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 - We recognize 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 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.
Deferred Revenue and Income - We defer revenue and income when we invoice 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 $421,713 and $421,713 as at March 31, 2012 and December 31, 2011, 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 – 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 the customer. 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 is 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.
Concentration of Credit Risk – We sell our products throughout the United States as well as in certain other countries. Sales to its recurring customers in the United States are generally granted on net 30-day credit terms. We perform periodic credit evaluations of our recurring customers and generally do not require collateral. In general, we require prepayment on all sales to customers outside the United States. An allowance for doubtful accounts is maintained for potential credit losses, which losses historically have not been significant.
OXYSURE® SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2012
(Unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
We invest our cash in deposits and money market funds with major financial institutions. We place our cash investments in instruments that meet high credit quality standards, as specified in our 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 - Our financial instruments consist principally of cash and cash equivalents, accounts receivable and accounts payable. We believe that the recorded values of all of our other financial instruments approximate their fair values because of their nature and respective maturity dates or durations. The fair value of our long-term debt is determined by using estimated market prices. Assets and liabilities measured at fair value are categorized based on whether or not the inputs are observable in the market and the degree that the inputs are observable. The categorization of financial instruments within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The hierarchy is prioritized into three levels (with Level 3 being the lowest) defined as follows:
Level 1: Inputs are based on quoted market prices for identical assets or liabilities in active markets at the measurement date.
Level 2: Inputs include quoted prices for similar assets or liabilities in active markets and/or quoted prices for identical or similar assets or liabilities in markets that are not active near the measurement date.
Level 3:Inputs include management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. The inputs are unobservable in the market and significant to the instrument’s valuation.
The fair value of the majority of our cash equivalents was determined based on “Level 1” inputs. We do not have any marketable securities in the “Level 2” and “Level 3” category. We believe that the recorded values of all our other financial instruments approximate their current fair values because of their nature and respective relatively short 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 $41,505 and $44,552 for the three month periods ended March 31, 2012 and 2011, respectively.
Other Long-Lived Assets – We have 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 $7,441 and $7,441 for the three month periods ended March 31, 2012 and 2011, 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, we estimate 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 each of the three month periods ended March 31, 2012 and 2011.
OXYSURE® SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2012
(Unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Other Assets – We record Other Assets net of accumulated amortization. Amortization expense for Other Assets $0 for each of the three month periods ended March 31, 2012 and 2011.
Allowance for Doubtful Accounts - We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make payments. We periodically review 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.
Research and Development Costs – Costs associated with the development of our products are charged to expense as incurred. $60 and $80 were incurred in the three month periods ended March 31, 2012 and 2011, respectively.
Income Taxes - In accordance with Accounting Standards Codification (“ASC”) Topic 740, “Income Taxes” (“ASC 740”), 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 we will generate sufficient taxable income in future periods to realize the benefit of our deferred tax assets. We recognize interest and penalties related to unrecognized tax benefits in income tax expense.
Equity Warrants - We 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. We evaluate 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.
OXYSURE® SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2012
(Unaudited)
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, we continued to use historical volatility in deriving its 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 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 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 is also based on historical data. For the three month periods ended March 31, 2012 and 2011, stock based compensation expense was approximately $9,514 and $36,410, 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 March 31, 2012 and 2011, stock based compensation expense was approximately $0 and $32,023, respectively 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 March 31, | |
| | | 2012 | | | 2011 | |
| | | | | | | |
| Common Stock options issued for compensation | | | 9,514 | | | | 36,410 | |
| Common Stock options and warrants issued for services | | | - | | | | 32,023 | |
| | | | | | | | | |
| Total | | | 9,514 | | | | 68,433 | |
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. We incurred $2,430 and $4,012 in advertising and promotion costs during the three month periods ended March 31, 2012 and 2011, respectively.
OXYSURE® SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2012
(Unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 was not involved in any legal proceedings, litigation or other legal actions during the three months ended March 31, 2012.
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 March 31, | |
| | | 2012 | | | 2011 (Restated) | |
| Historical net loss per share: | | | | | | |
| | | | | | | |
| Numerator | | | | | | |
| Net loss, as reported | | $ | (325,451 | ) | | $ | (374,084 | ) |
| Less: Effect of amortization of interest expense on convertible notes | | | 52,305 | | | | 115,683 | |
| Net loss attributed to common stockholders (diluted) | | $ | (273,146 | ) | | $ | (258,401 | ) |
| | | | | | | | | |
| Denominator | | | | | | | | |
| Weighted-average common shares outstanding | | | 17,844,462 | | | | 15,728,816 | |
| Effect of dilutive securities | | | - | | | | - | |
| Denominator for diluted net loss per share | | | 17,844,462 | | | | 15,728,816 | |
| Basic and diluted net loss per share | | $ | (0.02 | ) | | $ | (0.02 | ) |
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 March 31, | |
| | | 2012 | | | 2011 | |
| | | | | | | |
| Options to purchase common stock | | | 1,943,754 | | | | 2,080,604 | |
| Warrants to purchase common stock | | | 2,754,650 | | | | 2,825,098 | |
| Common shares issuable upon conversion of convertible preferred stock | | | 1,608,875 | | | | 3,814,249 | |
| Convertible note shares outstanding | | | 1,696,330 | | | | 2,136,482 | |
Restatements and Reclassifications - Certain financial statement items have been reclassified to conform to the current periods’ presentation. These reclassifications had no impact on previously reported net loss. Certain financial statement items for the quarter ended March 31, 2011 have been restated - please see Note 17 - Correction of error to prior period financial statements.
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.
OXYSURE® SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2012
(Unaudited)
NOTE 2 – BALANCE SHEET COMPONENTS
| | | March 31, | | | December 31, | |
| | | 2012 | | | 2011 | |
| | | | | | | |
| Cash and cash equivalents: | | | | | | |
| Cash | | | 3,484 | | | | 65,118 | |
| Total cash and cash equivalents | | $ | 3,484 | | | $ | 65,118 | |
| | | | | | | | | |
| Inventories: | | | | | | | | |
| Total inventories | | $ | 265,429 | | | $ | 247,956 | |
| | | | | | | | | |
| Accounts Receivable, net of allowances | | $ | 7,883 | | | $ | 2,758 | |
| | | | | | | | | |
| Property and equipment, net: | | | | | | | | |
| Machinery and equipment | | | 919,736 | | | | 919,736 | |
| Leasehold improvements | | | 547,856 | | | | 547,856 | |
| Computer equipment and furniture and fixtures | | | 203,922 | | | | 203,922 | |
| Software | | | 10,691 | | | | 10,691 | |
| | | | 1,682,204 | | | | 1,682,204 | |
| Accumulated depreciation and amortization | | | (1,590,050 | ) | | | (1,548,545 | ) |
| Total property and equipment, net | | $ | 92,155 | | | $ | 133,659 | |
| | | | | | | | | |
| | | | | | | | | |
| Accounts payable and accrued expenses: | | | | | | | | |
| Leasehold Improvement Allowance | | | 32,646 | | | | 48,969 | |
| Accounts payable | | | 146,500 | | | | 136,263 | |
| Accrued interest | | | 42,093 | | | | 40,094 | |
| Other accrued liabilities | | | 29,267 | | | | 20,015 | |
| Total accounts payable and accrued expenses | | $ | 250,506 | | | $ | 245,340 | |
NOTE 3 – INTANGIBLE ASSETS
We have two types of intangible assets: patents and trademarks. We capitalize expenditures associated with patents and trademarks related to our 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.
OXYSURE® SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2012
(Unaudited)
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 March 31, 2012 and 2011.
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 our amortized acquired intangible assets as of the March 31, 2012 are as follows:
| | | March 31, 2012 | |
| | | Gross | | | Accumulated
Amortization
and write off | | | Net | |
| | | | | | | | | | |
| Patents | | $ | 610,518 | | | $ | (212,463 | ) | | $ | 398,055 | |
| Trademarks | | $ | 45,723 | | | $ | (6,052 | ) | | $ | 39,671 | |
| | | $ | 656,241 | | | $ | (218,514 | ) | | $ | 437,727 | |
Of the net amount of $437,727 in intangible assets as of March 31, 2012, 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
We have issued warrants for the purchase of shares of our 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.
Frisco Promissory Note On April 3, 2007 we 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 required varying annual principal payments through August 2012. The note was non-interest bearing; however, interest has been imputed at 12.18% per annum. The unamortized discount at December 31, 2010 was $66,198. Individual annual payments were to be forgiven if certain performance targets are achieved, which include the number of full time employees, square feet occupied in the city of Frisco and the 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 we recognized the entire $30,000 under “Other income” in the Statement of Operations and Accumulated Deficit for the year ended December 31, 2008. On March 22, 2011 we entered into an Amended and Restated Performance Agreement with the FEDC. In terms of the Amended and Restated Performance Agreement, the FEDC provided us with economic assistance in the form of the renewal and extension of the outstanding 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.
OXYSURE® SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2012
(Unaudited)
NOTE 4 – NOTES PAYABLE (CONTINUED)
The renewed Frisco Note requires varying annual principal payments through December 2015. The face value of the renewed note is $213,000, and the note is non-interest bearing; however, interest has been imputed at 12.34% per annum.
On December 1, 2011 we received the first performance credit from the FEDC in the amount of $26,000 pursuant to the Amended and Restated Performance Agreement. We recognized the entire $26,000 under “Other income” in the Statement of Operations and Accumulated Deficit for the year ended December 31, 2011. The unamortized discount at March 31, 2012 was $49,650. The net amount of the note as at March 31, 2012 was $137,350.
Future principal payments of this note payable are as follows:
| 2012 | | | 39,000 | |
| 2013 | | | 44,000 | |
| 2014 | | | 52,000 | |
| 2015 | | | 52,000 | |
| | | $ | 187,000 | |
Agave/JTR Subordinated, Convertible Notes During March 2008, we 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 us 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. In November 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 our Directors. In connection with the First Note, on April 15, 2008 Agave was also issued penny warrants to purchase 350,000 shares of common stock. 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, our founder.
As of December 31, 2008 the maximum of $250,000 has been drawn against the Second Note. In connection with the Second Note, on December 31, 2008 JTR was also issued penny warrants to purchase 116,667 shares of common stock. 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, our 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.
OXYSURE® SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2012
(Unaudited)
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. We 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. We recorded no interest expense for the three months ended March 31, 2012 and 2011 in connection with the First Note.
We 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. We recorded no interest expense for the three months ended March 31, 2012 and 2011 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 March 31, 2012, the outstanding balance under the Senior Note was $1,018,654. As of March 31, 2012 the number of penny warrants issued to JTR pursuant to the Senior Note was 572,503. 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.
Maturity: The total amount outstanding under the Senior Note is classified as current.
OXYSURE® SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2012
(Unaudited)
NOTE 4 – NOTES PAYABLE (CONTINUED)
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 March 31, 2012 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 March 31, 2012. The debt discount for each issuance under the Senior Note is expensed as interest expense upon issuance. We recorded interest expenses in the amounts of $0 and $54,465 for the three months ended March 31, 2012 and March 31, 2011, respectively, in connection with the Senior Note.
Sinacola Subordinated, Convertible Notes.
First Landlord Note; Second Landlord Note:
On December 10, 2009 we entered into a Rent Satisfaction Agreement (the “2009 RSA”) with our landlord, Sinacola Commercial Properties, Ltd. (“Sinacola”). In terms of the 2009 RSA, all of our outstanding rent obligations under our 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.
We 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.
OXYSURE® SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2012
(Unaudited)
NOTE 4 – NOTES PAYABLE (CONTINUED)
We 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, we 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.
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. We 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. We recorded no interest expense for the three months ended March 31, 2012 and 2011 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. We recorded no interest expense for the three months ended March 31, 2012 and 2011 in connection with the Second Landlord Note.
With an effective date of March 30, 2012 the First Landlord Note was converted into 125,000 shares of restricted common stock at a conversion price of $1.00 per share, in accordance with the conversion provisions of the First Landlord Note. With an effective date of March 30, 2012 the Second Landlord Note was converted into 84,271 shares of restricted common stock at a conversion price of $1.50 per share, in accordance with the conversion provisions of the Second Landlord Note.
Third Landlord Note; Fourth Landlord Note:
On December 31, 2010 we entered into a second Rent Satisfaction Agreement (the “2010 RSA”) with our landlord, Sinacola. In terms of the 2010 RSA, all of our outstanding rent obligations for the 2010 financial year under our lease agreement, up to and including December 31, 2010 including, but not limited to, base rent, deferred rent, and our share of operating costs, are satisfied in full.
We 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.
OXYSURE® SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2012
(Unaudited)
NOTE 4 – NOTES PAYABLE (CONTINUED)
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.
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. We 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 we also amortize as interest expense over the life of the note. We recorded interest expense in the amounts of $15,000 and $15,000 for the three months ended March 31, 2012 and March 31, 2011, respectively in connection with the Third Landlord Note. We 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 we also amortize as interest expense over the life of the note. We recorded interest expense in the amounts of $14,417 and $14,417 for the three months ended March 31, 2012 and March 31, 2011, respectively in connection with the Fourth Landlord Note.
Fifth Landlord Note; Sixth Landlord Note:
On March 23, 2011 we entered into a third rent satisfaction agreement (the “2011 RSA”) with our landlord, Sinacola. In terms of the 2011 RSA, certain of our rent obligations for the period January 1, 2011 through June 30, 2011 under our lease agreement, including base rent and deferred rent, are satisfied in full.
We 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.
OXYSURE® SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2012
(Unaudited)
NOTE 4 – NOTES PAYABLE (CONTINUED)
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 September 30, 2013.
We 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 our 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.
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. We 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 we also amortize as interest expense over the life of the note. We recorded interest expense in the amounts of $6,250 and $556 for the three months ended March 31, 2012 and March 31, 2011, respectively in connection with the Fifth Landlord Note. We 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 we also amortize as interest expense over the life of the note. We recorded interest expense in the amounts of $5,968 and $531 for the three months ended March 31, 2012 and March 31, 2011, respectively in connection with the Sixth Landlord Note.
Seventh Landlord Note; Eighth Landlord Note:
On August 15, 2011 we entered into a fourth rent satisfaction agreement (the “Second 2011 RSA”) with our landlord, Sinacola. In terms of the Second 2011 RSA, certain of our rent obligations for the period July 1, 2011 through December 31, 2011 under our lease agreement, including base rent and deferred rent, are satisfied in full.
We 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.
OXYSURE® SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2012
(Unaudited)
NOTE 4 – NOTES PAYABLE (CONTINUED)
Maturity Date – Each of the Seventh Landlord Note and the Eighth Landlord Note has a maturity date of November 30, 2013.
We 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 our 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.
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. We 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 we amortize 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 we also amortize as interest expense over the life of the note. We recorded interest expense in the amounts of $5,460 and $0 for the three months ended March 31, 2012 and March 31, 2011, respectively in connection with the Seventh Landlord Note. We 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 we amortize 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 we also amortize as interest expense over the life of the note. We recorded interest expense in the amounts of $5,210 and $0 for the three months ended March 31, 2012 and March 31, 2011, respectively in connection with the Eighth Landlord Note.
OXYSURE® SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2012
(Unaudited)
NOTE 4 – NOTES PAYABLE (CONTINUED)
The following table reflects the carrying values of our short-term and long-term notes payable as of March 31, 2012:
| | | Effective Interest Rate | | | Principal | | | Discount | | | March 31, 2012 | |
| | | | | | | | | | | | | |
| Current notes payable | | | | | | | | | | | | |
| JTR, Senior Note | | | 0.00 | % | | $ | 1,018,656 | | | $ | - | | | $ | 1,018,654 | |
| Sinacola, Third Landlord Note | | | 54.55 | % | | | 110,000 | | | $ | 35,000 | | | $ | 75,000 | |
| Sinacola, Fourth Landlord Note | | | 52.09 | % | | | 110,715 | | | | 33,639 | | | | 77,077 | |
| Frisco EDC | | | 12.34 | % | | | 39,000 | | | | 9,309 | | | | 29,691 | |
| M. Nyewe Trust Note | | | 8.00 | % | | | 100,000 | | | | - | | | | 100,000 | |
| Other indebtedness | | | 0.00 | % | | | 214,750 | | | | - | | | | 214,750 | |
| | | | | | | | | | | | | | | | | |
| Total short-term notes payable | | | | | | $ | 1,593,121 | | | $ | 77,948 | | | $ | 1,515,172 | |
| | | | | | | | | | | | | | | | | |
| Long-term notes payable | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Sinacola, Fifth Landlord Note | | | 50.00 | % | | $ | 50,000 | | | | 24,444 | | | | 25,556 | |
| Sinacola, Sixth Landlord Note | | | 47.75 | % | | | 50,000 | | | | 23,343 | | | | 26,657 | |
| Sinacola, Seventh Landlord Note | | | 43.64 | % | | | 50,050 | | | | 38,220 | | | | 11,830 | |
| Sinacola, Eighth Landlord Note | | | 41.64 | % | | | 50,050 | | | | 36,473 | | | | 13,577 | |
| Agave, First Note | | | 0.00 | % | | | 750,000 | | | | - | | | | 750,000 | |
| JTR, Second Note | | | 0.00 | % | | | 250,000 | | | | - | | | | 250,000 | |
| Frisco EDC | | | 12.34 | % | | | 148,000 | | | | 40,340 | | | | 107,660 | |
| | | | | | | | | | | | | | | | | |
| Total long-term notes payable | | | | | | $ | 1,348,100 | | | $ | 162,821 | | | $ | 1,185,279 | |
| Total short-term and long-term notes payable | | | | | | $ | 2,941,221 | | | $ | 240,769 | | | $ | 2,700,451 | |
OXYSURE® SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2012
(Unaudited)
NOTE 4 – NOTES PAYABLE (CONTINUED)
The following table summarizes our outstanding notes payable as of March 31, 2012 and December 31, 2011:
| | | March 31, 2012 | | | December 31, 2011 | |
| | | | | | | |
| Current portion of notes payable | | $ | 244,441 | | | $ | 86,338 | |
| Current portion of convertible notes payable | | | 1,270,731 | | | | 1,478,722 | |
| Current portion of notes payable, net | | $ | 1,515,172 | | | $ | 1,565,059 | |
| | | | | | | | | |
| Long-term portion of notes payable | | $ | 148,000 | | | $ | 154,380 | |
| Less: Unamortized discount | | | (40,340 | ) | | | (46,720 | ) |
| | | | 107,660 | | | | 107,660 | |
| | | | | | | | | |
| | | | | | | | | |
| Long-term portion of convertible notes payable | | $ | 1,200,100 | | | $ | 1,200,100 | |
| Less: Unamortized discount | | | (122,481 | ) | | | (145,370 | ) |
| | | | 1,077,619 | | | | 1,054,730 | |
| | | | | | | | | |
| Long-term portion of notes payable, net | | $ | 1,185,279 | | | $ | 1,162,390 | |
OXYSURE® SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2012
(Unaudited)
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. The original issue price of the Series A Preferred is $1.00 per share. There were 1,318,750 and 3,126,434 Series A Preferred shares issued and outstanding as of March 31, 2012 and December 31, 2011, respectively.
During the three months ended March 31, 2012 the Company did not issue any shares of the Series A Preferred. During the three months ended March 31, 2012 approximately 1,807,684 shares of the Series A Preferred have been converted into approximately 2,205,374 shares of our common stock at a conversion ratio of 1.22:1.
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.
OXYSURE® SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2012
(Unaudited)
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 March 31, 2012 we issued approximately 2,205,374 shares of our common stock pursuant to the conversion of approximately 1,807,684 shares of our Series A Convertible Preferred Stock at a conversion ratio of 1.22:1. During the three months ended March 31, 2012, we also issued 209,271 shares of our common stock pursuant to the conversion of convertible notes. As of March 31, 2012 we had 18,934,510 shares of common stock issued and outstanding.
NOTE 6 - STOCK OPTIONS AND WARRANTS
Equity Incentive Plans
In April 2004, our 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.
Our 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 our 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 March 31, 2012:
| | | Employee | | | Non-Employee | | | | |
| | | | | | Weighted | | | | | | Weighted | | | | |
| | | Number | | | Average | | | Number | | | Average | | | Combined | |
| | | Of | | | Exercise | | | Of | | | Exercise | | | Total | |
| | | Options | | | Price | | | Options | | | Price | | | Options | |
| Outstanding at December 31, 2011 | | | 1,799,024 | | | $ | 0.47 | | | | 53,180 | | | $ | 0.72 | | | | 1,852,204 | |
| Granted | | | 180,000 | | | $ | 0.25 | | | | - | | | $ | - | | | | 180,000 | |
| Exercised | | | - | | | $ | - | | | | - | | | $ | - | | | | - | |
| Forfeited/Cancelled | | | (88,450 | ) | | $ | 1.02 | | | | - | | | $ | - | | | | (88,450 | ) |
| Outstanding at March 31, 2012 | | | 1,890,574 | | | $ | 0.44 | | | | 53,180 | | | $ | 0.72 | | | | 1,943,754 | |
OXYSURE® SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2012
(Unaudited)
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 March 31, 2012 and 2011:
| | | Equity Incentive Plans for Periods
Ended March 31, | |
| | | 2012 | | | 2011 | |
| | | | | | | |
| Expected terms (in years) | | | 5-10 | | | | 5-10 | |
| Volatility (weighted ave.) | | | 26 | % | | | 28 | % |
| Risk-free interest rate (weighted ave.) | | | 1.04 | % | | | 2.24 | % |
| Expected dividend rate | | | 0.00 | % | | | 0.00 | % |
| 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 | We use historical volatility in deriving our expected volatility assumption because we believe 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. We use historical volatility in deriving our 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. We only records stock-based compensation expense for awards that are expected to vest. While we generally consider historical forfeitures in its estimates, judgment is also required in estimating the amount of stock-based awards that are expected to be forfeited. Our estimate for forfeitures may differ from actual forfeitures. If actual results differ significantly from these estimates, stock-based compensation expense and our results of operations could be materially impacted when we record a true-up for the difference in the period that the awards vest. We adjust stock-based compensation expense based on our actual forfeitures on an annual basis, if necessary. |
As of March 31, 2012, there were unrecognized compensation costs of approximately $103,036 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 0.83 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 March 31, 2012, stock based compensation expense was approximately $9,514, which consisted primarily of stock-based compensation expense related to stock options recognized under GAAP issued to employees. For the three months ended March 31, 2012, there were no options exercised.
OXYSURE® SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2012
(Unaudited)
NOTE 6 - STOCK OPTIONS AND WARRANTS (CONTINUED)
Warrants.
The following table summarizes our warrant activities for the three months ended March 31, 2012:
| | | | | | Weighted | |
| | | Number | | | Average | |
| | | Of | | | Exercise | |
| | | Warrants | | | Price | |
| Outstanding at December 31, 2011* | | | 2,759,650 | | | $ | 0.48 | |
| Granted | | | - | | | $ | - | |
| Exercised | | | - | | | $ | - | |
| Forfeited/Cancelled | | | (5,000 | ) | | $ | 0.10 | |
| Outstanding at March 31, 2012 | | | 2,754,650 | | | $ | 0.48 | |
*These represent as-corrected amounts for the warrants outstanding as at December 31, 2011. The amounts disclosed in error in our financial statements for FY 2011 reflect 2,842,983 for the number of warrants outstanding and $.47 for the weighted average exercise price.
NOTE 7 – INCOME TAXES
No content available.
NOTE 8 – LICENSE AND SERVICE AGREEMENTS
No content available.
NOTE 9 – COMMITMENTS AND CONTINGENCY
Leases
Operating Lease – We lease our 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 March 31, 2012 and 2011, respectively.
Capital lease – We lease certain equipments under capital lease agreements that expire at various dates through 2012. Total Capital lease obligations were $328,952 and $330,571 as at March 31, 2012 and December 31, 2011, 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 March 31, 2012 the Company was not a party to any litigation matters.
OXYSURE® SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2012
(Unaudited)
NOTE 9 – COMMITMENTS AND CONTINGENCY (CONTINUED)
Indemnification
Under the indemnification provisions of our customer agreements, we routinely agree to indemnify and defend our 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 our products or services. The exposure to us under these indemnification provisions is generally limited to the total amount paid by the customers under pertinent agreements. However, certain indemnification provisions potentially expose us to losses in excess of the aggregate amount received from the customer. To date, there have been no claims against us or our 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 March 31, 2012 is as follows:
| | | First Note | | | Second Note | | | Senior Note | | | Other | |
| Holder | | Agave Resources, LLC(1) | | | JTR Investments, Limited(2) | | | JTR Investments, Limited(2) | | | Related Party | |
| Amount | | $ | 750,000 | | | $ | 250,000 | | | $ | 1,018,654 | | | $ | 214,750 | |
| Stated interest rate | | | 0 | % | | | 0 | % | | | 0 | % | | | 0 | % |
| Maturity | | 4/15/2013 | | | 4/15/2013 | | | Current | | | Current | |
| Warrants issued (Please see Note 6 – “Stock Options & Warrants” for warrant details) | | | 350,000 | | | | 116,667 | | | | 572,503 | | | | - | |
(1) Agave Resources, LLC is controlled by one of our Directors, Donald Reed.
(2) JTR Investments, Ltd. is a limited partnership controlled by our President and CEO, Julian Ross.
OXYSURE® SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2012
(Unaudited)
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 March 31, | |
| Historical net loss per share: | | 2012
| | | 2011
(Restated) | |
| | | | | | | |
| Net income (loss) | | $ | (325,451 | ) | | $ | (374,084 | ) |
| Shares used in computing basic per share amounts (weighted average) | | | 17,844,462 | | | | 15,728,816 | |
| Net income (loss) per share: | | | | | | | | |
| Basic and Diluted | | $ | (0.02 | ) | | $ | (0.02 | ) |
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.
OXYSURE® SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2012
(Unaudited)
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 March 31, 2012:
| | | Total | | | Level 1 | | | Level 2 | | | Level 3 | |
| | | | | | | | | | | | | |
Cash (1) | | $ | 3,484 | | | $ | 3,484 | | | | - | | | | - | |
| Total cash equivalents as of March 31, 2012 | | $ | 3,484 | | | $ | 3,484 | | | $ | - | | | $ | - | |
(1) Included in cash and cash equivalents on the Company's Balance Sheet.
NOTE 13 – OFF BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
We have not entered into any transactions with unconsolidated entities whereby we have financial guarantees, subordinated retained interests, or other contingent arrangements that expose us 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 us.
NOTE 14 – SEGMENT INFORMATION
We are organized as, and operate in, one reportable segment: the development, distribution and sale of specialty respiratory products and related medical products and accessories. Our chief operating decision-maker is our Chief Executive Officer. Our 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. Our assets are primarily located in the United States of America and not allocated to any specific region and we do not measure the performance of our 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 our customer orders.
OXYSURE® SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2012
(Unaudited)
NOTE 14 – SEGMENT INFORMATION (CONTINUED)
The following presents total revenue by geographic region for the three month periods ended March 31, 2012 and 2011:
| | | Three Months Ended March 31, | |
| | | 2012
| | | 2011
(Restated) | |
| | | | | | | |
| Revenues: | | | | | | |
| United States - product sales | | $ | 27,884 | | | $ | 36,028 | |
| ROW - product sales | | | - | | | | - | |
| Total revenues | | $ | 27,884 | | | $ | 36,028 | |
NOTE 15 – GOING CONCERN
Our financial statements are prepared using accounting principles generally accepted in the United States of America applicable to a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. We have been suffering from recurring loss from operations. We have an accumulated deficit of $13,756,109 and $13,430,659 at March 31, 2012 and December 31, 2011, respectively, and stockholders’ deficits of $2,841,669 and $2,777,139 as of March 31, 2012 and December 31, 2011, respectively. We require substantial additional funds to manufacture and commercialize our products. Our 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 March 31, 2012 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 our 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 we be unable to continue in existence.
NOTE 16 - SUBSEQUENT EVENTS
Conversion into Common Stock of First Landlord Note and Second Landlord Note: On May 3, 2012, we received fully executed agreements (“Agreements”) documenting the extension of the maturities of the First Landlord Note and Second Landlord Note (collectively, the “Notes”), and the conversion of the Notes into common stock.
The First Landlord Note, a subordinated convertible note with a principal amount of $125,000, and the Second Landlord Note, a subordinated convertible note with a principal amount of $126,407 were issued to our landlord, Sinacola Commercial Properties, Limited (“Landlord”) on December 10, 2009. The Agreements received on May 3, 2012 provide inter alia, for the following:
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.
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 sell our products throughout the United States as well as in certain other countries. Sales to its recurring customers in the United States are generally granted on net 30-day credit terms. We perform periodic credit evaluations of our recurring customers and generally do not require collateral. In general, we require prepayment on all sales to customers outside the United States. An allowance for doubtful accounts is maintained for potential credit losses, which losses historically have not been significant.
We invest our cash in deposits and money market funds with major financial institutions. We place our cash investments in instruments that meet high credit quality standards, as specified in our investment policy guidelines. These guidelines also limit the amount of credit exposure to any one issue, issuer or type of instrument.
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 $41,505 and $44,552 for the three month periods ended March 31, 2012 and 2011, respectively.
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 three months ended March 31, 2012, we did not recognize any impairment charge.
Research and Development Costs. Costs associated with the development of our products are charged to expense as incurred. $60 and $80 were incurred in the three month periods ended March 31, 2012 and 2011, respectively.
Income Taxes. In accordance with Accounting Standards Codification (“ASC”) Topic 740, “Income Taxes” (“ASC 740”), 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 we will generate sufficient taxable income in future periods to realize the benefit of our 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.
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 March 31, 2012 and 2011, stock based compensation expense was approximately $9,514 and $36,410, 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 March 31, 2012 and 2011, stock based compensation expense was approximately $0 and $32,023, respectively 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. We incurred $2,430 and $4,012 in advertising and promotion costs during the three month periods ended March 31, 2012 and 2011, respectively.
Financial Instruments. Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of March 31, 2012. 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.
Restatements and Reclassifications. Certain financial statement items have been reclassified to conform to the current periods’ presentation. These reclassifications had no impact on previously reported net loss. Certain financial statement items for the quarter ended March 31, 2011 have been restated - please see Note 17 - "Correction of error to prior period financial statements" to our financial statements.
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.
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 March 31, | |
| | | 2012 | | | 2011 | |
| | | | | | | |
| Revenues, net | | $ | 27,884 | | | $ | 36,028 | |
| Operating expenses | | | 283,485 | | | | 285,209 | |
| Net income (loss) | | | (325,451 | ) | | | (374,084 | ) |
| Net income (loss) per common share | | $ | (0.02 | ) | | $ | (0.02 | ) |
Results for the Three Months Ended March 31, 2012 Compared to the Three Months Ended March 31, 2011 (unaudited)
Revenues
We had $27,884 revenue from operations for the three months ended March 31, 2012 as compared to revenues of $36,028 for the three months ended March 31, 2011. This decrease is primarily due to a decrease in US product sales during the three months ended March 31, 2012.
Operating Expenses
Total expenses for the three months ended March 31, 2012 were $354,042, which amount includes $283,485 of selling, general and administrative expenses, $12,703 in cost of goods sold, and $57,855 in interest expense, as compared to total expenses for the three months ended March 31, 2011 of $443,863, which amount includes $285,209 of selling, general and administrative expenses, $27,567 in cost of goods sold, and $131,088 in interest expense. The decrease in interest expense is primarily attributable to a decrease in interest expense related to convertible notes.
Research and Development
Research and development expenses of $60 and $80 were incurred in the three months periods ended March 31, 2012 and 2011, respectively. There was fundamentally no change due to our limited budget during this period.
Net Loss
Net loss for the three months ended March 31, 2012 was $325,451 and diluted net loss per share was $0.02 as compared to a net loss for the three months ended March 31, 2011 of $374,084 and diluted net loss per share of $0.02. The net loss per share has remained unchanged for the comparative periods primarily because of a decrease in interest expense, offset by a decrease in revenue.
Liquidity and Capital Resources
We had a cash balance of approximately $3,484 as of March 31, 2012, as compared to $335 as of March 31, 2011. Our funds are kept in financial institutions located in the United States of America.
We had negative working capital of approximately $2,236,913 as of March 31, 2012 as compared to a negative working capital of $1,556,647 as of March 31, 2011.
We had total notes payable of $2,700,451 and $2,727,449 as of March 31, 2012 and December 31, 2011, respectively. The decrease in Notes Payable was primarily due to a decrease in Current Notes Payable, from $1,565,059 to $1,515,172, offset by an increase in Long Term Notes Payable, from $1,162,390 to $1,185,279.
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 $7,883 and $2,758 as at March 31, 2012 and December 31, 2011, 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 $13,756,109 at March 31, 2012.
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 2012, 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 did not raised any funds during the quarter ended March 31, 2012 and $12,300 during the quarter ended March 31, 2011 through the sale of common stock, preferred stock, and the exercise of warrants and stock options. We estimate that we will require approximately $3.2 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.
| 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.
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.
PART II - OTHER INFORMATION
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 March 31, 2012 the Company was not a party to any litigation matters.
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 |
On January 29, 2012 we issued a convertible promissory note (“Note”) for cash. The salient terms of the Note are as follows:
Principal amount (“Principal Amount “) of the Note: $100,000
Interest rate: 8% per annum
Maturity: The then outstanding Principal Amount, together with accrued and unpaid interest thereon, or the optional conversion shares (“Optional Conversion Shares”) as the case may be, is due on the 360th day subsequent to January 29, 2012 (the "Maturity Date").
Conversion: The Note is convertible, at the option of either the Company or the holder of the Note, at any time on or prior to the Maturity Date. All or any portion of the then outstanding Principal Amount and accrued but unpaid interest of the Note may be converted (the "Optional Conversion") into a number of shares of our 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 is $1.50 per Optional Conversion Share.
Effective March 30, 2012 we issued 209,271 shares of common stock in connection with the conversion of $251,407 in subordinated, promissory convertible notes.
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) |
None.
The following Exhibits are filed herein:
| | 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 |
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: May 21, 2012 | 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) |
