded values of all of its other financial instruments approximate their fair values because of their nature and respective maturity dates or durations.
Property and Equipment – Property and equipment are recorded at cost with depreciation and amortization provided over the shorter of the remaining lease term or the estimated useful life of the improvement ranging from three to seven years. Renewals and betterments that materially extend the life of an asset are capitalized. Expenditures for maintenance and repairs are charged to expense when incurred. Furniture and fixtures are depreciated over five years. Machinery and equipments are depreciated over five to seven years. Software is depreciated over three years. Leasehold improvements are computed using the shorter of the estimated useful lives of the assets or the lease terms. Depreciation expense was $44,076 and $47,075 for the three month periods ended September 30, 2011 and 2010 respectively.
Other Long-Lived Assets – The Company has two types of intangible assets – patents and trademarks. Intangible assets are carried at cost, net of accumulated amortization. Amortization expense for patents and trademarks was $7,442 and $7,391 for the three month periods ended September 30, 2011 and 2010, respectively.
Intangible assets with definite useful lives and other long-lived assets are tested for impairment if certain impairment indicators are identified. Management evaluates the recoverability of its identifiable intangible assets in accordance with applicable accounting guidance, which requires the assessment of these assets for recoverability when events or circumstances indicate a potential impairment exists. Certain events and circumstances the Company considered in determining whether the carrying value of identifiable intangible assets may not be recoverable include, but are not limited to: significant changes in performance relative to expected operating results; significant changes in the use of the assets; significant negative industry or economic trends; and changes in its business strategy. In determining if impairment exists, the Company estimates the undiscounted cash flows to be generated from the use and ultimate disposition of these assets. If impairment is indicated based on a comparison of the assets’ carrying values and the undiscounted cash flows, the impairment loss is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets. Impairment charges for patents were $0 for the three month periods ended September 30, 2011 and 2010.
Other Assets – The Company records Other Assets net of accumulated amortization. Amortization expense for Other Assets was $0 for each of the three month periods ended September 30, 2011 and 2010.
Allowance for Doubtful Accounts- The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of the Company’s customers to make payments. The Company periodically reviews these allowances, including an analysis of the customers’ payment history and information regarding the customers’ creditworthiness. Actual write-offs have not been materially different from the estimated allowance.
6
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Research and Development Costs – Costs associated with the development of the Company’s products are charged to expense as incurred. $60 and $1,153 were incurred in the three month periods ended September 30, 2011 and 2010, respectively.
Income Taxes - In accordance with Accounting Standards Codification (“ASC”) Topic 740, “Income Taxes” (“ASC 740”), the Company accounts for income taxes using an asset and liability approach, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company’s Consolidated Financial Statements, but have not been reflected in the Company's taxable income. A valuation allowance has been established to reduce deferred tax assets to their estimated realizable value. Therefore, the Company provides a valuation allowance to the extent that the Company does not believe it is more likely than not that it will generate sufficient taxable income in future periods to realize the benefit of its deferred tax assets. The Company recognizes interest and penalties related to unrecognized tax benefits in income tax expense.
Equity Warrants - The Company has issued warrants to purchase shares of its common stock in connection with convertible notes. In accordance with ASC 470-20, Debt with conversions and other options, the proceeds from the notes were allocated based on the relative fair values of the notes without the warrants issued in conjunction with the notes and of the warrants themselves at the time of issuance. The Company records the fair value of the warrants at the time of issuance as additional paid in capital and as a debt discount to the notes. The Company amortizes this debt discount as interest expense over the life of the note. Additionally, as a result of issuing the warrants with the convertible notes, a beneficial conversion option is recorded as a debt discount reflecting the incremental conversion option intrinsic value of the conversion option provided to the holders of the notes. Company also amortizes this debt discount as interest expense over the life of the notes. The intrinsic value of each conversion option was calculated as the difference between the effective conversion price and the fair value of the common stock, multiplied by the number of shares into which the note is convertible.
Stock-Based Compensation–The Company accounts for share-based payments, including grants of stock options to employees, consultants and non-employees; moreover, the Company issues warrants to the consultants and related parties. The Company is required to estimate the fair value of share-based awards and warrants on the date of grant. The value of the award is principally recognized as expense ratably over the requisite service periods. The Company has estimated the fair value of stock options and warrants as of the date of grant or assumption using the Black-Scholes option pricing model, which was developed for use in estimating the value of traded options that have no vesting restrictions and that are freely transferable. The Black-Scholes model requires the input of certain assumptions. Changes in the assumptions used in Black-Scholes model can materially affect the fair value estimates. The Company evaluates the assumptions used to value stock options on an annual basis. The expected term of stock options represents the weighted average period the stock options are expected to remain outstanding.
7
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The expected term is based on the observed and expected time to exercise and post-vesting cancellations of options by employees. Upon the adoption of the accounting guidance, the Company continued to use historical volatility in deriving its expected volatility assumption as allowed under GAAP because it believes that future volatility over the expected term of the stock options is not likely to differ materially from the past. The risk-free interest rate assumption is based on 5-year U.S Treasury zero-coupon rates appropriate for the expected term of the stock options. The expected dividend assumption is based on the history and expectation of dividend payouts. The fair values generated by the Black-Scholes model may not be indicative of the actual fair values of the equity awards, as the Company does not consider other factors important to those awards to employees, such as continued employment, periodic vesting requirements and limited transferability. The amount of stock based compensation expenses is net of an estimated forfeiture rate, which is also based on historical data. For the three month periods ended September 30, 2011 and 2010, stock based compensation expense was approximately $31,474 and $28,955 respectively, which consisted primarily of stock-based compensation expense related to stock options issued to the employees and recognized under GAAP.
The Company follows ASC Topic 505-50, formerly EITF 96-18, “Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling Goods and Services,” for stock options and warrants issued to consultants and other non-employees. In accordance with ASC Topic 505-50, these stock options and warrants issued as compensation for services to be provided to the Company are accounted for based upon the fair value of the services provided or the estimated fair market value of the option or warrant, whichever can be more clearly determined. The Company recognizes this expense over the period in which the services are provided. For the three month periods ended September 30, 2011 and 2010, stock based compensation expense was approximately $0 for both periods, which consisted primarily of stock-based compensation expense related to stock options and warrants recognized under GAAP issued to consultants and other non-employees.
The following table shows the components of the Company’s stock based compensation expense for employees, consultants and other non-employees:
Three months ended September 30, | ||||||||
2011 | 2010 | |||||||
Common Stock options issued for compensation | 31,474 | 28,955 | ||||||
Common Stock options and warrants issued for services | - | - | ||||||
Total | 31,474 | 28,955 |
Shipping and Handling Costs - Shipping and handling charges to customers are included in net revenues, and the associated costs incurred are recorded in cost of revenues.
Advertising Costs - Advertising costs are charged to operations when incurred. The Company incurred $2,103 and $4,263 in advertising and promotion costs during the three month periods ended September 30, 2011 and 2010, respectively.
Litigation and Settlement Costs - Legal costs are expensed as incurred. The Company records a charge equal to at least the minimum estimated liability for a loss contingency when both of the following conditions are met: (i) information available prior to issuance of the financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements and (ii) accrue the best estimate within a range of loss if there is a loss or, when there is no amount within a range that forms a better estimate, the Company will accrue the minimum amount in the range. The Company is not presently involved in any legal proceedings, litigation or other legal actions.
8
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Loss Per Share - Basic loss per share, which excludes anti-dilutive securities, is computed by dividing loss available to common shareholders by the weighted-average number of common shares outstanding for that particular period. In contrast, diluted loss per share considers the potential dilution that could occur from other equity instruments that would increase the total number of outstanding shares of common stock. Such amounts include shares potentially issuable under outstanding options, warrants, convertible preferred stock and convertible notes.
A reconciliation of the numerator and denominator used in the calculation of basic and diluted net loss per share follows:
Three months ended September 30, | ||||||||
2011 | 2010 | |||||||
Historical net loss per share: | ||||||||
Numerator | ||||||||
Net loss, as reported | $ | (361,663 | ) | $ | (520,101 | ) | ||
Less: Effect of amortization of interest expense on convertible notes | - | - | ||||||
Net loss attributed to common stockholders (diluted) | $ | (361,663 | ) | $ | (520,101 | ) | ||
Denominator | ||||||||
Weighted-average common shares outstanding | 15,846,347 | 15,724,816 | ||||||
Effect of dilutive securities | - | - | ||||||
Denominator for diluted net loss per share | 15,846,347 | 15,724,816 | ||||||
Basic and diluted net loss per share | $ | (0.02 | ) | $ | (0.03 | ) |
The following outstanding options, warrants, convertible preferred shares and convertible note shares were excluded from the computation of basic and diluted net loss per share for the periods presented because including them would have had an anti-dilutive effect.
Three months ended September 30, | ||||||||
2011 | 2010 | |||||||
Options to purchase common stock | 1,964,354 | 2,321,994 | ||||||
Warrants to purchase common stock | 2,821,983 | 2,535,764 | ||||||
Common shares issuable upon conversion of convertible preferred stock | 3,814,249 | 3,814,249 | ||||||
Convertible note shares outstanding | 2,452,502 | 1,724,605 |
Restatements and Reclassifications - Certain financial statement items have been restated to conform to the current periods’ presentation. These reclassifications had no impact on previously reported net loss.
9
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent Accounting Pronouncements
In June 2011, the Financial Accounting Standards Board, or FASB, issued guidance regarding the presentation of comprehensive income. The new standard requires the presentation of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The new standard also requires presentation of adjustments for items that are reclassified from other comprehensive income to net income in the statement where the components of net income and the components of other comprehensive income are presented. The updated guidance is effective on a retrospective basis for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. The adoption of this guidance will not have a material impact on our financial statements.
In May 2011 the FASB issued additional guidance on fair value measurements that clarifies the application of existing guidance and disclosure requirements, changes certain fair value measurement principles and requires additional disclosures about fair value measurements. The updated guidance is effective on a prospective basis for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. The adoption of this guidance will not have a material impact on our financial statements.
In September 2011 the FASB issued new accounting guidance intended to simplify goodwill impairment testing. Entities will be allowed to perform a qualitative assessment on goodwill impairment to determine whether a quantitative assessment is necessary. This guidance is effective for goodwill impairment tests performed in interim and annual periods for fiscal years beginning after December 15, 2011. Early adoption is permitted. The adoption of this guidance will not have a material impact on our financial statements.
10
NOTE 2 – BALANCE SHEET COMPONENTS
September 30, | December 31, | |||||||
2011 | 2010 | |||||||
Cash and cash equivalents: | ||||||||
Cash | 761 | 39,887 | ||||||
Total cash and cash equivalents | $ | 761 | $ | 39,887 | ||||
Inventories: | ||||||||
Total inventories | $ | 254,281 | $ | 227,692 | ||||
Accounts Receivable, net of allowances | $ | 16,859 | $ | 349 | ||||
Property and equipment, net: | ||||||||
Machinery and equipment | 919,736 | 919,736 | ||||||
Leasehold improvements | 547,856 | 547,856 | ||||||
Computer equipment and furniture and fixtures | 201,826 | 200,487 | ||||||
Software | 10,879 | 10,690 | ||||||
1,680,297 | 1,678,769 | |||||||
Accumulated depreciation and amortization | (1,506,725 | ) | (1,374,032 | ) | ||||
Total property and equipment, net | $ | 173,571 | $ | 304,736 | ||||
Accounts payable and accrued expenses: | ||||||||
Leasehold Improvement Allowance | 65,291 | 114,260 | ||||||
Accounts payable | 134,235 | 127,167 | ||||||
Accrued interest | 134,427 | 90,027 | ||||||
Other accrued liabilities | 38,864 | 57,483 | ||||||
Total accounts payable and accrued expenses | $ | 372,817 | $ | 388,937 |
NOTE 3 – INTANGIBLE ASSETS
The Company has two types of intangible assets: patents and trademarks. The Company capitalizes expenditures associated with patents and trademarks related to the Company’s various technologies. Capitalized costs include amounts paid to third parties for legal fees, application fees and other direct costs incurred in the filing and prosecution of patent and trademark applications. These assets are amortized on a straight-line method over their legal life.
11
NOTE 3 – INTANGIBLE ASSETS (CONTINUED)
Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable in accordance with applicable accounting guidance. Impairment charges for patents were $0 for each of the three month periods ended September 30, 2011 and 2010.
On January 15, 2004, the Company executed an Asset Purchase and Stock Transfer Agreement with entities controlled by the founder of the Company. In connection with this agreement, the Company acquired certain assets, including certain rights, title and interest to intellectual property, relating to the oxygen method and apparatus, developed by the founder of the Company prior to January 15, 2004. As consideration for the purchase, the Company issued 14,000,000 shares of common stock and a promissory note for $150,000 to these entities. The common stock was valued at $7,000 using the par value of the common stock on the date of issuance, which approximates these entities’ basis (which is not indicative of fair value). The non-recourse promissory note bore interest at 6.5% per annum and was paid in full during 2006.
The carrying values of the Company’s amortized acquired intangible assets as of the September 30, 2011 are as follows:
September 30, 2011 | ||||||||||||
Gross | Accumulated Amortization and write off | Net | ||||||||||
Patents | $ | 610,518 | $ | (198,924 | ) | $ | 411,594 | |||||
Trademarks | $ | 45,723 | $ | (4,707 | ) | $ | 41,016 | |||||
$ | 656,241 | $ | (203,631 | ) | $ | 452,610 |
Of the net amount of $452,610 in intangible assets as of September 30, 2011, approximately 90.9% is in patents and 9.1% is in trademarks. Included in the $656,241 gross amount for patents and trademarks is $157,000 acquired from entities controlled by the founder of the Company in January 2004. The remaining $499,241 represents amounts paid to third parties for legal fees, application fees and other direct costs incurred in the filing and prosecution of patent and trademark applications.
NOTE 4 – NOTES PAYABLE
The Company has issued warrants for the purchase of shares of the Company’s restricted common stock in connection with raising equity and debt financing and for other professional services. The fair value of warrants issued is determined in accordance with Codification topic 470-20.
12
NOTE 4 – NOTES PAYABLE (CONTINUED)
Frisco Promissory Note On April 3, 2007 the Company entered into a note agreement with the City of Frisco, Texas for $243,000 (the “Frisco Note”) pursuant to an economic incentive package provided through the Frisco Economic Development Corporation (“FEDC”). The note requires varying annual principal payments through August 2012. The note is non-interest bearing; however, interest has been imputed at 12.18% per annum. Individual annual payments will be forgiven if certain performance targets are achieved which include the number of full time employees, square feet occupied and taxable value of business and personal property in the City of Frisco. The first annual payment for 2008 in the amount of $30,000 was forgiven and the Company recognized the entire $30,000 under “Other income” in the Statement of Operations and Accumulated Deficit for the year ended December 31, 2008. The Company did not achieve the performance targets during 2009 and 2010, and the balance of the note payable to the City of Frisco as at December 31, 2010 was $146,802. On March 22, 2011 the Company entered into an Amended and Restated Performance Agreement with the FEDC. In terms of the Amended and Restated Performance Agreement, the FEDC provided the Company with economic assistance in the form of the renewal and extension of the forgivable loan of $213,000 together with revised performance credits over 5 years, commencing on March 22, 2011 and ending on the earlier to occur of: (i) the full payment of the economic incentives; or (ii) March 31, 2016.
The renewed note requires varying annual principal payments through December 2015. The note is non-interest bearing; however, interest has been imputed at 12.34% per annum. The unamortized discount at September 30, 2011 was $59,578. The face value of the renewed note is $213,000. Therefore, the net amount of the note as at September 30, 2011 was $153,422.
Future principal payments of this note payable are as follows:
2011 | $ | 26,000 | ||
2012 | 39,000 | |||
2013 | 44,000 | |||
2014 | 52,000 | |||
2015 | 52,000 | |||
$ | 213,000 |
Agave/JTR Subordinated, Convertible Notes During March 2008, the Company completed a $1 million financing package consisting of a promissory note for $750,000 (“First Note”) and a promissory note with a draw down provision for $250,000 (“Second Note”) (collectively, the “Notes”). The Notes are subordinated notes and are due and payable on the earlier of (i) completion of the next financing round completed by the Company or (ii) one year after the Notes are issued. In March 2009 the First Note and the Second Note were modified by extending the maturity date in each case to April 15, 2010. On December 31, 2009, the First Note and the Second Note were further modified by extending the maturity date in each case to April 15, 2011. In August 2010, the First Note and the Second Note were further modified by extending the maturity date in each case to April 15, 2012. On November 14, 2011, the First Note and the Second Note were further modified by extending the maturity date in each case to April 15, 2013. The holder of the First Note is Agave Resources, LLC (“Agave”), and the President of Agave is Donald Reed, one of the Company’s Directors. In connection with the First Note, Agave was also issued penny warrants to purchase 350,000 shares of common stock on April 15, 2008. The warrants are immediately exercisable and expire on April 15, 2013. The holder of the Second Note is JTR Investments, Limited (“JTR”) a company controlled by Julian T. Ross, the Company’s President and Chief Financial Officer.
As at December 31, 2008 the amount outstanding on the Second Note was $250,000. In connection with the Second Note, JTR was also issued penny warrants to purchase 116,667 shares of common stock on December 31, 2008. Both Notes are non-interest bearing. The basis for issuing penny warrants in connection with the First Note and the Second Note include, but are not limited to, the fact that no interest is payable on the Notes, the Company’s ability to attract new investment at the time, market conditions and other factors. Given these factors, the Board of Directors has deemed the terms of these transactions to be fair. No third party fairness opinion was obtained in relation to these transactions.
13
NOTE 4 – NOTES PAYABLE (CONTINUED)
Conversion Rights: At any time on or prior to the Maturity Date, at the option of the Company in its sole discretion, all or any portion of the then outstanding Principal Amount and accrued but unpaid interest of the Notes may be converted (the "Optional Conversion") into a number of shares of the Company’s common stock (the "Optional Conversion Shares") equal to the amount of the then outstanding Principal Amount plus the then accrued but unpaid interest to be converted, divided by the Conversion Price which shall be $1.50 per Optional Conversion Share.
In accordance with ASC 470-20, Debt with conversions and other options, the proceeds from the First Note were allocated based on the relative fair value of the note without the warrant issued in conjunction with the note and of the warrant itself at the time of issuance. The Company recorded the relative fair value of the warrant issued to Agave in the amount of $346,936 as a debt discount upon issuance, and amortized this debt discount as interest expense over the life of the note. Additionally, as a result of issuing the warrant with the subordinated convertible promissory note, a beneficial conversion option was recorded as a debt discount reflecting the incremental intrinsic value benefit of $96,936, at the time of issuance provided to the holder of the note, which was also amortized as interest expense over the life of the note. The Company recorded no interest expense for the three months ended September 30, 2011 and 2010 in connection with the First Note.
The Company recorded the relative fair value of the warrant issued to JTR in connection with the Second Note in the amount of $115,857 as a debt discount upon issuance, and expensed this amount as interest expense upon issuance. Additionally, as a result of issuing the warrant with the subordinated convertible promissory note, a beneficial conversion option was recorded as a debt discount reflecting the incremental intrinsic value benefit of $32,254, at the time of issuance provided to the holder of the note, which was also expensed as interest expense upon issuance. The Company recorded no interest expense for the three months ended September 30, 2011 and 2010 in connection with the JTR Second Note.
JTR Senior, Convertible Note. In July, 2008, JTR agreed to provide the Company with additional working capital to fund continuing operations (the “Senior Note Interim Funding”). On November 1, 2008 the Board agreed with JTR on the terms of a loan with a draw down provision of up to a maximum of $750,000. This maximum amount was subsequently increased to $2,000,000 on March 30, 2011. This is a Senior Note (all the tranches under this facility, collectively, the “Senior Note”) with no interest payable. All amounts advanced by JTR during the Senior Note Interim Funding are draw downs on the Senior Note. In connection with the Senior Note, the Company will issue .47 penny warrants for every dollar drawn under this facility. As of September 30, 2011, the outstanding balance under the Senior Note was $1,067,506. As of September 30, 2011 the number of penny warrants issued to JTR pursuant to the Senior Note was 551,503. The basis for issuing penny warrants in connection with the Senior Note include, but are not limited to, the fact that no interest is payable on the note, the Company’s ability to attract new investment at the time, market conditions, the terms previously agreed to in connection with the First Note and Second Note, and other factors. Given these factors, the Board of Directors has deemed the terms of this transaction to be fair. No third party fairness opinion was obtained in relation to this transaction.
Conversion Rights: At any time on or prior to the Maturity Date, at the option of the Company in its sole discretion, all or any portion of the then outstanding Principal Amount and accrued but unpaid interest of this Note may be converted (the "Optional Conversion") into a number of shares of the Company’s common stock (the "Optional Conversion Shares") equal to the amount of the then outstanding Principal Amount plus the then accrued but unpaid interest to be converted, divided by the Conversion Price which shall be $1.50 per Optional Conversion Share.
14
NOTE 4 – NOTES PAYABLE (CONTINUED)
Maturity: Of the total amount outstanding under the Senior Note, $422,850 is payable on April 15, 2012, and the remainder is classified as current. Of the total amount outstanding under the Senior Note, $422,850 is payable on April 15, 2012 provided that: (a) Any amounts due and payable under the Senior Note in excess of $422,850 shall remain current and due upon demand (the “Current JTR Senior Notes”); (b) In the event the Company completes an equity event (the “Equity Event”) prior to April 15, 2012 then up to a maximum total of $500,000 owed under the JTR Senior Note is repayable upon and at the time of such Equity Event, such that: (i) any amounts repaid upon the Equity Event shall be applied as to the Deferred JTR Senior Notes first; and (ii) any amounts remaining thereafter shall be applied to the Current JTR Senior Notes. If any amounts under the Deferred JTR Senior Notes remain outstanding subsequent to the Equity Event, these amounts shall remain deferred until April 15, 2012.
In accordance with ASC 470-20, Debt with conversions and other options, the proceeds from the Senior Note were allocated based on the relative fair values of the notes without the warrants issued in conjunction with the notes and of the warrants themselves at the time of issuance. As of September 30, 2011 the Company recorded the relative fair values of the warrants issued to JTR in connection with the Senior Note in the amount of $546,477 as a debt discount upon each issuance, and expensed each debt discount as interest expense upon issuance. Additionally, as a result of issuing the warrants with the convertible promissory notes, a beneficial conversion option was recorded as a debt discount on each note reflecting the incremental intrinsic value benefit totaling $162,842, at the time of each issuance provided to JTR in connection with the Senior Note up to an including September 30, 2011. The debt discount for each issuance under the Senior Note is expensed as interest expense upon issuance. The Company recorded interest expenses in the amounts of $44,411 and $26,606 for the three months ended September 30, 2011 and September 30, 2010, respectively, in connection with the Senior Note.
Alcedo Subordinated, Convertible Note. On December 10, 2009 the Company entered into a Note Purchase Agreement with the Tony & Judy Alcedo Family Trust (“Alcedo Trust”). The Company received $100,000 in cash from the Alcedo Trust, in exchange for a Subordinated Convertible Note with a face amount of $100,000 (the “Alcedo Note”). The Alcedo Note bears interest at a rate of 16% per annum, and originally matured on September 6, 2010. The maturity date was subsequently modified to December 16, 2011. As of September 30, 2011 the total interest accrued under the Alcedo Note was $28,933. The Alcedo Note is convertible into the common stock, at the option of the Company on or before December 16, 2011, at a conversion price of $1.00 per share, in accordance with the following:
Maturity Date: The then outstanding Principal Amount, together with accrued and unpaid interest thereon as set forth above, or the Optional Conversion Shares (as described below) as the case may be, shall become due on December 16, 2011 (the "Maturity Date").
Conversion Rights: At any time on or prior to the Maturity Date, at the option of the Company in its sole discretion, all or any portion of the then outstanding Principal Amount and accrued but unpaid interest of this Note may be converted (the "Optional Conversion") into a number of shares of the Company’s common stock (the "Optional Conversion Shares") equal to the amount of the then outstanding Principal Amount plus the then accrued but unpaid interest to be converted, divided by the Conversion Price which shall be $1.00 per Optional Conversion Share.
In addition to the Alcedo Note, the Company issued the Alcedo Trust 100,000 warrants pursuant to the Note Purchase Agreement. The warrants are exercisable into the common stock of the Company at an exercise price of $2.50 per share, and expire on December 10, 2014.
In accordance with ASC 470-20, Debt with conversions and other options, the proceeds from the Alcedo Note were allocated based on the relative fair values of the notes without the warrants issued in conjunction with the notes and of the warrants themselves at the time of issuance. The Company recorded the relative fair value of the warrant issued to Alcedo in the amount of $25,535 as a debt discount upon issuance, and amortized this debt discount as interest expense over the life of the note. Additionally, as a result of issuing the warrant with the subordinated convertible promissory note, a beneficial conversion option was recorded as a debt discount reflecting the incremental conversion option intrinsic value benefit of $0, at the time of issuance provided to the holder of the note. The Company recorded interest expenses in the amounts of $0 and $6,526 for the three months ended September 30, 2011 and September 30, 2010, respectively, in connection with the Alcedo Note.
15
NOTE 4 – NOTES PAYABLE (CONTINUED)
Afritex Subordinated, Convertible Note. On March 26, 2010 (“Afritex Note Effective Date”) the Company issued a Subordinated Convertible Note (the “Afritex Note”) to Afritex Medical Products (Pty) Ltd., a South African company, in which the Company’s President is also a beneficial shareholder and member of its Board of Directors (“Afritex”). The Afritex Note was issued in connection with a certain licensing agreement and a distribution agreement, both entered into between the Company and Afritex on March 26, 2010. The Afritex Note has a face amount of $270,000 and bears interest at a rate of 16% per annum, and matures 630 days (as amended) subsequent to the Afritex Note Effective Date. As at September 30, 2011 the total interest accrued under the Afritex Note was $65,400.
The Afritex Note is convertible into the common stock, at the option of the Company on or before the Maturity Date, at a conversion price of $1.00 per share, in accordance with the following:
Maturity Date: The then outstanding Principal Amount, together with accrued and unpaid interest thereon as set forth above, or the Optional Conversion Shares (as described below) as the case may be, shall become due on the 630th Day (as amended) subsequent to March 26, 2010 (the "Maturity Date").
Conversion Rights: At any time on or prior to the Maturity Date, at the option of the Company in its sole discretion, all or any portion of the then outstanding Principal Amount and accrued but unpaid interest of this Note may be converted (the "Optional Conversion") into a number of shares of the Company’s common stock (the "Optional Conversion Shares") equal to the amount of the then outstanding Principal Amount plus the then accrued but unpaid interest to be converted, divided by the Conversion Price which shall be $1.00 per Optional Conversion Share.
Upon the issuance of the Afritex Note, the Company recorded an expense of $270,000 to reflect the customer incentive provided to Afritex in connection with the licensing and distribution agreements.
In addition to the Afritex Note, the Company issued to Afritex 270,000 warrants pursuant to that said license agreement and distribution agreement. The warrants are exercisable into the common stock of the Company at an exercise price of $2.50 per share, and expire on March 26, 2015.
In accordance with ASC 470-20, Debt with conversions and other options, the proceeds from the Afritex Note were allocated based on the relative fair values of the notes without the warrants issued in conjunction with the notes and of the warrants themselves at the time of issuance. The Company recorded the relative fair value of the warrant issued to Afritex in the amount of $70,267 as a debt discount upon issuance, and amortized this debt discount as interest expense over the life of the note. Additionally, as a result of issuing the warrant with the subordinated convertible promissory note, a beneficial conversion option was recorded as a debt discount reflecting the incremental conversion option intrinsic value benefit of $0, at the time of issuance provided to the holder of the note. The Company recorded interest expense in the amounts of $0 and $23,422 for the three months ended September 30, 2011 and September 30, 2010, respectively, in connection with the Afritex Note.
16
NOTE 4 – NOTES PAYABLE (CONTINUED)
Sinacola Subordinated, Convertible Notes.
First Landlord Note; Second Landlord Note:
On December 10, 2009 the Company entered into a Rent Satisfaction Agreement (the “2009 RSA”) with its landlord, Sinacola Commercial Properties, Ltd. (“Sinacola”). In terms of the 2009 RSA, all of the Company’s outstanding rent obligations under its lease agreement, up to and including December 31, 2009 including, but not limited to, base rent, deferred rent, and its share of operating costs, are satisfied in full.
The Company issued Sinacola two Promissory Notes pursuant to the 2009 RSA, as follows:
First Landlord Note: The first note (the “First Landlord Note”) is a subordinated convertible note in the principal amount of $125,000. The First Landlord Note carries no interest and is convertible, at Sinacola’s option, into the common stock of the Company at an exercise price of $1.00 per common share on the maturity date.
Second Landlord Note: The second note (the “Second Landlord Note”) is a subordinated convertible note in the principal amount of $126,407. The Second Landlord Note carries no interest and is convertible into the common stock of the Company at an exercise price of $1.50 per common share on the maturity date. However, if the common stock has traded at $1.50 or above for four (4) consecutive weeks on a nationally recognized market (based on daily closing prices) then the Second Landlord Note is convertible at the Company’s option.
Maturity Date – Each of the First Landlord Note and the Second Landlord Note has a maturity date defined as follows:
The then outstanding Principal Amount shall become due and payable on the earlier to occur of: (i) December 31, 2011; or (ii) the closing of the next equity financing round (the “Equity Event”) completed by the Company (in each case, the "Maturity Date"); provided that; (a) if the Equity Event is in an amount exceeding $1,000,000 but less than $1,500,000, then only 20% of the Principal Amount shall be due and payable; (b) if the Equity Event is in an amount exceeding $1,500,000 but less than $2,000,000, then only 40% of the Principal Amount shall be due and payable; (c) if the Equity Event is in an amount exceeding $2,000,000 but less than $3,000,000, then only 60% of the Principal Amount shall be due and payable; (d) if the Equity Event is in an amount exceeding $3,000,000 but less than $4,000,000, then only 80% of the Principal Amount shall be due and payable; (e) if the Equity Event is in an amount exceeding $4,000,000, then 100% of the Principal Amount shall be due and payable. For any partial Principal Amount paid under (ii) (a) - (ii) (d) above, the balance of the outstanding Principal Amount would continue to be due and payable on the earlier to occur of this (i) or (ii) (a-e) above. In the event of a partial payment, any subsequent payment resulting from an Equity Event shall be based on the percentage of the original Principal Amount and not a percentage of the outstanding Principal Amount after a partial payment under this maturity provision.
The Company also issued Sinacola with 163,415 penny warrants pursuant to the 2009 RSA (the “2009 Landlord Warrant”). The 2009 Landlord Warrant is convertible into 163,415 shares of its common stock, and is exercisable in whole or in part at any time on or before December 31, 2014 at an exercise price of $.01 per share. In addition, the Company agreed to modify that certain prior warrant issued to Sinacola on August 23, 2007 (the “2007 Landlord Warrant”). The 2007 Landlord Warrant provided for Sinacola to purchase 50,000 shares of common stock on or before March 1, 2012 at an exercise price of $2.00 per share. Pursuant to the 2009 RSA the exercise price of the 2007 Landlord Warrant was modified to $1.00 per share, while all other terms and conditions remained the same.
17
NOTE 4 – NOTES PAYABLE (CONTINUED)
In accordance with ASC 470-20, Debt with conversions and other options, the proceeds from the First Landlord Note and the Second Landlord Note were allocated based on the relative fair values of the notes without the warrants issued in conjunction with the notes and of the warrants themselves at the time of issuance. The Company recorded the relative fair value of the warrant issued to First Landlord Note in the amount of $80,521 as a debt discount upon issuance, and amortized this debt discount as interest expense over the life of the note. Additionally, as a result of issuing the warrant with the subordinated convertible promissory note, a beneficial conversion option was recorded as a debt discount reflecting the incremental conversion option intrinsic value benefit of $44,479, at the time of issuance provided to the holder of the note, which was also amortized as interest expense over the life of the note. The Company recorded interest expense in the amounts of $15,625 and $15,625 for the three months ended September 30, 2011 and September 30, 2010, respectively, in connection with the First Landlord Note. The Company recorded the relative fair value of the warrant issued to Second Landlord Note in the amount of $81,428 as a debt discount upon issuance, and amortized this debt discount as interest expense over the life of the note. Additionally, as a result of issuing the warrant with the subordinated convertible promissory note, a beneficial conversion option was recorded as a debt discount reflecting the incremental conversion option intrinsic value benefit of $39,292, at the time of issuance provided to the holder of the note, which was also amortized as interest expense over the life of the note. The Company recorded interest expense in the amounts of $15,090 and $15,090 for the three months ended September 30, 2011 and September 30, 2010, respectively, in connection with the Second Landlord Note.
Third Landlord Note; Fourth Landlord Note:
On December 31, 2010 the Company entered into a Rent Satisfaction Agreement (the “2010 RSA”) with its landlord, Sinacola Commercial Properties, Ltd. (“Sinacola”). In terms of the 2010 RSA, all of the Company’s then outstanding rent obligations for the 2010 financial year under its lease agreement, up to and including December 31, 2010 including, but not limited to, base rent, deferred rent, and its share of operating costs, are satisfied in full.
The Company issued Sinacola two Promissory Notes pursuant to the 2010 RSA, as follows:
Third Landlord Note: The first note (the “Third Landlord Note”) is a subordinated convertible note in the principal amount of $110,000. The Third Landlord Note carries no interest and is convertible, at Sinacola’s option, into the common stock of the Company at an exercise price of $1.00 per common share on the maturity date.
Fourth Landlord Note: The second note (the “Fourth Landlord Note”) is a subordinated convertible note in the principal amount of $110,715. The Fourth Landlord Note carries no interest and is convertible into the common stock of the Company at an exercise price of $1.50 per common share on the maturity date. However, if the common stock has traded at $1.50 or above for four (4) consecutive weeks on a nationally recognized market (based on daily closing prices) then the Fourth Landlord Note is convertible at the Company’s option.
Maturity Date – Each of the Third Landlord Note and the Fourth Landlord Note has a maturity date of October 31, 2012.
The Company also issued Sinacola with 143,465 penny warrants pursuant to the 2010 RSA (the “2010 Landlord Warrant”). The 2010 Landlord Warrant is convertible into 143,465 shares of the Company’s common stock, and is exercisable in whole or in part at any time on or before December 31, 2015 at an exercise price of $.01 per share.
18
NOTE 4 – NOTES PAYABLE (CONTINUED)
In accordance with ASC 470-20, Debt with conversions and other options, the proceeds from the Third Landlord Note and the Fourth Landlord Note were allocated based on the relative fair values of the notes without the warrants issued in conjunction with the notes and of the warrants themselves at the time of issuance. The Company recorded the relative fair value of the warrant issued to Third Landlord Note in the amount of $70,853 as a debt discount upon issuance, and amortized this debt discount as interest expense over the life of the note. Additionally, as a result of issuing the warrant with the subordinated convertible promissory note, a beneficial conversion option was recorded as a debt discount reflecting the incremental conversion option intrinsic value benefit of $39,147, at the time of issuance provided to the holder of the note, which was also amortized as interest expense over the life of the note. The Company recorded interest expense in the amounts of $15,000 and $0 for the three months ended September 30, 2011 and September 30, 2010, respectively in connection with the Third Landlord Note. The Company recorded the relative fair value of the warrant issued to Fourth Landlord Note in the amount of $71,314 as a debt discount upon issuance, and amortized this debt discount as interest expense over the life of the note. Additionally, as a result of issuing the warrant with the subordinated convertible promissory note, a beneficial conversion option was recorded as a debt discount reflecting the incremental conversion option intrinsic value benefit of $34,409, at the time of issuance provided to the holder of the note, which was also amortized as interest expense over the life of the note. The Company recorded interest expense in the amounts of $14,417 and $0 for the three months ended September 30, 2011 and September 30, 2010 in connection with the Fourth Landlord Note.
Fifth Landlord Note; Sixth Landlord Note:
On March 23, 2011 the Company entered into a rent satisfaction agreement (the “2011 RSA”) with its landlord, Sinacola Commercial Properties, Ltd. (“Sinacola”). In terms of the 2011 RSA, certain of the Company’s rent obligations for the period January 1, 2011 through June 30, 2011 under its lease agreement, including base rent and deferred rent, are satisfied in full.
The Company issued Sinacola two Promissory Notes pursuant to the 2011 RSA, as follows:
Fifth Landlord Note: The first note (the “Fifth Landlord Note”) is a subordinated convertible note in the principal amount of $50,000. The Fifth Landlord Note carries no interest and is convertible, at Sinacola’s option, into the common stock of the Company at an exercise price of $1.00 per common share on the maturity date.
Sixth Landlord Note: The second note (the “Sixth Landlord Note”) is a subordinated convertible note in the principal amount of $50,000. The Sixth Landlord Note carries no interest and is convertible into the common stock of the Company at an exercise price of $1.50 per common share on the maturity date. However, if the common stock has traded at $1.50 or above for four (4) consecutive weeks on a nationally recognized market (based on daily closing prices) then the Sixth Landlord Note is convertible at the Company’s option.
Maturity Date – Each of the Fifth Landlord Note and the Sixth Landlord Note has a maturity date of June 30, 2013.
The Company also issued Sinacola with 65,000 penny warrants pursuant to the 2011 RSA (the “2011 Landlord Warrant”). The 2011 Landlord Warrant is convertible into 65,000 shares of the Company’s common stock, and is exercisable in whole or in part at any time on or before March 23, 2016 at an exercise price of $.01 per share.
19
NOTE 4 – NOTES PAYABLE (CONTINUED)
In accordance with ASC 470-20, Debt with conversions and other options, the proceeds from the Fifth Landlord Note and the Sixth Landlord Note were allocated based on the relative fair values of the notes without the warrants issued in conjunction with the notes and of the warrants themselves at the time of issuance. The Company recorded the relative fair value of the warrant issued to Fifth Landlord Note in the amount of $32,207 as a debt discount upon issuance, and amortized this debt discount as interest expense over the life of the note. Additionally, as a result of issuing the warrant with the subordinated convertible promissory note, a beneficial conversion option was recorded as a debt discount reflecting the incremental conversion option intrinsic value benefit of $17,793, at the time of issuance provided to the holder of the note, which was also amortized as interest expense over the life of the note. The Company recorded interest expense in the amounts of $6,250 and $0 for the three months ended September 30, 2011 and September 30, 2010, respectively in connection with the Fifth Landlord Note. The Company recorded the relative fair value of the warrant issued to Sixth Landlord Note in the amount of $32,207 as a debt discount upon issuance, and amortized this debt discount as interest expense over the life of the note. Additionally, as a result of issuing the warrant with the subordinated convertible promissory note, a beneficial conversion option was recorded as a debt discount reflecting the incremental conversion option intrinsic value benefit of $15,540, at the time of issuance provided to the holder of the note, which was also amortized as interest expense over the life of the note. The Company recorded interest expense in the amounts of $5,968 and $0 for the three months ended September 30, 2011 and September 30, 2010 in connection with the Sixth Landlord Note.
Seventh Landlord Note; Eighth Landlord Note:
On August 15, 2011 the Company entered into a rent satisfaction agreement (the “Second 2011 RSA”) with its landlord, Sinacola Commercial Properties, Ltd. (“Sinacola”). In terms of the Second 2011 RSA, certain of the Company’s rent obligations for the period July 1, 2011 through December 31, 2011 under its lease agreement, including base rent and deferred rent, are satisfied in full.
The Company issued Sinacola two Promissory Notes pursuant to the Second 2011 RSA, as follows:
Seventh Landlord Note: The first note (the “Seventh Landlord Note”) is a subordinated convertible note in the principal amount of $50,050. The Fifth Landlord Note carries no interest and is convertible, at Sinacola’s option, into the common stock of the Company at an exercise price of $1.00 per common share on the maturity date.
Eighth Landlord Note: The second note (the “Eighth Landlord Note”) is a subordinated convertible note in the principal amount of $50,050. The Eighth Landlord Note carries no interest and is convertible into the common stock of the Company at an exercise price of $1.50 per common share on the maturity date. However, if the common stock has traded at $1.50 or above for four (4) consecutive weeks on a nationally recognized market (based on daily closing prices) then the Sixth Landlord Note is convertible at the Company’s option.
Maturity Date – Each of the Seventh Landlord Note and the Eighth Landlord Note has a maturity date of November 30, 2013.
The Company also issued Sinacola with 65,065 penny warrants pursuant to the Second 2011 RSA (the “Second 2011 Landlord Warrant”). The Second 2011 Landlord Warrant is convertible into 65,065 shares of the Company’s common stock, and is exercisable in whole or in part at any time on or before August 15, 2016 at an exercise price of $.01 per share.
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NOTE 4 – NOTES PAYABLE (CONTINUED)
In accordance with ASC 470-20, Debt with conversions and other options, the proceeds from the Seventh Landlord Note and the Eighth Landlord Note were allocated based on the relative fair values of the notes without the warrants issued in conjunction with the notes and of the warrants themselves at the time of issuance. The Company recorded the relative fair value of the warrant issued to Seventh Landlord Note in the amount of $32,223 as a debt discount upon issuance, and amortizes this debt discount as interest expense over the life of the note. Additionally, as a result of issuing the warrant with the subordinated convertible promissory note, a beneficial conversion option was recorded as a debt discount reflecting the incremental conversion option intrinsic value benefit of $17,827, at the time of issuance provided to the holder of the note, which was also amortized as interest expense over the life of the note. The Company recorded interest expense in the amounts of $910 and $0 for the three months ended September 30, 2011 and September 30, 2010, respectively in connection with the Seventh Landlord Note. The Company recorded the relative fair value of the warrant issued to Eighth Landlord Note in the amount of $32,223 as a debt discount upon issuance, and amortizes this debt discount as interest expense over the life of the note. Additionally, as a result of issuing the warrant with the subordinated convertible promissory note, a beneficial conversion option was recorded as a debt discount reflecting the incremental conversion option intrinsic value benefit of $15,540, at the time of issuance provided to the holder of the note, which is also amortized as interest expense over the life of the note. The Company recorded interest expense in the amounts of $868 and $0 for the three months ended September 30, 2011 and September 30, 2010 in connection with the Eighth Landlord Note.
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NOTE 4 – NOTES PAYABLE (CONTINUED)
The following table reflects the carrying values of the Company’s short-term and long-term notes payable as of September 30, 2011:
Effective Interest Rate | Principal | Discount | September 30, 2011 | |||||||||||||
Current notes payable | ||||||||||||||||
JTR, Senior Note | 0.02 | % | $ | 1,067,506 | $ | - | $ | 1,067,506 | ||||||||
Agave, First Note | 0.00 | % | 750,000 | - | 750,000 | |||||||||||
JTR, Second Note | 0.00 | % | 250,000 | - | 250,000 | |||||||||||
Alcedo Note | 16.00 | % | 100,000 | - | 100,000 | |||||||||||
Afritex Note | 16.00 | % | 270,000 | - | 270,000 | |||||||||||
Sinacola, First Landlord Note | 50.00 | % | 125,000 | 11,979 | 113,021 | |||||||||||
Sinacola, Second Landlord Note | 47.75 | % | 126,407 | 11,569 | 114,838 | |||||||||||
Frisco EDC | 12.34 | % | 39,240 | 6,621 | 32,619 | |||||||||||
Related Party Loans | 0.00 | % | 24,750 | - | 24,750 | |||||||||||
Total short-term notes payable | $ | 2,752,903 | $ | 30,169 | $ | 2,722,734 | ||||||||||
Long-term notes payable | ||||||||||||||||
Sinacola, Third Landlord Note | 54.55 | % | $ | 110,000 | $ | 65,000 | $ | 45,000 | ||||||||
Sinacola, Fourth Landlord Note | 52.09 | % | 110,715 | 62,472 | 48,244 | |||||||||||
Sinacola, Fifth Landlord Note | 50.00 | % | 50,000 | 36,944 | 13,056 | |||||||||||
Sinacola, Sixth Landlord Note | 47.75 | % | 50,000 | 35,280 | 14,720 | |||||||||||
Sinacola, Seventh Landlord Note | 43.64 | % | 50,050 | 49,140 | 910 | |||||||||||
Sinacola, Eighth Landlord Note | 41.64 | % | 50,050 | 46,894 | 3,156 | |||||||||||
Frisco EDC | 12.34 | % | 173,760 | 52,958 | 120,802 | |||||||||||
Total long-term notes payable | $ | 594,575 | $ | 348,689 | $ | 245,887 | ||||||||||
Total short-term and long-term notes payable | $ | 3,347,478 | $ | 378,858 | $ | 2,968,621 |
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NOTE 4 – NOTES PAYABLE (CONTINUED)
The following table summarizes our outstanding notes payable as of September 30, 2011 and December 31, 2010:
September 30, 2011 | December 31, 2010 | |||||||
Current portion of notes payable | $ | 57,369 | $ | 129,185 | ||||
Current portion of convertible notes payable | 2,665,365 | 779,329 | ||||||
Current portion of notes payable, net | $ | 2,722,734 | $ | 908,514 | ||||
Long-term portion of notes payable | $ | 173,760 | $ | 131,585 | ||||
Less: Unamortized discount | (52,958 | ) | (44,782 | ) | ||||
120,802 | 86,803 | |||||||
Long-term portion of convertible notes payable | $ | 420,816 | $ | 1,643,566 | ||||
Less: Unamortized discount | (295,730 | ) | (215,723 | ) | ||||
125,085 | 1,427,843 | |||||||
Long-term portion of notes payable, net | $ | 245,887 | $ | 1,514,646 |
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NOTE 5 - SHAREHOLDERS’ EQUITY
Preferred Shares Rights
On December 31, 2005, the Company’s Board of Directors adopted a Preferred Shares Rights Agreement (the “Original Rights Agreement”). Pursuant to the Agreement, the Board authorized the issuance of up to 5,000,000 shares of preferred stock, par value $0.0005 per share. As of December 31, 2005, the Company had authorized the issuance of 2,000,000 shares of preferred stock designated as Series A Convertible Preferred Stock (“Series A Preferred”). On March 22, 2006 the Company authorized an increase in the issuance of the Series A Preferred to 3,100,000 shares of preferred stock. On July 2, 2008 the Company further authorized an increase in the issuance of the Series A Preferred to 3,143,237 shares of preferred stock. As of September 30, 2011 there were 3,126,434 Series A Preferred shares issued and outstanding. The original issue price of the Series A Preferred is $1.00 per share.
During the three months ended September 30, 2011 the Company did not issue any shares of the Series A Preferred. As at September 30, 2011 the Company had 3,126,434 shares of Series A Preferred Stock issued and outstanding.
A summary of the designations and preferences of its Series A Preferred stock is as follows:
Ranking – The Series A Preferred ranks senior to common stock.
Dividends – Series A Preferred may be entitled to receive a quarterly non-cumulative dividend in the amount of $.01 per share upon approval from the Board of Directors.
Liquidation Preference – In the event of any liquidation, dissolution, or winding up of the Company, the holders of Series A Preferred are entitled to receive 100% of the original issue price of $1.00 per share.
Conversion Rights – Each share of Series A Preferred is convertible at any time, at the option of the holder into 1.22 shares of common stock, subject to adjustment. Series A Preferred are subject to automatic conversion upon consummation of underwritten offering by the Company of shares of common stock to the public, in which the aggregate cash proceeds are at least $3 million and the price paid per share is at least $5.00.
Redemption Rights – All of the Series A Preferred may be called at any time by the Company within ten years, but not prior to two years after issuance. The redemption value is $1.00 per share, plus an amount equal to all unpaid dividends thereon.
Voting Rights – The holder of each share of Series A Preferred has the right to one vote for each share of common stock into which such share of Series A Preferred could be converted.
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NOTE 5 - SHAREHOLDERS’ EQUITY (CONTINUED)
Common Stock
The Company has authorized 100,000,000 shares of $0.0004 par value common stock.
During the three months ended September 30, 2011, the Company issued 210,997 shares for warrants exercised for proceeds of $2,110. As of September 30, 2011 the Company had 15,967,563 shares of Common Stock issued and outstanding.
NOTE 6 - STOCK OPTIONS AND WARRANTS
Equity Incentive Plans
In April 2004, the Company’s Board of Directors and the stockholders at that time approved the adoption of a Voting Stock Option Plan (“the Plan”), which provides for the issuance of stock options to eligible employees, consultants, Board members and Advisory Board members of the Company to acquire up to a maximum of 5,000,000 shares of common stock.
The Company’s Board of Directors, which determines the number of options that will be granted, the effective dates of the grants, the option process and the vesting schedules, administers the Plan. In the absence of an established market for the common stock of the Company, the Board of Directors determines the fair market value of the Company’s common stock. Options generally expire between five and ten years from the date of grant and automatically terminate 90 days after such optionee ceases to be an eligible individual under the Plan other than by reason of death or disability.
The portion of options granted that is not exercisable on the date the optionee ceases to be an eligible individual under the Plan by reason other than death, shall terminate and be forfeited to the Company on the date of such cessation. An optionee has no right as a stockholder with respect to any shares covered by the options granted to him until a certificate representing such shares is issued to them.
Stock Options
The following table summarizes information about the number and weighted average of the options that were forfeited or expired under the Plan as at September 30, 2011:
Employee | Non-Employee | |||||||||||||||||||
Weighted | Weighted | |||||||||||||||||||
Number | Average | Number | Average | Combined | ||||||||||||||||
Of | Exercise | Of | Exercise | Total | ||||||||||||||||
Options | Price | Options | Price | Options | ||||||||||||||||
Outstanding at June 30, 2011 | 1,998,924 | 0.53 | 65,430 | 0.96 | 2,064,354 | |||||||||||||||
Granted | - | - | - | - | - | |||||||||||||||
Exercised | - | - | - | - | - | |||||||||||||||
Forfeited/Cancelled | (100,000 | ) | 1.00 | - | - | (100,000 | ) | |||||||||||||
Outstanding at September 30, 2011 | 1,898,924 | 0.51 | 65,430 | 0.96 | 1,964,354 |
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NOTE 6 - STOCK OPTIONS AND WARRANTS (CONTINUED)
We used the following assumptions to estimate the fair value of options granted under the Plan for the three months ended September 30, 2011 and 2010:
For the three months ended September 30, | ||||||||
2011 | 2010 | |||||||
Risk-free interest rate (weighted average) | 0.96 | % | 1.27 | % | ||||
Expected volatility (weighted average) | 22 | % | 20 | % | ||||
Expected term (in years) | 5 | 5 | ||||||
Expected dividend yield | 0.00 | % | 0.00 | % |
Risk-Free Interest Rate | The risk-free interest rate assumption was based on U.S. Treasury instruments with a term that is consistent with the expected term of our stock options. | |
Expected Volatility | The Company uses historical volatility in deriving its expected volatility assumption because it believes that future volatility over the expected term of the stock options is not likely to differ from the past. | |
Expected Term | The expected term of stock options represents the weighted average period the stock options are expected to remain outstanding. The expected term is based on the observed and expected time to exercise and post-vesting cancellations of options by optionees. The Company uses historical volatility in deriving its expected volatility assumption because it believes that future volatility over the expected term of the stock options is not likely to differ from the past. | |
Expected Dividend Yield | The expected dividend yield of 0% is based on our history and expectation of dividend payouts. We have not paid and do not anticipate paying any dividends in the near future. | |
Forfeitures | FASB ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company only records stock-based compensation expense for awards that are expected to vest. While the Company generally considers historical forfeitures in its estimates, judgment is also required in estimating the amount of stock-based awards that are expected to be forfeited. The Company’s estimates for forfeitures may differ from actual forfeitures. If actual results differ significantly from these estimates, stock-based compensation expense and its results of operations could be materially impacted when the Company records a true-up for the difference in the period that the awards vest. The Company adjusts stock-based compensation expense based on its actual forfeitures on an annual basis, if necessary. |
As of September 30, 2011, there were unrecognized compensation costs of approximately $46,629 related to non-vested stock option awards granted after April 2004 that will be recognized on a straight-line basis over the weighted average remaining vesting period of 0.29 years.
Stock compensation cost, using the graded vesting attribute method in accordance with Codification topic 718, is recognized over the requisite service period, generally 5 years, during which each tranche (one fifth) of shares is earned (zero, one, two, three, and four years). The value of each tranche is amortized on a straight-line basis. For the three months ended September 30, 2011, stock based compensation expense was approximately $31,474, which consisted primarily of stock-based compensation expense related to stock options recognized under GAAP issued to employees. For the three months ended September 30, 2011, there were no options exercised.
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NOTE 6 - STOCK OPTIONS AND WARRANTS (CONTINUED)
Warrants.
The following table summarizes the Company’s warrant activities for the three months ended September 30, 2011:
Weighted | ||||||||
Number | Average | |||||||
Of | Exercise | |||||||
Warrants | Price | |||||||
Outstanding at June 30, 2011 | 2,932,909 | $ | 0.47 | |||||
Granted | 100,071 | $ | 0.01 | |||||
Exercised | (210,997 | ) | $ | 0.01 | ||||
Forfeited/Cancelled | - | - | ||||||
Outstanding at September 30, 2011 | 2,821,983 | $ | 0.48 |
NOTE 7 – INCOME TAXES
No content available.
NOTE 8 – LICENSE AND SERVICE AGREEMENTS
No content available.
NOTE 9 – COMMITMENTS AND CONTINGENCY
Leases
Operating Lease – The Company leases its office and manufacturing space under an operating lease that includes fixed annual increases and expires in September 2012. Total rent expense was $28,932 and $28,932 for the three months ended September 30, 2011 and 2010, respectively.
Capital lease –The Company leases certain of equipments under capital lease agreements that expire at various dates through 2012. Total Capital lease obligations were $333,730 and $337,670 as at September 30, 2011 and December 31, 2010, respectively.
Legal Proceedings
The Company is subject to litigation in the normal course of business, none of which management believes will have a material adverse effect on the Company’s financial statements. As of September 30, 2011 the Company was not a party to any litigation matters.
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NOTE 9 – COMMITMENTS AND CONTINGENCY (CONTINUED)
Indemnification
Under the indemnification provisions of the Company’s customer agreements, the Company agrees to indemnify and defend its customers against infringement of any patent, trademark, or copyright of any country or the misappropriation of any trade secret, arising from the customers’ legal use of the Company’s services. The exposure to the Company under these indemnification provisions is generally limited to the total amount paid by the customers under pertinent agreements. However, certain indemnification provisions potentially expose the Company to losses in excess of the aggregate amount received from the customer. To date, there have been no claims against the Company or its customers pertaining to such indemnification provisions and no amounts have been recorded.
NOTE 10 – RELATED PARTY TRANSACTIONS
As discussed in Note 4, “Notes Payable” several of the notes payable are entered among related parties.
A summary of the related party financings and notes as at September 30, 2011 is as follows:
First Note | Second Note | Senior Note | Afritex Note | Other | ||||||||||||||||
Holder | Agave Resources, LLC(1) | JTR Investments, Limited(2) | JTR Investments, Limited(2) | Afritex Medical Products (Pty) Limited(4) | Related Party | |||||||||||||||
Amount | $ | 750,000 | $ | 250,000 | $ | 1,067,506 | (3) | $ | 270,000 | $ | 24,750 | |||||||||
Stated interest rate | 0 | % | 0 | % | 0 | % | 16 | % | 0 | % | ||||||||||
Maturity | April 15, 2012 | April 15, 2012 | April 15, 2012: $422,850(3) Current: $644,656 | December 16, 2011 | Current | |||||||||||||||
Warrants issued (Please see Note 6 – “Stock Options & Warrants” for warrant details | 350,000 | 116,667 | 551,503 | 270,000 | 0 |
(1) Agave Resources, LLC is controlled by one of the Company’s Directors, Donald Reed.
(2) JTR Investments, Ltd. is a limited partnership controlled by its President and CEO, Julian Ross.
(3) Of the total amount outstanding on the Senior Note, $422,850 (the “Deferred JTR Senior Notes”) is payable on April 15, 2012 provided that: (a) Any amounts due and payable under the JTR Senior Note in excess of $422,850 shall remain current and due upon demand (the “Current JTR Senior Notes”); (b) In the event the Company completes an equity event (the “Equity Event”) prior to April 15, 2012 then up to a maximum total of $500,000 owed under the JTR Senior Note is repayable upon and at the time of such Equity Event, such that: (i) any amounts repaid upon the Equity Event shall be applied as to the Deferred JTR Senior Notes first; and (ii) any amounts remaining thereafter shall be applied to the Current JTR Senior Notes. If any amounts under the Deferred JTR Senior Notes remain outstanding subsequent to the Equity Event, these amounts shall remain deferred until April 15, 2012.
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NOTE 10 – RELATED PARTY TRANSACTIONS (CONTINUED)
(4) Afritex Medical Products is a South African distributor of the Company. The as-amended maturity date of the Afritex Note is December 16, 2011. Mr. Ross, the Company’s President and CFO is also a beneficial owner and a director of Afritex.
Other than related parties Notes and the Senior Notes discussed in Note 4, “Notes Payable”, of Notes to Financial Statements, the Company received additional $24,750 (net of repayments) in advances from related parties as of September 30, 2011.
As the related parties offered non-interest bearing notes payable to the Company, the Company issued various warrants to its related parties; please refer to Note 4, “Notes Payable” for detail.
NOTE 11 – NET INCOME (LOSS) PER SHARE
The following table sets forth the computation of net basic and diluted net income (loss) per share:
Three months ended September 30, | ||||||||
2011 | 2010 | |||||||
Historical net loss per share: | ||||||||
Net income (loss) | $ | (361,663 | ) | $ | (520,101 | ) | ||
Shares used in computing basic per share amounts (weighted average) | 15,846,347 | 15,724,816 | ||||||
Net income (loss) per share: | ||||||||
Basic and Diluted | $ | (0.02 | ) | $ | (0.03 | ) |
NOTE 12 – FAIR VALUE MEASUREMENTS
Effective January 1, 2009, the Company adopted new fair value accounting guidance. The adoption of the guidance was limited to financial assets and liabilities and did not have a material effect on the Company’s financial condition or results of operations.
The guidance defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which the Company would transact business and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance. The guidance establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The guidance establishes three levels of inputs that may be used to measure fair value:
Level 1 — Quoted prices in active markets for identical assets or liabilities.
Level 2 — Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.
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NOTE 12 – FAIR VALUE MEASUREMENTS (CONTINUED)
Level 3 — Unobservable inputs to the valuation methodology that is significant to the measurement of fair value of assets or liabilities.
Assets Measured at Fair Value on a Recurring Basis
The following table presents the Company’s financial assets and liabilities that are measured at fair value on a recurring basis which were comprised of the following types of instruments as of September 30, 2011:
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Cash (1) | $ | 761 | $ | 761 | - | - | ||||||||||
Total cash equivalents as of September 30, 2011 | $ | 761 | $ | 761 | $ | - | $ | - | ||||||||
(1) Included in cash and cash equivalents on the Company's Balance Sheet. |
NOTE 13 – OFF BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
The Company has not entered into any transactions with unconsolidated entities whereby the Company has financial guarantees, subordinated retained interests, or other contingent arrangements that expose the Company to material continuing risks, contingent liabilities, or any other obligation under a variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to the Company.
NOTE 14 – SEGMENT INFORMATION
The Company is organized as, and operates in, one reportable segment: the development and sale of specialty respiratory products. The Company’s chief operating decision-maker is its Chief Executive Officer. The Company’s Chief Executive Officer reviews financial information presented on a consolidated basis for purposes of evaluating financial performance and allocating resources, accompanied by information about revenue by geographic regions. The Company’s assets are primarily located in the United States of America and not allocated to any specific region and it does not measure the performance of its geographic regions based upon asset-based metrics. Therefore, geographic information is presented only for revenue. Revenue by geographic region is based on the ship to address on the customer order.
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NOTE 14 – SEGMENT INFORMATION (CONTINUED)
The following presents total revenue by geographic region for the three month periods ended September 30, 2011 and 2010:
Three Months Ended September 30, | ||||||||
2011 | 2010 | |||||||
Revenues: | ||||||||
United States - product sales | $ | 21,505 | $ | 33,999 | ||||
ROW - product sales | - | 19,836 | ||||||
Total revenues | $ | 21,505 | $ | 53,835 |
NOTE 15 – GOING CONCERN
The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”), which contemplate continuation of the Company as a going concern. The Company has an accumulated deficit of $13,097,377 and $11,898,260 at September 30, 2011 and December 31, 2010, respectively, and stockholders’ deficit of $2,967,691 and $2,325,967 as of September 30, 2011 and December 31, 2010, respectively. The Company requires substantial additional funds to manufacture and commercialize our products. Management is actively seeking additional sources of equity and/or debt financing; however, there is no assurance that any additional funding will be available.
In view of the matters described above, recoverability of a major portion of the recorded asset amounts shown in the accompanying September 30, 2011 balance sheet is dependent upon continued operations of the Company, which in turn is dependent upon the Company’s ability to meet its financing requirements on a continuing basis, to maintain present financing, and to generate cash from future operations. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence.
NOTE 16 - SUBSEQUENT EVENTS
Afritex Note conversion: On October 13, 2011, the Company received a conversion notice (the “Afritex Conversion Notice”) from Afritex Medical Products (Pty) Ltd. (“Afritex”), converting the entire principal and accrued interest of a convertible note issued to Afritex into common stock.
The Company is the issuer of that certain subordinated convertible note dated March 26, 2010 (“Afritex Note”) in favor of Afritex (please see Note 4, “Notes Payable”). In terms of the Afritex Conversion Notice received by the Company, Afritex irrevocably exercised its option to convert $335,880 of the principal amount and accrued but unpaid interest outstanding under the Afritex Note into 335,880 conversion shares in accordance with the terms of the Afritex Note.
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NOTE 16 - SUBSEQUENT EVENTS (CONTINUED)
Alcedo Note conversion: On October 27, 2011, the Company issued a conversion notice (the “Alcedo Conversion Notice”) to the Tony & Judy Alcedo Family Trust (“Alcedo”), converting the entire principal and accrued interest of a convertible note issued to Alcedo into common stock.
The Company is the issuer of that certain subordinated convertible note dated December 10, 2009 (“Alcedo Note”) in favor of Alcedo (please see Note 4, “Notes Payable”). In terms of the Alcedo Conversion Notice issued by the Company, the Company irrevocably exercised its option to convert $130,089 of the principal amount and accrued but unpaid interest outstanding under the Alcedo Note into 130,089 conversion shares in accordance with the terms of the Alcedo Note.
Agave/Ross note extensions: On November 14, 2011, the Company reached agreement to modify the maturities of that certain Agave First Note and that certain JTR Second Note (please see Note 4, “Notes Payable”) to April 15, 2013.
During March 2008, the Company completed a $1 million financing transaction consisting of a promissory note for $750,000 (“Agave First Note”) and a promissory note with a draw down provision for up to $250,000 (“JTR Second Note”) (collectively, the “Notes”). As at December 31, 2008 the amount outstanding on the JTR Second Note was $250,000. The Notes are subordinated, convertible notes and were due and payable on the earlier to occur of (i) completion of the next financing round completed by the Company; or (ii) one year after the Notes were issued. In March 2009 the Agave First Note and the JTR Second Note were modified by extending the maturity date in each case to April 15, 2010. On December 31, 2009, the Agave First Note and the JTR Second Note were further modified by extending the maturity date in each case to April 15, 2011. In August 2010, the Agave First Note and the JTR Second Note were further modified by extending the maturity date in each case to April 15, 2012.
On November 14, 2011, the Agave First Note and the JTR Second Note were further modified by extending the maturity date in each case to April 15, 2013.
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ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion and analysis should be read in conjunction with our financial statements, including the notes thereto, appearing elsewhere in this report.
Overview
OxySure Systems, Inc. was formed on January 15, 2004 as a Delaware “C” Corporation for the purpose of developing products with the capability of generating medical grade oxygen “on demand,” without the necessity of storing oxygen in compressed tanks. We developed a unique technology that generates medically pure (USP) oxygen from two dry, inert powders. Other available chemical oxygen generating technologies contain hazards that we believe make them commercially unviable for broad-based emergency use by lay rescuers or the general public. Our launch product is the OxySure Model 615 portable emergency oxygen system. We believe that the OxySure Model 615 is currently the only product on the market that can be safely pre-positioned in public and private venues for emergency administration of medical oxygen by lay persons, without the need for training.
Critical Accounting Policies
The SEC defines critical accounting policies as those that are, in management's view, most important to the portrayal of our financial condition and results of operations and those that require significant judgments and estimates.
The discussion and analysis of our financial condition and results of operations is based upon our financial statements which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities. On an on-going basis, we evaluate our estimates including the allowance for doubtful accounts, the salability and recoverability of inventory, income taxes and contingencies. We base our estimates on historical experience and on other assumptions that we believe to be reasonable under the circumstances, the results of which form our basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We cannot predict what future laws and regulations might be passed that could have a material effect on our results of operations. We assess the impact of significant changes in laws and regulations on a regular basis and update the assumptions and estimates used to prepare our financial statements when we deem it necessary.
Revenue Recognition. Our revenue recognition policies are in accordance with the SEC Staff Accounting Bulletin (SAB) No. 104. Sales revenue is recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations on our part exist and collectability is reasonably assured. Revenues are recognized from product sales, net of discounts and rebates. This revenue recognition policy is applied to both customers and distributors. Fees from licensees desiring to manufacture and distribute our products or derivative products using our intellectual property include initial license fees and royalties. Initial license fees are generally recognized upon granting of the license to the licensee. Royalties are recognized in the period earned.
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Allowance for doubtful accounts. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of the Company’s customers to make payments. The Company periodically reviews these allowances, including an analysis of the customers’ payment history and information regarding the customers’ creditworthiness. Actual write-offs have not been materially different from the estimated allowance. Our accounts receivable represent a significant portion of our current assets and total assets.
Inventories. Our inventory consists of raw material and components for our portable oxygen systems as well as completed products and accessories. Inventories are computed using the lower of cost or market, which approximates actual cost on a first-in first-out basis. Inventory components are parts, work-in-process and finished goods. Finished goods are reported as inventories until the point of title transfer to our customers. We write down our inventory value for estimated obsolescence equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. These factors are impacted by market and economic conditions, technology changes, new product introductions and changes in strategic direction and require estimates that may include uncertain elements. Actual demand may differ from forecasted demand, and such differences may have a material effect on recorded inventory values. Management has established inventory reserves to cover estimated inventory losses for all work-in-process and finished goods related to products we manufactured, as well as raw material and components for those products that had no potential use in products to be manufactured in the future. Management was required to make judgments about the future benefit of our raw materials and components. Actual reserve requirements could differ significantly from management’s estimates, which could have a significant unfavorable impact on our future gross margins.
Cash and Cash Equivalents. We consider all highly liquid investments purchased with maturity of three months or less to be cash equivalents. Cash and cash equivalents may at times exceed federally insured limits. To minimize this risk, we place our cash and cash equivalents with high credit quality institutions.
Property and Equipment. Property and equipment are recorded at cost with depreciation and amortization provided over the shorter of the remaining lease term or the estimated useful life of the improvement. Renewals and betterments that materially extend the life of an asset are capitalized. Expenditures for maintenance and repairs are charged to expense when incurred.
Impairment of Long-Lived Assets. We review long-lived assets, including amortizable intangibles, for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the sum of the expected future undiscounted cash flows is less than the carrying amount of the asset, a loss is recognized for the difference between the fair value and carrying value of the asset. During the six months ended September 30, 2011, we did not recognize any impairment charge.
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Research and Development Costs. Costs associated with the development of the Company’s products are charged to expense as incurred. $60 and $300 were incurred in the three month periods ended September 30, 2011 and 2010, respectively.
Income Taxes. We account for income taxes using an asset and liability approach, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our Consolidated Financial Statements, but have not been reflected in our taxable income. A valuation allowance has been established to reduce deferred tax assets to their estimated realizable value. Therefore, we provide a valuation allowance to the extent that we do not believe it is more likely than not that it will generate sufficient taxable income in future periods to realize the benefit of its deferred tax assets. We recognize interest and penalties related to unrecognized tax benefits in income tax expense.
Equity Warrants. We have issued warrants to purchase shares of our common stock in connection with convertible notes. In accordance with ASC 470-20, Debt with conversions and other options, the proceeds from the notes were allocated based on the relative fair values of the notes without the warrants issued in conjunction with the notes and of the warrants themselves at the time of issuance. We record the fair value of the warrants at the time of issuance as additional paid in capital and as a debt discount to the notes. We amortize this debt discount as interest expense over the life of the note. Additionally, as a result of issuing the warrants with the convertible notes, a beneficial conversion option is recorded as a debt discount reflecting the incremental conversion option intrinsic value of the conversion option provided to the holders of the notes. We also amortize this debt discount as interest expense over the life of the notes. The intrinsic value of each conversion option was calculated as the difference between the effective conversion price and the fair value of the common stock, multiplied by the number of shares into which the note is convertible.
Stock-Based Compensation. We account for share-based payments, including grants of stock options to employees, consultants and non-employees; moreover, we issue warrants to the consultants and related parties. We are required to estimate the fair value of share-based awards and warrants on the date of grant. The value of the award is principally recognized as expense ratably over the requisite service periods. We have estimated the fair value of stock options and warrants as of the date of grant or assumption using the Black-Scholes option pricing model, which was developed for use in estimating the value of traded options that have no vesting restrictions and that are freely transferable. The Black-Scholes model requires the input of certain assumptions. Changes in the assumptions used in Black-Scholes model can materially affect the fair value estimates. With exception of forfeiture rates, which we evaluate annually, we evaluate the assumptions used to value stock options on a quarterly basis. The expected term of stock options represents the weighted average period the stock options are expected to remain outstanding.
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The expected term is based on the observed and expected time to exercise and post-vesting cancellations of options by employees. Upon the adoption of the accounting guidance, we continue to use historical volatility in deriving our expected volatility assumption as allowed under GAAP because we believe that future volatility over the expected term of the stock options is not likely to differ materially from the past. The risk-free interest rate assumption is based on the five-year U.S. Treasury zero-coupon rate appropriate for the expected term of the stock options. The expected dividend assumption is based on the history and expectation of dividend payouts. The fair values generated by the Black-Scholes model may not be indicative of the actual fair values of the equity awards, as we do not consider other factors important to those awards to employees, such as continued employment, periodic vesting requirements and limited transferability. The amount of stock based compensation expenses is net of an estimated forfeiture rate, which we adjust on an annual basis, if at all, and which is based on historical data and information from comparable companies, and our judgment of whether the options are expected to vest. For the three month periods ended September 30, 2011 and 2010, stock based compensation expense was approximately $31,474 and $28,955 respectively, which consisted primarily of stock-based compensation expense related to stock options issued to the employees and recognized under GAAP.
We follow ASC Topic 505-50, formerly EITF 96-18, “Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling Goods and Services,” for stock options and warrants issued to consultants and other non-employees. In accordance with ASC Topic 505-50, these stock options and warrants issued as compensation for services to be provided to us are accounted for based upon the fair value of the services provided or the estimated fair market value of the option or warrant, whichever can be more clearly determined. We recognize this expense over the period in which the services are provided. For the three month periods ended September 30, 2011 and 2010, stock based compensation expense was approximately $0 for both periods, which consisted primarily of stock-based compensation expense related to stock options and warrants recognized under GAAP issued to consultants and other non-employees.
Accounting Estimates. The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amount of revenues and expenses during the reported period. Actual results could differ from those estimated.
Advertising Costs. Advertising costs are charged to operations when incurred. The Company incurred $2,103 and $4,263 in advertising and promotion costs during the three month periods ended September 30, 2011 and 2010, respectively.
Financial Instruments. Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of September 30, 2011. The respective carrying value of certain on balance sheet financial instruments approximate their fair values. These financial instruments include cash, accounts payable, accrued expenses and notes payable. Fair values were assumed to approximate carrying values for these financial instruments because they are short term in nature and their carrying amounts approximate fair values.
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Restatements and Reclassifications. Certain financial statement items have been restated to conform to the current periods’ presentation. These reclassifications had no impact on previously reported net loss.
Recently Enacted Accounting Standards. In June 2011, the Financial Accounting Standards Board, or FASB, issued guidance regarding the presentation of comprehensive income. The new standard requires the presentation of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The new standard also requires presentation of adjustments for items that are reclassified from other comprehensive income to net income in the statement where the components of net income and the components of other comprehensive income are presented. The updated guidance is effective on a retrospective basis for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. The adoption of this guidance will not have a material impact on our financial statements.
In May 2011 the FASB issued additional guidance on fair value measurements that clarifies the application of existing guidance and disclosure requirements, changes certain fair value measurement principles and requires additional disclosures about fair value measurements. The updated guidance is effective on a prospective basis for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. The adoption of this guidance will not have a material impact on our financial statements.
In September 2011 the FASB issued new accounting guidance intended to simplify goodwill impairment testing. Entities will be allowed to perform a qualitative assessment on goodwill impairment to determine whether a quantitative assessment is necessary. This guidance is effective for goodwill impairment tests performed in interim and annual periods for fiscal years beginning after December 15, 2011. Early adoption is permitted. The adoption of this guidance will not have a material impact on our financial statements.
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Results of Operations
You should read the selected financial data set forth below along with our discussion and our financial statements and the related notes. We have derived the financial data from our unaudited financial statements. We believe the financial data shown in the table below include all adjustments consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of such information. Operating results for the period are not necessarily indicative of the results that may be expected in the future.
For the three months ended September 30, | For the nine months ended September 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Revenues, net | $ | 21,505 | $ | 53,835 | $ | 120,055 | $ | 329,919 | ||||||||
Operating expenses | 320,659 | 440,297 | 871,204 | 1,286,652 | ||||||||||||
Net income (loss) | (361,663 | ) | (520,101 | ) | (1,199,117 | ) | (1,296,974 | ) | ||||||||
Net income (loss) per common share | $ | (0.02 | ) | $ | (0.03 | ) | $ | (0.08 | ) | $ | (0.08 | ) |
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Results for the Nine Months Ended September 30, 2011 Compared to the Nine Months Ended September 30, 2010 (unaudited)
Revenues
We had $120,055 revenue from operations for the nine months ended September 30, 2011 as compared to revenues of $329,919 for the nine months ended September 30, 2010. This decrease is primarily due to a license agreement entered into on March 26, 2010 which resulted in the recording of a non-recurring license fee in the prior period. The license agreement is with Afritex Medical Products (Pty) Ltd, a South African company. Revenue from products increased from $104,919 for the nine months ended September 30, 2010 to $120,055 for the nine months ended September 30, 2011.
Operating Expenses
Total expenses for the nine months ended September 30, 2011 were $1,438,034, which amount includes $871,204 of selling, general and administrative expenses, $69,811 in cost of goods sold, and $497,019 in interest expense, as compared to total expenses for the nine months ended September 30, 2010 of $1,632,940, which amount includes $1,286,652 of selling, general and administrative expenses, $55,327 in cost of goods sold, and $290,961 in interest expense. The decrease in selling, general and administrative expenses is partly attributable to a decrease in advertising and promotion expense.
Research and Development
Research and development expenses of $200 and $2,088 were incurred in the nine months periods ended September 30, 2011 and 2010, respectively. This decrease is due to our limited budget during this period.
Net Loss
Net loss as of September 30, 2011 was $1,199,117 and diluted net loss per share was $0.08 as compared to a net loss as of September 30, 2010 of $1,296,974 and diluted net loss per share of $0.08. The net loss per share has remained unchanged for the comparative periods primarily because of a decrease in selling, general and administrative expenses and a concomitant decrease in revenue as a result of the effect of a non-recurring license fee of $225,000 recognized in the prior period.
Results for the Three Months Ended September 30, 2011 Compared to the Three Months Ended September 30, 2010 (unaudited)
Revenues
We had $21,505 revenue from operations for the three months ended September 30, 2011 as compared to revenues of $53,835 for the three months ended September 30, 2010. This decrease is primarily attributable to a decrease in product sales.
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Operating Expenses
Total expenses for the three months ended September 30, 2011 were $468,279, which amount includes $320,659 of selling, general and administrative expenses, $10,312 in cost of goods sold, and $137,309 in interest expense, as compared to total expenses for the three months ended September 30, 2010 of $576,936, which amount includes $440,297 of selling, general and administrative expenses, $29,869 in cost of goods sold, and $106,770 in interest expense. The decrease in selling, general and administrative expenses is partly attributable to a decrease in non-recurring operating expense.
Research and Development
Research and development expenses of $60 and $1,154 were incurred in the three months periods ended September 30, 2011 and 2010, respectively. This decrease is due to our limited budget during this period.
Net Loss
Net loss for the three months ended September 30, 2011 was $361,663 and diluted net loss per share was $0.02 as compared to a net loss for the three months ended September 30, 2010 of $520,101 and diluted net loss per share of $0.03. The net loss per share has decreased for the comparative periods primarily because of a decrease in selling, general and administrative expenses.
Liquidity and Capital Resources
We had a cash balance of approximately $761 as of September 30, 2011, as compared to $16,137 as of September 30, 2010. Our funds are kept in financial institutions located in the United States of America.
We had negative working capital of approximately $3,335,377 as of September 30, 2011 as compared to a negative working capital of $1,376,573 as of September 30, 2010.
We had total notes payable of $2,968,621 and $2,328,458 as of September 30, 2011 and September 30, 2010, respectively. The increase in Notes Payable was primarily due to an increase in Current Notes Payable, from $644,003 to $2,722,734, including an increase of $452,206 in notes issued in JTR Investments, Limited in connection funding provided for operations between September 30, 2010 and September 30, 2011. JTR Investments, Limited is an affiliate of us. In addition:
· | $251,407 in notes payable due December 31, 2011 in connection with rent was reclassified from Long-Term Notes Payable at September 30, 2010 to Current Notes Payable at September 30, 2011; |
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· | $750,000 in notes payable due April 15, 2012 in connection with the Agave Senior Note was reclassified from Long-Term Notes Payable at September 30, 2010 to Current Notes Payable at September 30, 2011. Agave Resources, LLC is an affiliate of us; |
· | $250,000 in notes payable due April 15, 2012 in connection with the JTR Second Note was reclassified from Long-Term Notes Payable at September 30, 2010 to Current Notes Payable at September 30, 2011. JTR Investments, Limited is an affiliate of us; and |
· | $422,850 in notes payable due April 15, 2012 or before, in connection with the deferred portion of the JTR Senior Note was reclassified from Long-Term Notes Payable at September 30, 2010 to Current Notes Payable at September 30, 2011. JTR Investments, Limited is an affiliate of us. |
We generally provide our customers with terms of up to 30 days on our accounts receivable. In some cases we require prepayment, depending on history or credit review. Further, we generally require pre-payment on orders shipped to international destinations. Our accounts receivable, net of allowances for sales returns and allowance for doubtful accounts, were $16,859 and $25,370 as at September 30, 2011 and September 30, 2010, respectively.
Since inception, we have been engaged primarily in product research and development, obtaining certain regulatory approvals, investigating markets for our products, developing manufacturing and supply chain partners, and developing distribution, licensing and other channel relationships. In the course of funding research and development activities, we have sustained operating losses since inception and have an accumulated deficit of $13,097,377 at September 30, 2011.
We completed product development of our launch product, and launched sales thereof in early 2008. We have and will continue to use significant capital to manufacture and commercialize our products. These factors raise substantial doubt about our ability to continue as a going concern. In this regard, management is proposing to raise any necessary additional funds not provided by operations through loans or through additional sales of our common stock.
During 2011, we will need additional capital to market and sell our products, and to further develop and enhance our current product offerings, introduce new products and address unanticipated competitive threats, technical problems, economic conditions or other requirements. We raised approximately $2,110 during the quarter ended September 30, 2011 and $0 during the quarter ended September 30, 2010 through the sale of common stock, preferred stock, and the exercise of warrants and stock options. We estimate that we will require approximately $4.5 million over the next 12 months to remain viable. There is no assurance that we will be successful in raising this additional capital or in achieving profitable operations. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might result from this uncertainty. However, there can be no assurance that any additional financing will be available to us. Additional equity financing may involve substantial dilution to our then existing stockholders. In the event we are unable to raise additional capital, we may be required to substantially reduce or curtail our activities.
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ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide information under this item.
ITEM 4. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
Our President and Chief Financial Officer has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) as of the end of period covered by this report. Based upon such evaluation, the President and Chief Financial Officer concluded that our disclosure controls and procedures were effective to ensure that the information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to our management, including our President and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
ITEM 1. | LEGAL PROCEEDINGS |
To the best knowledge of our management, there are no legal proceedings pending or threatened against us.
ITEM 1A. | RISK FACTORS |
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide information under this item.
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
During the period January through September 2011, we issued warrants to purchase a total of 185,690 shares of common stock with an aggregate exercise price of $0.01 per share in connection with financing. These warrants were valued at $183,985 in total using the fair values of the underlying shares on the dates of issuance. During the period January through September 2011, we issued warrants to purchase a total of 130,065 shares of common stock with an aggregate exercise price of $0.01 per share in connection with rent. These warrants were valued at $128,859 in total using the fair values of the underlying shares on the dates of issuance. These transactions were exempt from registration pursuant to Section 4(2) of the Securities Act of 1933. We relied on the exemption from registration relating to offerings that do not involve any public offering pursuant to Section 4(2) under the Act. We believe that each purchaser is an “accredited investor” under Rule 501 under Regulation D of the Act and had adequate access to information about us.
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
None.
ITEM 4. | (REMOVED AND RESERVED) |
ITEM 5. | OTHER INFORMATION |
None.
ITEM 6. | EXHIBITS |
The following Exhibits are filed herein:
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No. | Title | ||
31.1 | Certification of President Pursuant to the Securities Exchange Act of 1934, Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
31.2 | Certification of Chief Financial Officer Pursuant to the Securities Exchange Act of 1934, Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||
32 | Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
DATED: November 21, 2011 | OXYSURE SYSTEMS, Inc. |
/s/Julian T. Ross | |
BY: Julian T. Ross | |
ITS: President and Chief Financial Officer | |
(Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer) |
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