We will need to establish relationships with collaborative and development partners to fully develop and market our existing and new products.
We do not possess all of the resources necessary to develop and commercialize existing and new products on a mass scale resulting from or that may result from our technologies. Unless we expand our product development capacity and enhance our internal marketing capability, we will need to make appropriate arrangements with collaborative partners to develop and commercialize current and future products.
If we do not find appropriate partners, our ability to develop and commercialize products could be adversely affected. Even if we are able to find collaborative partners, the overall success of the development and commercialization of product candidates in those programs will depend largely on the efforts of other parties and is beyond our control. In addition, in the event we pursue our commercialization strategies through collaboration, there are a variety of attendant technical, business and legal risks, including, but not limited to:
| ● | a partner would likely gain access to our proprietary information, potentially enabling the partner to develop products without us or design around our intellectual property; |
| ● | we may not be able to control the amount and timing of resources that our partners may be willing or able to devote to the development or commercialization of our product candidates or to their marketing and distribution; and |
| ● | disputes may arise between us and our partners that will result in the delay or termination of the research, development or commercialization of our products and product candidates or that may result in costly litigation or arbitration that diverts our resources. |
The occurrence of any of the above risks could impair our ability to generate revenues and harm our business and financial condition.
We rely on third parties to manufacture many of our product parts and subassemblies and we expect to rely on third parties for new product candidates and our business will suffer if they do not perform.
Our production activity is primarily focused on the final assembly of our portable emergency oxygen device, and we outsource the manufacturing of most of the parts, components or subassemblies. We expect to continue to utilize this manufacturing model for this product as well as for new product candidates. As a result, we do not expect to manufacture many of our products and product inputs and will engage third party contractors, molders and packagers to provide manufacturing or contract manufacturing, molding or production services. If our contractors do not operate in accordance with regulatory requirements and quality standards, our business will suffer. We expect to use or rely on components and services that are provided by sole source suppliers. The qualification of additional or replacement vendors is time consuming and costly. If a sole source supplier has significant problems supplying our products or product inputs, our sales and revenues will suffer until we find a new source of supply.
Our production process is very labor intensive.
Due to resource constraints and current limitations in our production process, our production process is very labor intensive. We hope in the future to increase the level of automation in our process, and if we do, there is no assurance that we will be able to realize any production efficiencies through such automation. If we are not able to automate our processes or do not realize any production efficiencies though automation, we may need a larger production force, and if we do, our production costs may rise. Furthermore, if our production process stays labor intensive then our production cycle times may be slower which will prevent us from responding to large orders effectively and timeously. We may elect to outsource some or all of our production process in an effort reduce costs and increase production capacity. If we do, we may experience quality issues and long production lead times, which will adversely impact customer satisfaction and sales. In addition, quality issues may lead to enforcement action by the FDA.
Moving to higher production volumes could be accompanied by quality problems.
To date, we have produced and shipped limited quantities of our first product, the portable emergency oxygen device. In the event that demand for this product increases, we will have to accommodate such increases in demand by increasing our production throughput. There can be no assurance that we would be successful in increasing our production throughput in response to any increases in demand, or that we would not suffer losses in product quality. Any upward pressure on production capacity requirements may have an adverse impact on quality, production cost and delivery times. Furthermore, we may seek to outsource some, part or all of our production process to meet demand. Any such outsourcing of production may have an adverse impact on quality, production cost and delivery times.
We rely on third parties for the sales and distribution of our products, who may not be successful in selling our products, or who may not perform to their sales commitments or obligations.
We currently do not have adequate resources to market, sell and distribute any products outside of the U.S. and engage third party marketing and distribution companies to perform these tasks. We also do not have adequate resources to effectively market, sell and distribute products in the U.S. While we believe that distribution partners will be available, we cannot assure you that the distribution partners, if any, will succeed in selling our products. We may not be able to maintain satisfactory arrangements with our sales and distribution partners, who may not devote adequate resources to selling our products.
Our distribution partners may not honor their agreements with us or they may not honor the provisions of the sales quotas or minimum sales requirements prescribed in those agreements, where applicable. Our Brazilian and South African distributors have minimum sales commitments with us that they have not met. While we may have remedies available to us under our distribution agreements with our South African and Brazilian distributors, we have elected not to seek the relief provided by those remedies. There can be no assurance that these distributors, or any other distributors in the future will adhere to their minimum sales commitments to us.
If any of these situations occurs or remains unresolved, we may not be able to successfully market and sell our products, which would decrease or eliminate our ability to generate revenues.
We may not be successful at marketing and selling our technology or products.
We began commercializing our first product, our portable emergency oxygen device, in earnest in 2008. We also intend to develop additional products and technologies for various vertical market applications. We may not be able to market and sell our technology or products and any financial or research efforts we exert to develop, commercialize or promote such products may not result in revenue or earnings.
We may not be able to compete with better-established competitors.
While our portable emergency oxygen device is a medical device, it is targeted at commercial, education and government markets, as well as consumer markets. In addition, our intended future products are targeted at various commercial, education, government and consumer markets. The industries in which we operate, which include, but are not limited to, the medical device and biotechnology industries, are intensely competitive. Most of our competitors have significantly greater financial, technical, manufacturing, marketing and distribution resources as well as greater industry experience than we have. The particular medical conditions, illnesses or diseases our portable emergency oxygen device and future product lines are intended to address can also be addressed by other medical devices, products, procedures or drugs. Many of these alternatives are widely accepted by physicians and our target customers and have a long history of use. Physicians and target customers may use our competitors’ products and/or our products may not be competitive with other technologies. If these things happen, our sales and revenues will be adversely impacted. In addition, our current and potential competitors may establish cooperative relationships with large medical equipment companies or companies with competitive technologies to gain access to greater research and development or marketing resources. Competition may result in price reductions, reduced gross margins and loss of market share.
Our products may be displaced by newer technology.
The medical device and biotechnology industries are undergoing rapid and significant technological change. Third parties may succeed in developing or marketing technologies and products that are more effective than those developed or marketed by us, or that would make our technology and products obsolete or non-competitive. Additionally, researchers and engineers could develop new technologies and products that could replace our technologies and products or reduce their importance. Accordingly, our success will depend, in part, on our ability to respond quickly to medical and technological changes through the development and introduction of new products. We may not have the resources to do this. If our product candidates become obsolete and our efforts to develop new products do not result in any commercially successful products, our sales and revenues will suffer.
We may not have sufficient legal protection against infringement or loss of our intellectual property and we may lose rights to our licensed intellectual property if diligence requirements are not met.
Our success depends, in part, on our ability to secure and maintain patent protection, to preserve our trade secrets, and to operate without infringing on the patents of third parties. While we intend to protect our proprietary positions by filing United States and foreign patent applications for our important inventions and improvements, domestic and foreign patent offices may not issue these patents.
To date we have filed various patents with respect to our technology and product candidates. Some of these applications include applications for provisional patents which are not reviewed by the United States Patent and Trademark Office (“PTO”) and will not result in the issuance of a patent, unless a regular patent application is filed within one year after the filing of the provisional patent application. Generally, our provisional patent applications do not contain all of the detailed design and other information required by a regular patent application. As a result, it may be uncertain whether the description of the invention in a provisional patent meets the “best mode and enablement” requirements for issuance of a patent. Failure to adequately describe the invention may result in the loss of certain claims. Although we intend to file regular patent applications with respect to any of our provisional patent applications, such filings require substantial expenditures of management time and legal fees. If we do not have the funds or resources to prepare, file and maintain patent applications, we could lose proprietary rights to our technology.
Even if we file patent applications and patents are issued, third parties may challenge, invalidate, or circumvent our patents or patent applications in the future. Competitors, many of which have significantly more resources than we have and have made substantial investments in competing technologies, may apply for and obtain patents that will prevent, limit, or interfere with our ability to make, use, or sell our products either in the United States or abroad.
In the United States, patent applications are secret until patents are issued, and in foreign countries, patent applications are secret for a time after filing. Publications of discoveries tend to significantly lag the actual discoveries and the filing of related patent applications. Third parties may have already filed applications for patents for products or processes that will make our products obsolete or will limit our patents or invalidate our patent applications.
We require our employees, consultants, advisers and suppliers to execute confidentiality and assignment of invention agreements in connection with their employment, consulting, advisory, or supply relationships with us. They may breach these agreements and we may not obtain an adequate remedy for breach. Further, third parties may gain access to our trade secrets or independently develop or acquire the same or equivalent information.
We could be damaged by product liability claims.
Our portable emergency oxygen device is intended for use by laypersons, without any training requirements. If one of our products malfunctions or a person misuses it and injury results to a user or operator, the injured party could assert a product liability claim against our company. While we currently carry a limited amount of product liability insurance in the amount of $4 million, it may not sufficiently shield us from any potential product liability claims, and we might not have sufficient funds available to pay any successful claims in excess of the limits of our insurance. Furthermore, any potential product liability claim may lead to our product liability insurance being cancelled, or we may not be able to obtain such insurance at a rate that is acceptable to us or at all. Because personal injury claims based on product liability may be very large, an underinsured or an uninsured claim could financially damage our company.
We may encounter unforeseen costs in supplying products.
Our estimates of the costs and time to be consumed in receiving components or input products supplied by outside vendors or third party companies may not be accurate. There can be no assurance that we will not experience supply chain issues such as supply interruptions, fluctuations in supply or demand, or fluctuations in shipping costs caused by fluctuations in fuel costs. If we were to experience such supply issues, they may have a material adverse effect on our business and operations. We may not be able to transfer any adverse cost variations to our customers.
Risks Relating to the Regulatory Environment
We may have compliance issues with the FDA which could prevent or delay our ability to generate revenues.
Our primary product, the portable emergency oxygen device is considered a Class II medical device by the FDA.
The FDA regulations govern the following activities that we perform, or that are performed on our behalf, to ensure that medical devices distributed domestically or exported internationally are safe and effective for their intended uses:
| ● | product design, development and manufacture; |
| ● | product safety, testing, labeling and storage; |
| ● | pre-marketing clearance or approval; |
| ● | record keeping procedures; |
| ● | product marketing, sales and distribution; and |
| ● | post-marketing surveillance, complaint handling, medical device reporting, reporting of deaths or serious injuries and repair or recall of products. |
Failure to comply with applicable regulatory requirements can result in enforcement action by the FDA, which may include any of the following sanctions:
| ● | warning letters, untitled letters, fines, injunctions, consent decrees, and civil penalties; |
| ● | repair, replacement, refunds, recall, or seizure of our products; |
| ● | operating restrictions, partial suspension or total shutdown of production; |
| ● | refusing our requests for 510(k) clearance or Pre-market Approval (“PMA”) of new products, new intended uses or modifications to existing products; |
| ● | withdrawing 510(k) clearance or PMA approvals that have already been granted; and |
We may face problems related to the Department of Transportation regarding the shipment of our product which could potentially increase our shipping costs and limit our revenue potential.
The U.S. Department of Transportation (“DOT”) issued an interpretation letter on October 3, 2008 determining that our primary product, the portable emergency oxygen device, should be classified as “Oxygen Generator, Chemical, UN3356” for the purposes of shipment. As a result of this interpretation, we are required to maintain at least one certified shipping personnel on staff to conduct shipping from our warehouse. This DOT interpretation also requires us to put certain hazardous materials labeling on our packages upon shipment.
Furthermore, delivery and logistics providers such as United Parcel Service (“UPS”) and Federal Express typically charge a hazardous materials fee (“hazmat fee”) for products shipped with a UN3356 designation. These issues have caused us to experience problems related to shipping, including the following:
| To date, we have typically passed any shipping hazmat fees on to our customers, but we have experienced customer resistance to these fees. |
| During the period that we are shipping under the UN3356 shipping designation, the OxySure Model 615 can be transported by all modalities, including rail, road, ocean, and air. However, when transported by air it has to be: (i) transported on cargo aircraft; (ii) appropriately labeled; and (iii) no more than 25 kilograms gross in weight. However, several air cargo transporters have declined to transport “chemical oxygen generators,” especially internationally. This has caused problems for us in shipping limited quantities of products by air to international destinations. |
During the period that we are shipping under the UN3356 shipping designation, we may not be able to continue to pass the hazmat fees on to our customers. If we elect to absorb these hazmat fees, it may significantly increase our shipping costs. If we continue to pass these hazmat fees on to our customers, it may limit our revenue potential. Further, during the period that we are shipping under the UN3356 shipping designation we could suffer a temporary or permanent suspension of our ability to ship our products if we were to fail to comply with the applicable shipping requirements, which could result in a total loss or large decrease in the sales of our product. A permanent suspension of our ability to ship could result from, without limitation, repeated, gross violations of applicable regulations that have remained uncured, while we are shipping under the UN3356 shipping designation.
While the FDA has deemed the Model 615 sufficiently safe for over the counter purchase by lay persons, and while we have obtained independent, third party validation of the non-hazardous nature of Model 615, we are required, for shipment purposes, to comply with requirements of this interpretation letter until we can obtain a Special Permit or other similar relief, removing these shipping requirements. We intend to pursue such a Special Permit or other similar relief. However, there can be no assurance that we will be able to obtain such a Special Permit or that we will be able to obtain some other, similar relief from DOT. If we are able to obtain such a Special Permit or other similar relief, there can be no assurance that it won’t take a very long time to achieve. Any delay or inability to obtain such a Special Permit or other, similar relief could have a material adverse impact on the marketability of our product, which in turn could limit our revenue potential.
We are subject to regulations and limitations set forth by the Federal Aviation Administration which could limit our ability to generate revenues.
The Federal Aviation Administration (“FAA”) maintains control over any oxygen devices that are carried by commercial aircraft, either as commercial cargo, passenger luggage or as passenger on-board items. The DOT interpretation letter dated October 3, 2008 determined that our primary product, the portable emergency oxygen device should be classified as “Oxygen Generator, Chemical, UN3356” for the purposes of shipment. This means, in part, that the product can only be shipped on cargo aircraft and cannot be carried on board commercial aircraft unless the FAA grants us specific approval for our product to be allowed on commercial aircraft. Currently, we have not sought approval from the FAA for passengers to carry our portable emergency oxygen device on board commercial aircraft. We intend to seek approval by the FAA for passengers to be allowed to carry our portable emergency oxygen device on board commercial aircraft. There can be no assurance that we will be able to obtain such approval. If we are able to obtain such approval, there can be no assurance that it won’t take a long time to obtain. Any delay or inability to obtain such FAA approval could have a material adverse impact on the marketability of our product and could limit our revenue potential.
We may face problems or delays in obtaining regulatory approval in international markets which could prevent or delay our ability to generate revenues.
As a medical device, our product is highly regulated. We anticipate that most of the international markets we expect to operate in will require some sort of regulatory approval. There can be no assurance that we will be able to obtain the regulatory approvals we will need to operate in our intended international markets. If we do pursue such regulatory approvals, it may take a long time to obtain. Further, we are generally reliant on third parties to pursue and obtain regulatory approvals in international markets, including our distribution partners in those markets. There can be no assurance that these partners will pursue these approvals timeously, if at all. Our South African distributor has not obtained approval from the South African Medicines Control Council for the marketing and sale of Model 615 in South Africa.
Risks Relating to Owning our Common Stock
Our common stock is traded over the counter, which may deprive stockholders of the full value of their shares.
While we intend to move the quotation of our common stock to a more senior exchange as soon as practicable, our common stock is currently quoted on the OTC Bulletin Board (“OTCQB”). There can be no assurance that we will be successful in listing on a more senior exchange. Because we are on the OTCQB, our common stock has very few market makers, low trading volumes and larger spreads between bid and asked prices than securities listed on an exchange such as the New York Stock Exchange or the NASDAQ Stock Market. These factors may result in higher price volatility and less market liquidity for our common stock.
If our stock price drops significantly, we may become subject to securities litigation that could result in a harmful diversion of our resources.
In the past, following periods of volatility in the market price of a particular company’s stock, securities class action litigation has been brought against such companies. Any litigation arising from the volatility in the price of our common stock could have an adverse effect upon our business, financial condition, and results of operations.
The share prices of our common stock may not bear any relationship to our book value.
The share prices of our common stock may not bear any direct relationship to the value of our physical assets, our book value, or any other general accepted criteria of valuation. Additionally, the share prices for our common stock may be highly volatile as has been the case with the securities of other companies in emerging businesses. Factors such as our financial results, the introduction of new products or services, the strength of our competitors, and various factors affecting our industry generally, may have a significant impact on the share price of our securities. In recent years, the stock market has experienced a high level of price and volume volatility. Market prices for the securities of many companies, particularly of small and emerging growth companies like ours whose common stock is traded in the over-the-counter market, have experienced wide price fluctuations which have not necessarily been related to the operating performance of these companies.
A low share price severely limits the potential market for our common stock.
Our common stock has been trading at a price below $5.00 per share, subjecting trading in the stock to certain Securities and Exchange Commission (“SEC”) rules requiring additional disclosures by broker-dealers. These rules generally apply to any non-NASDAQ equity security that has a market price per share of less than $5.00 per share, subject to certain exceptions (a “penny stock”). Such rules require the delivery, prior to any penny stock transaction, of a disclosure schedule explaining the penny stock market and the risks associated therewith and impose various sales practice requirements on broker-dealers who sell penny stocks to persons other than established customers and institutional or wealthy investors. For these types of transactions, the broker-dealer must make a special suitability determination for the purchaser and have received the purchaser’s written consent to the transaction prior to the sale. The broker-dealer also must disclose the commissions payable to the broker-dealer, current bid and offer quotations for the penny stock and, if the broker-dealer is the sole market maker, the broker-dealer must disclose this fact and the broker-dealer’s presumed control over the market. Such information must be provided to the customer orally or in writing before or with the written confirmation of trade sent to the customer. Monthly statements must be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. The additional burdens imposed upon broker-dealers by such requirements could discourage broker-dealers from effecting transactions in our common stock.
FINRA sales practice requirements may also limit a stockholder’s ability to buy and sell our stock.
In addition to the penny stock rules promulgated by the SEC, which are discussed in the immediately preceding risk factor, Financial Industry Regulatory Authority (“FINRA”) rules require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit the ability to buy and sell our stock and have an adverse effect on the market value for our shares.
An investor’s ability to trade our common stock may be limited by trading volume.
A consistently active trading market for our common stock may not develop on the OTCQB. A limited trading volume may prevent our shareholders from selling shares at such times or in such amounts as they may otherwise desire.
We have a concentration of stock ownership and control, which may have the effect of delaying, preventing, or deterring a change of control.
Our common stock ownership is highly concentrated. Through their ownership of shares of our common stock, two individuals, our President, Julian T. Ross and Donald Reed, a member of our Board of Directors, beneficially own approximately 73.26% of our total outstanding shares of common stock. This amount includes warrants, options, and convertible notes held by JTR Investments, Limited and Agave Resources, LLC. As a result of the concentrated ownership of the stock, these two stockholders, acting together, will be able to control all matters requiring stockholder approval, including the election of directors and approval of mergers and other significant corporate transactions. This concentration of ownership may have the effect of delaying, preventing or deterring a change in control of our company. It could also deprive our stockholders of an opportunity to receive a premium for their shares as part of a sale of our company and it may affect the share price of our common stock.
Failure to design, implement and maintain effective internal controls could have a material adverse effect on our business and stock price.
As a public company, we have significant requirements for enhanced financial reporting and internal controls. The process of designing and implementing effective internal controls is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to expend significant resources to maintain a system of internal controls that is adequate to satisfy our reporting obligations as a public company. If we are unable to establish or maintain appropriate internal financial reporting controls and procedures, it could cause us to fail to meet our reporting obligations on a timely basis, result in material misstatements in our financial statements and harm our operating results. Testing and maintaining internal controls may divert our management’s attention from other matters that are important to our business. We may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404 or our independent registered public accounting firm may not issue a favorable assessment. If either we are unable to conclude that we have effective internal control over financial reporting or our independent registered public accounting firm are unable to provide us with an unqualified report, investors could lose confidence in our reported financial information, which could have a negative effect on the trading price of our stock.
Our lack of sufficient personnel creates a material weakness in our internal controls. If we fail to implement a remediation plan to cure our lack of internal controls over our financial reporting, we may lose credibility with investors and the market price of our common stock may be adversely impacted.
While there are internal controls and procedures in place that relate to financial reporting and the prevention and detection of material misstatements, it is our management’s opinion that a material weakness in the financial reporting process resulted from insufficient personnel. We are currently working to improve our internal financial reporting controls. We plan to continue to assess our internal controls and procedures and intend to take further action as necessary or appropriate to address our material weaknesses, including to effect ongoing compliance with Section 404 of the Sarbanes-Oxley Act of 2002. The existence of a material weakness is an indication that there is a more than remote likelihood that a material misstatement of our financial statements will not be prevented or detected in a future period while that material weakness continues to exist. The process of designing and implementing effective internal controls and procedures is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to expend significant resources to maintain a system of internal controls that is adequate to satisfy our reporting obligations as a public company. We cannot assure you that additional material weaknesses or significant deficiencies in our internal controls will not be discovered in the future. In the event that we cannot implement a remediation plan in a timely manner, investors and others may lose confidence in the reliability of our financial statements, which in turn could harm our business and negatively impact the trading price of our stock.
Our board of directors has the authority to issue shares of “blank check” preferred stock, which may make an acquisition of our company by another company more difficult.
We may in the future adopt certain measures that may have the effect of delaying, deferring or preventing a takeover or other change in control of our company that a holder of our common stock might consider in its best interest. Specifically, our board of directors, without further action by our stockholders, currently has the authority to issue shares of preferred stock and to fix the rights (including voting rights), preferences and privileges of these shares (“blank check” preferred). Such preferred stock may have rights, including economic rights, senior to our common stock. As a result, the issuance of the preferred stock could have a material adverse effect on the price of our common stock and could make it more difficult for a third party to acquire a majority of our outstanding common stock.
Because we will not pay dividends in the foreseeable future, stockholders will only benefit from owning common stock if it appreciates.
We have never paid dividends on our common stock and we do not intend to do so in the foreseeable future. We intend to retain any future earnings to finance our growth. Accordingly, stockholders will only benefit from owning our common stock if it appreciates.
We are likely to attempt to raise additional capital through issuances of debt or equity securities, which may cause our stock price to decline, dilute the ownership interests of our existing stockholders, and/or limit our financial flexibility.
Historically we have financed our operations through the issuance of equity securities and debt financings, and we expect to continue to do so for the foreseeable future. To the extent that we raise additional funds by issuing equity securities, our stockholders may experience significant dilution of their ownership interests. Debt financing, if available, may involve restrictive covenants that limit our financial flexibility or otherwise restrict our ability to pursue our business strategies. Additionally, if we issue shares of common stock, or securities convertible or exchangeable for common stock, the market price of our existing common stock may decline. There can be no assurance that we will be successful in obtaining any additional capital resources in a timely manner, on favorable terms, or at all.
Our share price has been volatile and may continue to be volatile which may subject us to securities class action litigation in the future.
The market price of shares of our common stock has been, and may be in the future, subject to wide fluctuations in response to many risk factors listed in this section, and others beyond our control, including:
| actual or anticipated fluctuations in our financial condition and operating results; |
| status and/or results of any regulatory approvals; |
| regulatory actions with respect to our products or our competitors’ products; |
| actions and decisions by our collaborators or partners; |
| actual or anticipated changes in our growth rate relative to our competitors; |
| actual or anticipated fluctuations in our competitors’ operating results or changes in their growth rate; |
| competition from existing products or new products that may emerge; |
| issuance of new or updated research or reports by securities analysts; |
| fluctuations in the valuation of companies perceived by investors to be comparable to us; |
| share price and volume fluctuations attributable to inconsistent trading volume levels of our shares; |
| market conditions for medical device stocks in general; |
| status of our search and selection of future management and leadership; and |
| general economic and market conditions. |
Some companies that have had volatile market prices for their securities have had securities class action lawsuits filed against them. Such lawsuits, should they be filed against us in the future, could result in substantial costs and a diversion of management’s attention and resources. This could have a material adverse effect on our business, results of operations and financial condition.
ITEM 1B—UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2—PROPERTIES
We do not own any property at the present time and have no agreements to acquire any property. Our executive offices are located at 10880 John W. Elliot Drive, Suite 600, Frisco Texas, 75033. The space is approximately 16,200 square feet, and comprises approximately 6,200 square feet of office space and approximately 10,000 square feet of production and warehouse space. This space was purpose built for our production needs. We believe that this space is adequate for our needs at this time, and we believe that we will be able to locate additional space in the future, if needed, on commercially reasonable terms. We entered into a lease on this facility in March 2007 (the “March 2007 Lease”) and it expired on October 15, 2012. We are currently renting our space on a month to month basis as negotiations for a new lease with our landlord are being completed. There can be no assurance that we will enter into a new lease in our current facility, or if we do, that we will be able to do so on commercially reasonable terms. The cost for the March 2007 Lease was as follows:
| Lease Year | | Base Rent per Square Foot of Rentable Area (per year) | | | Annual Base Rent | | | Monthly Base Rent | |
| 1 | | $ | 8.50 | | | $ | 137,700.00 | | | $ | 11,475.00 | |
| 2 | | $ | 10.75 | | | $ | 174,150.00 | | | $ | 14,512.50 | |
| 3 | | $ | 12.00 | | | $ | 194,400.00 | | | $ | 16,200.00 | |
| 4 | | $ | 12.25 | | | $ | 198,450.00 | | | $ | 16,537.50 | |
| 5 | | $ | 12.50 | | | $ | 202,500.00 | | | $ | 16,875.00 | |
We are not involved in any legal proceedings and we do not know of any legal proceedings, which are threatened or contemplated against us.
ITEM 4—REMOVED AND RESERVED
ITEM 5—MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Price and Number of Stockholders
Our common stock is listed on the OTCQB under the symbol “OXYS.” The following table sets forth, for the past fiscal year, the range of high and low sales prices in each fiscal quarter for our common stock.
| For the year ended December 31, 2012 | | | | |
| | | | | | | |
| | | High | | | Low | |
| | | | | | | |
| Fourth quarter | | $ | 2.75 | | | $ | 0.47 | |
| Third quarter | | $ | 0.88 | | | $ | 0.45 | |
| Second quarter | | $ | 2.50 | | | $ | 0.50 | |
| First quarter | | $ | 2.75 | | | $ | 0.05 | |
We were approved for trading on December 20, 2011. There has been no trading of our common stock during fiscal year 2011, and no high and low sales are reportable.
As of April 1, 2013, there were approximately 77 holders of record of our common stock, and 22 holders of record of our Series A convertible preferred stock. In addition, we believe that a significant number of beneficial owners of our common stock hold their shares in nominee or in “street name” accounts through brokers. On April 1, 2013, the last sale price reported on the OTCQB for our common stock was $.75 per share.
Dividend Policy
Since inception of OxySure, no dividends have been paid on our common stock. We intend to retain any earnings for use in our business activities, so it is not expected that any dividends on our common stock will be declared and paid in the foreseeable future.
Repurchases of Common Stock
None.
Unregistered Sales of Equity Securities
During the year ended December 31, 2012:
(1) We issued 1,711,952 shares of common stock pursuant to the conversion of convertible subordinated promissory notes totaling $2,433,850 at an aggregate conversion price of $1.42 per share.
(2) We issued 2,815,374 shares of common stock pursuant to the cashless conversion of 2,307,684 shares of our Series A Preferred at a conversion ratio of 1.22:1.
(3) We issued 374,808 shares of common stock pursuant to the exercise of 374,808 stock options and received proceeds of $98,284.
(4) We issued 882,616 shares of common stock pursuant to the exercise of 882,616 warrants and received proceeds of $6,106.
(5) We issued 68,889 shares of common stock for $41,250 in cash at an aggregate price of $.60 per share.
(6) We issued 97,500 shares of common stock for services valued at approximately $20,748.
(7) We issued 77,674 shares of common stock in connection with the acquisition of assets valued at approximately $95,062.
All of the securities described above were issued in reliance on the exemption from registration set forth in Section 4(2) of the Securities Act of 1933.
ITEM 6—SELECTED FINANCIAL DATA
Not Applicable.
ITEM 7—MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis together with the financial statements and the related notes to those statements included in “Item 8 – Financial Statements and Supplementary Data.” This discussion contains forward-looking statements that involve risks and uncertainties. As a result of many factors, such as those set forth under “Risk Factors” and elsewhere in this Annual Report on Form 10-K, our actual results may differ materially from those anticipated in these forward-looking statements.
Forward-Looking Statements
Statements and information included in this Annual Report on Form 10-K that are not purely historical, including, without limitation, statements that relate to the Company's expectations with regard to the future impact on the Company's results from new products in development, are forward-looking statements within the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. When used in this report, words such as “believe,” “expect,” “intend,” “goal,” “plan,” “pursue,” “likely,” “believe,” “project,” “anticipate,” “intend,” “estimate,” “evaluate,” “opinion,” “may,” “could,” “future,” “potential,” “probable,” “if,” “will” and similar expressions generally identify forward-looking statements. These statements are subject to risks and uncertainties.
Forward-looking statements in this Annual Report on Form 10-K represent our beliefs, projections and predictions about future events. These statements are necessarily subjective and involve known and unknown risks, uncertainties and other important factors that could cause our actual results, performance or achievements, or industry results, to differ materially from any future results, performance or achievement described in or implied by such statements. Actual results may differ materially from the expected results described in our forward-looking statements, including with respect to the correct measurement and identification of factors affecting our business or the extent of their likely impact, the accuracy and completeness of publicly available information relating to the factors upon which our business strategy is based, or the success of our business. The factors or uncertainties that could cause actual results, performance or achievement to differ materially from forward-looking statements contained in this report can be found in our filings with the Securities and Exchange Commission, including our filings on Form 10-K.
Results of operations- Comparison of the years ended December 31, 2012 and 2011
The following table sets forth our condensed statement of operations data and presentation of that data as amount of change from period-to-period.
| | | For the year ended December 31, | |
| | | 2012 | | | 2011 | | | Increase/ (Decrease) | | | % Increase/ (Decrease) | |
| | | | | | | | | | | | | |
| Revenues, net | | $ | 269,697 | | | $ | 185,209 | | | $ | 84,488 | | | | 46 | % |
| Cost of goods sold | | | 95,587 | | | | 103,389 | | | $ | (7,802 | ) | | | -8 | % |
| Gross profit | | | 174,110 | | | | 81,820 | | | | 92,290 | | | | 113 | % |
| | | | 64.6 | % | | | 44.2 | % | | | | | | | | |
| | | | 59.3 | % | | | | | | | | | | | | |
| Operating expenses | | | | | | | | | | | | | | | | |
| Selling, general and administrative | | | 1,020,298 | | | | 1,150,786 | | | | (2,171,084 | ) | | | -189 | % |
| Loss from operating expenses | | | (846,188 | ) | | | (1,068,966 | ) | | | 1,915,154 | | | | -179 | % |
| | | | | | | | | | | | | | | | | |
| Other income (expenses) | | | | | | | | | | | | | | | | |
| Other income (expense) | | | 224,639 | | | | 144,882 | | | | 79,757 | | | | | |
| Interest expense | | | (206,722 | ) | | | (608,316 | ) | | | 401,594 | | | | | |
| Total other income (expenses) | | | 17,917 | | | | (463,434 | ) | | | 481,351 | | | | | |
| | | | | | | | | | | | | | | | | |
| Net loss | | $ | (828,271 | ) | | $ | (1,532,399 | ) | | | 704,128 | | | | -45.95 | % |
Revenue
We generate revenue primarily through the sale of Model 615 and related accessories and complimentary products through distribution partners and dealers. Revenue and percentage changes for the years ended December 31, 2012 and 2011, respectively, are as follows:
| | | For the year ended December 31, | | | | | | | |
| | | 2012 | | | 2011 | | | Increase/ (Decrease) | | | % Increase/ (Decrease) | |
| | | | | | | | | | | | | |
| Revenues, net | | $ | 269,697 | | | $ | 185,209 | | | $ | 84,488 | | | | 45.6 | % |
Revenues increased during the twelve months ended December 31, 2012 primarily due to an increase in product sales in the United States as well as international territories.
Gross Profit
Gross profit as a percent of revenue was 64.6% and 44.2% for the years ended December 31, 2012 and 2011, respectively. This increase was primarily due to the combined effect of an increase in service revenues, and an increase in product gross margins.
Marketing and Sales Expenses
Marketing and sales expenses consisted primarily of personnel-related costs, including sales commissions, and the costs of marketing programs aimed at increasing revenue, such as advertising, trade shows, public relations, investor relations and other market development and investor awareness programs. Marketing and sales expenses and percentage changes for the years ended December 31, 2012 and 2011, respectively, are as follows:
| | | For the year ended December 31, | | | | | | | |
| | | 2012 | | | 2011 | | | Increase/ (Decrease) | | | % Increase/ (Decrease) | |
| | | | | | | | | | | | | |
| Marketing and sales expenses | | $ | 76,427 | | | $ | 15,141 | | | $ | 61,286 | | | | 405 | % |
The increase in marketing and sales expenses for the twelve months ended December 31, 2012 was primarily as a result of an increase in expenses associated with marketing and awareness building of our products and investor relations expenses.
General and Administrative Expenses
General and administrative expenses consist primarily of compensation for executive, administrative and production personnel, including stock-based compensation. Other general and administrative expenses include facility costs, legal and accounting services, other professional services, and consulting fees. General and administrative expenses and percentage changes for the years ended December 31, 2012 and 2011, respectively, are as follows:
| | | For the year ended December 31, | | | | | | | |
| | | 2012 | | | 2011 | | | Increase/ (Decrease) | | | % Increase/ (Decrease) | |
| | | | | | | | | | | | | |
| General and administrative expense | | $ | 943,872 | | | $ | 1,094,374 | | | $ | (150,502 | ) | | | -14 | % |
The decrease in general and administrative expenses for the twelve months ended December 31, 2012 was primarily as a result of a decrease in depreciation expense and employee stock option expense, offset by an increase in amortization expense. The decrease in employee stock option expense was primarily due to options forfeitures.
Research and Development Expense
Costs associated with research and development increased to $25,816 from $260 in the years ended December 31, 2012 and 2011, respectively, primarily due to an increase in costs associated with laboratory testing and new product development.
Interest expense
Interest expense decreased approximately $401,596 in the twelve months ended December 31, 2012, primarily due to a decrease in amortization expense related to debt discount amortization and the amortization of warrant fair values in connection with convertible notes. We had approximately $189,611 in non-cash amortization expense related to convertible notes in 2012, as compared to approximately $546,104 in non-cash amortization expense related to convertible notes in 2011. We incurred other non-cash interest expenses of $16,430 and $57,845 in 2012 and 2011, respectively, related to stated, accrued but unpaid interest on convertible loans.
Interest expenses and percentage changes for the years ended December 31, 2012 and 2011, respectively, are as follows:
| | | For the year ended December 31, | | | | | | | |
| | | 2012 | | | 2011 | | | Increase/ (Decrease) | | | % Increase/ (Decrease) | |
| | | | | | | | | | | | | |
| Interest expense: | | | | | | | | | | | | |
| Amortization of debt discount and warrant fair values related to convertible notes | | $ | 189,611 | | | $ | 546,104 | | | $ | (356,493 | ) | | | -65 | % |
| Other Interest | | | 17,110 | | | | 62,213 | | | $ | (45,104 | ) | | | -72 | % |
| Total interest expense | | $ | 206,720 | | | $ | 608,316 | | | $ | (401,596 | ) | | | -66 | % |
During the twelve months ended December 31, 2012, other income increased approximately $79,757 compared to the same period in the prior year. This increase was primarily due to the receipt of an economic incentive in the amount of $39,000 from the Frisco Economic Development Corporation, and gains recognized from the impairment of certain accounts payable and notes payable.
Liquidity, capital resources and plan of operation
We have incurred losses since our inception and as of December 31, 2012 we had an accumulated deficit of approximately $14,258,667 and a deficit in stockholders equity of approximately $652,125. We expect to continue to incur losses until we generate sufficient revenue to offset our expenses, and we anticipate that we will continue to incur net losses for the foreseeable future. We expect to incur increased expenses related to our anticipated growth, as well as the development and commercialization of other product candidates and, as a result, we will need to generate significant net product sales, royalty and other revenues to achieve profitability.
Liquidity
Since inception, we have been engaged primarily in technology and product research and development, investigating markets for our products, developing manufacturing and supply chain partners, developing our production capability, and developing distribution, licensing and other channel relationships. In the course of funding these activities, we have sustained operating losses since inception and have an accumulated deficit of $14,258,667 at December 31, 2012. We have financed our operations since inception through the issuance of debt and equity securities and loans and advances from stockholders. We had $253,346 and $315,833 of total current assets and negative working capital of $1,536,239 and $2,244,219 as of December 31, 2012 and 2011, respectively. We had a cash balance of approximately $13,514 as of December 31, 2012, as compared to $65,118 as of December 31, 2011. Our funds are kept in financial institutions located in the United States of America.
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 $18,487 and $2,758 as at December 31, 2012 and December 31, 2011, respectively.
We had total notes payable of $474,661 and $2,727,449 as of December 31, 2012 and December 31, 2011, respectively. The decrease in total notes payable was primarily due to the combined effect of a decrease in current notes payable, from $1,565,059 at December 31, 2011 to $398,589 at December 31, 2012, and a decrease in long term notes payable from $1,162,390 at December 31, 2011 to $76,072 at December 31, 2012. These decreases are primarily due to the conversion of convertible subordinated promissory notes totaling $2,433,850 at an aggregate conversion price of $1.42 per share, primarily related to the JTR/Agave conversions and the conversion of the Sinacola First Landlord Note and the Sinacola Second Landlord 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.
The renewed Frisco Note requires varying annual principal payments through December 2015. The Frisco 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. The unamortized discount at December 31, 2011 was $52,752, and the net amount of the Frisco Note as at December 31, 2011 was $134,248.
Effective December 1, 2012 we received the performance credit from the FEDC in the amount of $39,000 pursuant to the Amended and Restated Performance Agreement. The unamortized discount at December 31, 2012 was $40,340, and the net amount of the Frisco Note as at December 31, 2012 was $107,660.
Future principal payments of the Frisco Note payable are as follows:
| 2013 | | | 44,000 | |
| 2014 | | | 52,000 | |
| 2015 | | | 52,000 | |
| | | $ | 148,000 | |
During 2013, 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 estimate that we will require approximately $2.43 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. 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.
In estimating the needed amount, the following assumptions were made:
| ● | There are no deferments of accounts payable or exchange of rent expense for equity; and |
| ● | There are no refinancings of our debt obligations. |
The following table sets out the major components of our estimates of cash needs over the next 12 months to remain viable, subject to the above assumptions:
| Accounts Payable & Accrued Expenses | | $ | 652,125 | |
| Capital leases - current | | | 296,116 | |
| Notes payable- current | | | 398,589 | |
| | | | | |
| Subtotal | | $ | 1,290,360 | |
| | | | | |
| Rent expense | | | 202,500 | |
| Insurance & taxes | | | 38,000 | |
| Regulatory compliance costs | | | 100,000 | |
| Salaries & wages | | | 550,000 | |
| Inventory | | | 125,000 | |
| General corporate expenses | | | 125,000 | |
| | | | | |
| Subtotal | | $ | 1,140,500 | |
| | | | | |
| Total estimate | | $ | 2,430,860 | |
Our business is relatively new, and we are not aware of any material trends that are at least likely to impact our financial condition, liquidity and results of operation.
Going Concern
Our continuation as a going concern is dependent upon our ability to generate sufficient cash flow from operations to meet our obligations on a timely basis and/or obtain financing as may be required. As of December 31, 2012 and 2011, we have incurred net losses from operations and had stockholders’ deficits of $14,258,667 and $13,430,659, respectively, since inception. We had a working capital deficit of $1,536,239 as of December 31, 2012 and $2,244,219 as of December 31, 2011. We have had limited revenues from the marketing of our primary product, the OxySure Model 615 as we are early in its commercialization and it currently operates in this single industry segment. These factors raise significant doubt about our ability to continue as a going concern.
During the next 12 months, our foreseeable cash requirements will relate to continual development of the operations of our business, maintaining our good standing and making the requisite filings with the Securities and Exchange Commission, and the payment of expenses associated with reviewing or investigating any potential business ventures. We may experience a cash shortfall and may be required to raise additional capital. Historically, we have relied upon internally generated funds and funds from the sale of shares of stock and loans and advances from our shareholders and private investors to finance our operations and growth. We may raise additional capital through future public or private offerings of our stock or through loans from investors, although there can be no assurance that we will be able to obtain such financing. Our failure to do so could have a material and adverse effect upon us and our shareholders.
We have a series of plans to mitigate the going concern:
| 1. | Management is seeking additional sources of equity and/or debt financing on terms that are reasonable for us; however, there is no assurance that any such additional funding will be available. |
| 2. | We anticipate that sales during 2013 and 2014 from existing markets will grow, and we believe that we will be able to generate sales from new markets. Existing markets include education customers such as schools, school districts and colleges, and commercial customers such as manufacturing facilities, churches and other commercial venues. New markets will include, but not be limited to, government customers and new international territories and markets. |
| 3. | We plan to increase our market penetration through the addition of new distributors, both the US and outside the US during 2013 and beyond. We also plan to increase the number of sub-distributors and sales agents we will appoint in the U.S. to sell our products. |
| 4. | We plan to continue to diversify our product range through the addition of complementary products and solutions. Some of these products will be sourced from third party manufacturers and suppliers. |
| 5. | We may seek or consider strategic business combinations with other companies to complement our resources and create synergies. |
Cash Flows
The following table shows a summary of our cash flows for the periods indicated:
| | | For the year ended December 31, | |
| | | 2012 | | | 2011 | |
| Net cash used in operating activities | | | (120,457) | | | | (689,461 | ) |
| Net cash used in investing activities | | | (36,048) | | | | (44,808 | ) |
| Net cash provided by financing activities | | | 104,901 | | | | 759,500 | |
Net cash used in operating activities. Net cash used in operating activities was $(120,457) and $(689,461) for the years ended December 31, 2012 and 2011, respectively. The improvement in cash flows from the operating activities was due primarily to the combined effects of a reduction in net loss and an improvement in amortization expense.
Net cash used in investing activities. Net cash used in investing activities was $(36,048) and $(44,808) for the years ended December 31, 2012 and 2011, respectively. The decrease in cash used for investing activities was due primarily to a decrease in cash used to acquire other assets, offset by an increase in cash used for property and equipment.
Net cash provided by financing activities. Net cash provided by financing activities was $104,901 and $759,500 for the years ended December 31, 2012 and 2011, respectively. The decrease in net cash provided by financing activities was due primarily to a decrease in net loan proceeds, offset by an increase in cash received from the exercise of common stock options and warrants.
Operating Capital and Capital Expenditure Requirements
Our future capital requirements will depend on many factors and include, but are not limited to the following:
| the progress, timing and success of the commercialization of Model 615 and our other product candidates and potential product candidates; |
| the outcome, timing and cost of regulatory approvals and the regulatory approval process; |
| delays that may be caused by changing regulatory requirements; |
| the number of product candidates that we pursue; |
| the costs involved in filing and prosecuting patent applications and enforcing and defending patent claims; |
| the timing and terms of future in-licensing and out-licensing transactions, if any; |
| the cost and timing of establishing new or increasing existing sales, marketing, manufacturing and distribution capabilities; |
| the cost of procuring commercial supplies; |
| the extent to which we acquire or invest in businesses, products or technologies; and |
| the possible costs of litigation. |
We anticipate that we will need additional capital in the future to fund growth. Until we can generate a sufficient amount of product revenue, if ever, we expect to finance future cash needs through public or private equity offerings, debt financings or corporate collaboration and licensing arrangements. Such funding, if needed, may not be available on favorable terms, if at all. In the event we are unable to obtain additional capital, we may delay or reduce the scope of our current activities and other expenses.
To the extent that we raise additional funds by issuing equity securities, our stockholders may experience additional significant dilution, and debt financing, if available, may involve restrictive covenants. To the extent that we raise additional funds through collaboration and licensing arrangements, it may be necessary to relinquish some rights to our technologies or our product candidates or grant licenses on terms that may not be favorable to us. We may seek to access the public or private capital markets whenever conditions are favorable, even if we do not have an immediate need for additional capital.
Summary of Significant Accounting Policies
A summary of significant accounting policies of OxySure® Systems, Inc. (“OxySure” or the “Company”) is presented to assist in understanding the Company’s financial statements. The accounting policies presented in these footnotes conform to accounting principles generally accepted in the United States of America and have been consistently applied in the preparation of the accompanying financial statements. These financial statements and notes are representations of the Company’s management who are responsible for their integrity and objectivity.
OxySure Systems, Inc. (OXYS: OTCQB) (the “Company,” “OSI,” “we,” “us,” or “our”) was incorporated on January 15, 2004 as a Delaware corporation. The Company is located in Frisco, Texas and is a medical technology company that focuses on the design, manufacture and distribution of specialty respiratory and emergency medical solutions. The company pioneered a safe and easy to use solution to produce medically pure (USP) oxygen from inert powders. The company owns nine (9) issued patents and patents pending on this technology which makes the provision of emergency oxygen safer, more accessible and easier to use than traditional oxygen provision systems. OxySure's products improve access to emergency oxygen that affects the survival, recovery and safety of individuals in several areas of need: (1) Public and private places and settings where medical emergencies can occur; (2) Individuals at risk for cardiac, respiratory or general medical distress needing immediate help prior to emergency medical care arrival; and (3) Those requiring immediate protection and escape from exposure situations or oxygen-deficient situations in industrial, mining, military, or other "Immediately Dangerous to Life or Health" (IDLH) environments.
In 2008 the Company launched its first product utilizing this technology – a portable emergency oxygen system for lay person use, called the OxySure Model 615. On December 9, 2005, the Company received approval from the Food and Drug Administration (510K, Class II) for Model 615. The FDA approval is for over-the-counter purchase, without the need of a prescription.
The Company has, at the present time, not paid any dividends and any dividends that may be paid in the future will depend upon the financial requirements of the Company and other relevant factors.
On July 19, 2004, the Company affected a 1-for-5 reverse stock split of the Company’s common stock. All share numbers and common stock numbers, including stock options and warrants, have been retroactively adjusted to reflect the reverse stock split.
While the Company has effectively managed its working capital deficit the going concern risk remains an issue for the company to manage. The Company has implemented, and plans to further implement several different strategies in order to help the Company ease the going concern issue. Refer to Note 15, “Going concern” of the Notes to Financial Statements for a partial list of the Company’s plans to mitigate the going concern issue.
Basis of Presentation - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported period. Actual results could differ from those estimates. Management further acknowledges that it is solely responsible for adopting sound accounting practices, establishing and maintaining a system of internal accounting control and preventing and detecting fraud. The Company’s system of internal accounting control is designed to assure, among other items, that (1) recorded transactions are valid; (2) all valid transactions are recorded; and (3) transactions are recorded in the period in a timely manner to produce financial statements which present fairly the financial condition of the Company.
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 $499,225 and $421,713 for the years ended December 31, 2012 and 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, we place our 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.
At December 31, 2012 inventories consisted of the following:
| | | December 31, 2012 | |
| | | | |
| Parts inventory | | $ | 105,647 | |
| Work in process | | | 76,106 | |
| Finished goods | | | 39,591 | |
| Total inventories | | $ | 221,345 | |
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.
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 $138,936 and $174,173 for the years ended December 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 $29,861 and $29,566 for the years ended December 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 we 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 years ended December 31, 2012 and 2011.
Other Assets – We record Other Assets net of accumulated amortization. During 2012 we recorded total deferred loan costs in the amount of $249,723. Amortization expense for Other Assets was $24,972 and $0 for the years ended December 31, 2012 and 2011, respectively.
Capitalization of software: The Company accounts for internal-use software and website development costs, including the development of its partner marketplaces in accordance with ASC 350-50 (Intangibles – Website cost). The Company capitalizes internal costs consisting of payroll and direct payroll-related costs of employees who devote time to the development of internal-use software, as well as any external direct costs. It amortizes these costs over their estimated useful lives, which typically range between three to five years. The Company’s judgment is required in determining the point at which various projects enter the stages at which costs may be capitalized, in assessing the ongoing value of the capitalized costs, and in determining the estimated useful lives over which the costs are amortized. The estimated life is based on management’s judgment as to the product life cycle.
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. We recorded bad debt expense of $1,376 and $0 for the years ended December 31, 2012 and 2011, respectively.
Research and Development Costs – Costs associated with the development of our products are charged to expense as incurred. $25,816 and $260 were incurred in the years ended December 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.
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 years ended December 31, 2012 and 2011, stock based compensation expense was approximately $7,999 and $104,419 respectively, which consisted primarily of stock-based compensation expense related to stock options recognized under GAAP issued to the employees.
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. We recognize this expense over the period in which the services are provided. For the years ended December 31, 2012 and 2011, stock based compensation expense was approximately $0 and $29,354 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 our stock based compensation expense for employees, consultants and other non-employees:
| | | Year ended December 31, | |
| | | 2012 | | | 2011 | |
| | | | | | | |
| Common Stock options issued for compensation | | $ | 7,999 | | | $ | 104,419 | |
| Common Stock options and warrants issued for services | | | - | | | | 29,354 | |
| | | | | | | | | |
| Total | | $ | 7,999 | | | $ | 133,773 | |
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. During the years ended December 31, 2012 and 2011 we incurred $76,427 and $15,141 respectively, in advertising and promotion costs.
Litigation and Settlement Costs - Legal costs are expensed as incurred. We record 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, we will accrue the minimum amount in the range. We are not presently involved in any legal proceedings, litigation or other legal actions.
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:
| | | Year ended December 31, | |
| | | 2012 | | | 2011 | |
| Historical net loss per share: | | | | | | |
| | | | | | | |
| Numerator | | | | | | |
| Net loss, as reported | | | (828,271 | ) | | | (1,532,399 | ) |
| Less: Effect of amortization of interest expense on convertible notes | | | - | | | | - | |
| Net loss attributed to common stockholders (diluted) | | | (828,271 | ) | | | (1,532,399 | ) |
| | | | | | | | | |
| Denominator | | | | | | | | |
| Weighted-average common shares outstanding | | | 19,862,088 | | | | 15,930,327 | |
| Effect of dilutive securities | | | - | | | | - | |
| Denominator for diluted net loss per share | | | 19,862,088 | | | | 15,930,327 | |
| Basic and diluted net loss per share | | $ | (0.04 | ) | | $ | (0.10 | ) |
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.
| | | Year ended December 31, | |
| | | 2012 | | | 2011 | |
| | | | | | | |
| Options to purchase common stock | | | 1,461,096 | | | | 1,852,204 | |
| Warrants to purchase common stock | | | 1,877,034 | | | | 2,842,983 | |
| Common shares issuable upon conversion of convertible preferred stock | | | 998,875 | | | | 3,814,249 | |
| Convertible note shares outstanding | | | 350,560 | | | | 1,962,935 | |
Restatements and Reclassifications - Certain financial statement items have been reclassified to conform to the current year’s presentation.
Recent Accounting Pronouncements
In April 2011, the FASB issued ASU 2011-02, “Receivables (Topic 310) A Creditors Determination of Whether a Restructuring Is a Troubled Debt Restructuring.” The update clarifies the guidance on a creditors evaluation of whether it has granted a concession as well as clarifying the guidance when a creditor’s evaluation of whether a debtor is experiencing financial difficulties. The guidance clarifies when a Company should record impairment due to concessions or the financial difficulties of the debtor. The new standard is effective for fiscal years and interim periods ending after June 15, 2011. The guidance should be applied retrospectively to restructurings occurring on or after the beginning of the fiscal year of adoption. The adoption did not have a material effect on our consolidated financial position or results of operations.
In April 2011, the FASB issued ASU 2011-03, “Transfers and Servicing (Topic 860) Reconsideration of Effective Control for Repurchase Agreements.” ASU 2011-03 applies to transactions where the seller transfers financial assets that both entitle and obligate the transferor to repurchase or redeem the financial assets before their maturity. The amendments in this guidance remove from the assessment of effective control the criteria requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms even in the event of default by the transferee and the collateral maintenance guidance related to that criterion. The new standard is effective for fiscal years and interim periods ending after December 15, 2011 and should be applied on a prospective basis. The adoption did not have a material effect on our consolidated financial position or results of operations.
In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820), Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS.” The amendment results in a consistent definition of fair value and ensures the fair value measurement and disclosure requirements are similar between GAAP and International Financial Reporting Standards (“IFRS”). This amendment changes certain fair value measurement principles and enhances the disclosure requirements particularly for Level 3 fair value measurements. This amendment will be effective for the Company on January 1, 2012. The adoption did not have a material effect on our consolidated financial position or results of operations.
In June 2011, the Financial Accounting Standards Board (“FASB”) issued ASU 2011-05, “Comprehensive Income (Topic 220), and Presentation of Comprehensive Income.” ASU 2011-05 amends the presentation of other comprehensive income and the Statement of Consolidated Operations. Under this amendment, entities will be required to present the total 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. Regardless of which reporting option is selected, the Company is required to present on the face of the financial statements, reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statements where the components of net income and the components of other comprehensive income are presented. The current option to report other comprehensive income and its components in the statement of changes in equity has been eliminated. This amendment will be effective for the Company on January 1, 2012 and full retrospective application is required. The amendment did not have a material impact on our financial statements.
Effecting certain sections covered under ASU 2011-05, in December, 2011, the FASB issued ASU 2011-12, “Comprehensive Income (Topic 220),” Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items out of Accumulated Other Comprehensive Income in ASU 2011-05.” The pronouncement is effective for fiscal years and interim periods beginning January 1, 2012 with retrospective application for all comparative periods presented. The Company’s adoption of the new standard did not have a material effect on our consolidated financial position or results of operations.
In September 2011, the Financial Accounting Standards Board (“FASB”) issued ASU 2011-08, “Intangibles – Goodwill and Other (Topic 350), Testing Goodwill for Impairment.” ASU 2011-08 amends the required annual impairment testing of goodwill by providing an entity an option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events and circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test under Topic 350-24 and Topic 350-20-35-9 is unnecessary. However, if an entity concludes otherwise, then it is required to perform the impairment testing under Topic 350-24 by calculating the fair value of the reporting unit and comparing the results with the carrying amount. If the fair value exceeds the carrying amount, then the entity must perform the second step test of measuring the amount of the impairment test under Topic 350-20-35-9.
An entity has the option to bypass the qualitative assessment and proceed directly to the two step goodwill impairment test. Additionally, the entity has the option to resume with the qualitative testing in any subsequent period. The amendment became effective for the Company on January 1, 2012 and did not have a material effect on our consolidated financial position or results of operations.
In December 2011, the FASB issued ASU 2011-11, “Balance Sheet (Topic 210), Disclosures about Offsetting Assets and Liabilities.” The guidance in this update requires us to disclose information about offsetting and related arrangements to enable users of our financial statements to understand the effect of those arrangements on our financial position. The pronouncement is effective for fiscal years and interim periods beginning on or after January 1, 2013 with retrospective application for all comparative periods presented. Our adoption of the new standard is not expected to have a material effect on our consolidated financial position or results of operations.
ITEM 7A—QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8—FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
OXYSURE SYSTEMS, INC.
INDEX TO FINANCIAL STATEMENTS
| | Page |
| Report of Independent Registered Public Accounting Firm | 48 |
| Balance Sheets | 49 |
| Statements of Operations | 50 |
| Statements of Stockholders’ Equity (Deficit) | 51 |
| Statements of Cash Flows | 52 |
| Notes to Financial Statements | 53 |
SAM KAN & COMPANY 1151 Harbor Bay Pkwy., Suite 202 Alameda, CA 94502 Phone: 510 .355 .0492 Fax: 866 .828 .1446 http://www .skancpa .com |  |
Report of Independent Registered Public Accounting Firm
To the Board of Directors of
OxySure Systems, Inc.
Frisco, Texas
We have audited the accompanying balance sheet of OxySure Systems, Inc. (hereinafter the "Company") as of December 31, 2012 and 2011, and the related statements of operations, stockholders' equity (deficit), and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to from the above presented fairly, in all material respects, the financial position of the Company as of December 31, 2012 and 2011, and the results of their operations and their cash flows for the years then ended were in conformity with U .S . generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 15 to the financial statements, the Company has suffered recurring losses and has experienced negative cash flows from operations, which raises substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to those matters are also described in Note 15 to the financial statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
| /s/ Sam Kan & Company | |
| Sam Kan & Company | |
April 1, 2013
Alameda, California
| OXYSURE SYSTEMS INC. |
| BALANCE SHEETS |
| |
| | | December 31, | |
| | | 2012 | | | 2011 | |
| | | | | | | |
| ASSETS | | | | | | |
| Current assets | | | | | | |
| Cash and cash equivalents | | $ | 13,514 | | | $ | 65,118 | |
| Accounts receivable, net of allowances for sales returns and allowance for doubtful accounts | | | 18,487 | | | | 2,758 | |
| Inventories | | | 221,345 | | | | 247,956 | |
| Prepaid expenses and other current assets | | | - | | | | - | |
| Total current assets | | | 253,346 | | | | 315,833 | |
| | | | | | | | | |
| Property and equipment, net | | | 27,599 | | | | 133,659 | |
| Intangible assets, net | | | 418,479 | | | | 445,168 | |
| Other assets | | | 516,373 | | | | 53,274 | |
| | | | | | | | | |
| TOTAL ASSETS | | $ | 1,215,797 | | | $ | 947,934 | |
| | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | |
| Current liabilities | | | | | | | | |
| Accounts payable and accrued expenses | | $ | 595,655 | | | $ | 245,340 | |
| Capital leases - current | | | 296,116 | | | | 327,939 | |
| Notes payable - current | | | 398,589 | | | | 1,565,059 | |
| Deferred revenue | | | 499,225 | | | | 421,713 | |
| Total current liabilities | | | 1,789,585 | | | | 2,560,051 | |
| | | | | | | | | |
| Long-term liabilities | | | | | | | | |
| Capital leases | | $ | 2,265 | | | $ | 2,632 | |
| Notes payable | | | 76,072 | | | | 1,162,390 | |
| Total long-term liabilities | | | 78,337 | | | | 1,165,022 | |
| | | | | | | | | |
| TOTAL LIABILITIES | | | 1,867,922 | | | | 3,725,073 | |
| | | | | | | | | |
| COMMITMENTS AND CONTINGENCY (NOTE 9) | | | | | | | | |
| | | | | | | | | |
| STOCKHOLDERS’ EQUITY | | | | | | | | |
| Preferred stock, par value $0.0005 per share; 25,000,000 shares authorized; | | | | | | | | |
| 818,750 Series A convertible preferred shares issued and outstanding as of December 31, 2012 and 3,126,434 shares issued and outstanding as of December 31, 2011. | | | 409 | | | | 1,563 | |
| Common stock, par value $0.0004 per share; 100,000,000 shares authorized; | | | | | | | | |
| 22,548,678 shares of voting common stock issued and outstanding as of December 31, 2012 and 16,519,865 shares issued and outstanding as of December 31, 2011. | | | 9,016 | | | | 6,608 | |
| Additional Paid-in Capital | | | 13,597,117 | | | | 10,645,347 | |
| Accumulated deficit | | | (14,258,667 | ) | | | (13,430,659 | ) |
| | | | | | | | | |
| TOTAL STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME | | | (652,125 | ) | | | (2,777,139 | ) |
| | | | | | | | | |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | | $ | 1,215,797 | | | $ | 947,934 | |
See accompanying notes to financial statements
| OXYSURE SYSTEMS INC. |
| STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT |
| | | | | | | |
| | | For the year ended December 31, | |
| | | 2012 | | | 2011 | |
| | | | | | | |
| Revenues, net | | $ | 269,697 | | | $ | 185,209 | |
| Cost of goods sold | | | 95,587 | | | | 103,389 | |
| Gross profit | | | 174,110 | | | | 81,820 | |
| | | | | | | | | |
| Operating expenses | | | | | | | | |
| Selling, general and administrative | | | 1,020,298 | | | | 1,150,786 | |
| Loss from operating expenses | | | (846,188 | ) | | | (1,068,966 | ) |
| | | | | | | | | |
| Other income (expenses) | | | | | | | | |
| Other income (expense) | | | 224,639 | | | | 144,882 | |
| Interest expense | | | (206,722 | ) | | | (608,316 | ) |
| Total other income (expenses) | | | 17,917 | | | | (463,434 | ) |
| | | | | | | | | |
| Net loss | | | (828,271 | ) | | | (1,532,399 | ) |
| | | | | | | | | |
| Accumulated deficit - beginning of the period | | | (13,430,659 | ) | | | (11,898,260 | ) |
| Prior period adjustments | | | 263 | | | | - | |
| | | | | | | | | |
| Accumulated deficit - end of the period | | $ | (14,258,667 | ) | | $ | (13,430,659 | ) |
| | | | | | | | | |
| Basic net income (loss) per common share | | $ | (0.04 | ) | | $ | (0.10 | ) |
| Diluted net income (loss) per common share | | $ | (0.04 | ) | | $ | (0.10 | ) |
| | | | | | | | | |
| Weighted average common shares outstanding: | | | | | | | | |
| Basic | | | 19,862,088 | | | | 15,930,327 | |
| Diluted | | | 19,862,088 | | | | 15,930,327 | |
See accompanying notes to financial statements
STATEMENT OF STOCKHOLDERS' EQUITY
AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011
| | | Convertible | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Preferred Stock | | | Common Stock | | | | | | | | | | | | | | | | | | | | | | |
| | | Shares | | | Par Value | | | Shares | | | Par Value | | | Warrant Issuance | | | Additional Paid-in Capital - Preferred Stock | | | Additional Paid-in Capital - Warrants and Options | | | Additional Paid-in Capital | | | Deficit Accumulated | | | Accumulated Other Comprehensive Income/ (Loss) | | | Total Stockholders' Equity (Deficit) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance as of December 31, 2010 | | | 3,126,434 | | | $ | 1,563 | | | | 15,724,816 | | | $ | 6,290 | | | | 167,750 | | | $ | 3,214,401 | | | $ | 3,909,615 | | | $ | 2,272,674 | | | $ | (11,898,260 | ) | | $ | - | | | $ | (2,325,966 | ) |
| | | | | | | | | | | | - | | | | - | | | | - | | | | | | | | - | | | | - | | | | - | | | | | | | | - | |
| - Common stock options exercised | | | | | | | | | | | 34,750 | | | | 14 | | | | - | | | | | | | | - | | | | 21,246 | | | | - | | | | | | | | 21,260 | |
| - Common stock warrants exercised | | | | | | | | | | | 294,330 | | | | 118 | | | | (35,000 | ) | | | | | | | - | | | | 36,992 | | | | - | | | | | | | | 2,110 | |
| - Common stock issued upon conversion of convertible notes | | | | | | | | | | | 465,969 | | | | 186 | | | | - | | | | | | | | - | | | | 465,783 | | | | - | | | | | | | | 465,969 | |
| - Common stock options issued for compensation | | | | | | | | | | | - | | | | - | | | | | | | | | | | | 104,419 | | | | - | | | | - | | | | | | | | 104,419 | |
| - Common stock options and warrants issued for services | | | | | | | | | | | - | | | | - | | | | | | | | | | | | 29,354 | | | | - | | | | - | | | | | | | | 29,354 | |
| - Common stock warrants issued in connection with convertible loans | | | | | | | | | | | - | | | | - | | | | | | | | | | | | 458,114 | | | | - | | | | - | | | | | | | | 458,114 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | - | | | | | | | | - | |
| Net Loss for year ending December 31, 2011 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (1,532,399 | ) | | | | | | | (1,532,399 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance as of December 31, 2011 | | | 3,126,434 | | | $ | 1,563 | | | | 16,519,865 | | | $ | 6,608 | | | | 132,750 | | | $ | 3,214,401 | | | $ | 4,501,501 | | | $ | 2,796,695 | | | $ | (13,430,659 | ) | | $ | - | | | $ | (2,777,139 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| - Common stock options exercised | | | | | | | | | | | 374,808 | | | | 146 | | | | | | | | | | | | | | | | 98,138 | | | | | | | | | | | | 98,284 | |
| - Common stock warrants exercised | | | | | | | | | | | 882,616 | | | | 353 | | | | (85,000 | ) | | | | | | | | | | | 90,753 | | | | | | | | | | | | 6,106 | |
| - Common stock issued upon conversion of convertible preferred stock | | | (2,307,684 | ) | | | (1,154 | ) | | | 2,815,374 | | | | 1,126 | | | | | | | | (2,306,530 | ) | | | | | | | 2,306,558 | | | | | | | | | | | | (0 | ) |
| - Common stock issued upon conversion of convertible notes | | | | | | | | | | | 1,711,952 | | | | 685 | | | | | | | | | | | | | | | | 2,433,165 | | | | | | | | | | | | 2,433,850 | |
| - Common stock issued for cash | | | | | | | | | | | 68,889 | | | | 28 | | | | | | | | | | | | | | | | 41,222 | | | | | | | | | | | | 41,250 | |
| - Common stock issued for services | | | | | | | | | | | 97,500 | | | | 39 | | | | | | | | | | | | | | | | 20,709 | | | | | | | | | | | | 20,748 | |
| - Common stock issued in connection with the acquisition of assets | | | | | | | | | | | 77,674 | | | | 31 | | | | | | | | | | | | | | | | 95,031 | | | | | | | | | | | | 95,062 | |
| - Common stock options issued for compensation | | | | | | | | | | | | | | | | | | | | | | | | | | | 7,999 | | | | | | | | | | | | | | | | 7,999 | |
| - Common stock options and warrants issued for services | | | | | | | | | | | | | | | | | | | | | | | | | | | - | | | | | | | | | | | | | | | | - | |
| - Common stock warrants issued in connection with deferred loan costs | | | | | | | | | | | | | | | | | | | | | | | | | | | 16,913 | | | | 232,810 | | | | | | | | | | | | 249,723 | |
| - Common stock warrants issued in connection with convertible loans | | | | | | | | | | | | | | | | | | | | | | | | | | | - | | | | | | | | | | | | | | | | - | |
| - Prior period adjustment: correction to accounting error | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 263 | | | | | | | | 263 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net Loss for year ending December 31, 2012 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (828,271 | ) | | | | | | | (828,271 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance as of December 31, 2012 | | | 818,750 | | | $ | 409 | | | | 22,548,678 | | | $ | 9,016 | | | | 47,750 | | | $ | 907,871 | | | $ | 4,526,413 | | | $ | 8,115,081 | | | $ | (14,258,667 | ) | | $ | - | | | $ | (652,125 | ) |
See accompanying notes to financial statements
| OXYSURE SYSTEMS INC. |
| STATEMENTS OF CASH FLOWS |
| | | Year Ended December 31, | |
| | | 2012 | | | 2011 | |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | |
| Net loss | | | (828,271 | ) | | $ | (1,532,399 | ) |
| Adjustments to reconcile net loss to net | | | | | | | | |
| cash used in operating activities | | | | | | | | |
| Depreciation | | | 138,936 | | | | 174,173 | |
| Amortization of intangible assets | | | 54,834 | | | | 29,766 | |
| Prior period adjustment | | | 263 | | | | - | |
| Amortization of debt discount and warrant fair values related to convertible loans | | | 189,611 | | | | 546,104 | |
| Changes in deferred rent and leasehold improvement allowance | | | 65,079 | | | | (18,106 | ) |
| Issuance of common stock options to employees as | | | | | | | | |
| compensation | | | 7,999 | | | | 104,419 | |
| Issuance of common stock options and warrants in exchange | | | | | | | | |
| for services | | | 20,748 | | | | 29,354 | |
| Changes in current assets and liabilities | | | | | | | | |
| Accounts receivable | | | (15,729 | ) | | | (2,409 | ) |
| Inventory | | | 26,611 | | | | (20,265 | ) |
| Prepaid expenses and other current assets | | | - | | | | (40,666 | ) |
| Accounts payable and accrued liabilities | | | 141,950 | | | | (125,491 | ) |
| Deferred revenue | | | 77,512 | | | | 166,058 | |
| | | | | | | | | |
| NET CASH USED IN OPERATING ACTIVITIES | | | (120,457) | | | | (689,461 | ) |
| | | | | | | | | |
| CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | | |
| Purchases of intangible assets | | | (3,172 | ) | | | (1,231 | ) |
| Other assets | | | - | | | | (40,142 | ) |
| Purchases of property and equipment | | | (32,876 | ) | | | (3,435 | ) |
| | | | | | | | | |
| NET CASH USED IN INVESTING ACTIVITIES | | | (36,048 | ) | | | (44,808 | ) |
| | | | | | | | | |
| CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | |
| Loan proceeds, net | | | (8,549 | ) | | | 763,940 | |
| Payment of capital leases | | | (32,190 | ) | | | (27,810 | ) |
| Issuance of common stock for cash | | | 41,250 | | | | - | |
| Proceeds from exercise of common stock options and warrants | | | 104,392 | | | | 23,370 | |
| | | | | | | | | |
| NET CASH PROVIDED BY FINANCING ACTIVITIES | | | 104,901 | | | | 759,500 | |
| | | | | | | | | |
| Net change in cash and cash equivalents | | | (51,604 | ) | | | 25,231 | |
| | | | | | | | | |
| Cash and cash equivalents, at beginning of period | | | 65,118 | | | | 39,887 | |
| | | | | | | | | |
| Cash and cash equivalents, at end of period | | $ | 13,514 | | | $ | 65,118 | |
| | | | | | | | | |
| Supplemental disclosure of cash flow information: | | | | | | | | |
| Cash paid during the period for: | | | | | | | | |
| Interest | | $ | 679 | | | $ | 4,368 | |
| Income taxes | | $ | - | | | $ | - | |
| | | | | | | | | |
| Supplemental non-cash investing and financing activities: | | | | | | | | |
| Promissory subordinated convertible notes issued in connection with rent satisfaction agreements | | $ | - | | | $ | 200,100 | |
| Issuance of common stock upon conversion of convertible notes | $ | 2,433,850 | | | $ | 465,969 | |
| Issuance of common stock warrants in connection with convertible notes | | $ | - | | | $ | 458,114 | |
| Issuance of common stock upon conversion of preferred stock | | $ | 2,307,684 | | | $ | - | |
| Website development with financing arrangement | | $ | 143,286 | | | $ | - | |
| Issuance of common stock for assets acquired | | $ | 95,062 | | | $ | - | |
| Issuance of common stock in connection with deferred loan costs | | $ | 249,723 | | | $ | - | |
See accompanying notes to financial statements
OXYSURE® SYSTEMS, INC.
NOTES TO AUDITED FINANCIAL STATEMENTS
DECEMBER 31, 2012 AND 2011
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of significant accounting policies of OxySure® Systems, Inc. (“OxySure” or the “Company”) is presented to assist in understanding the Company’s financial statements. The accounting policies presented in these footnotes conform to accounting principles generally accepted in the United States of America and have been consistently applied in the preparation of the accompanying financial statements. These financial statements and notes are representations of the Company’s management who are responsible for their integrity and objectivity.
OxySure Systems, Inc. (OXYS: OTCQB) (the “Company,” “OSI,” “we,” “us,” or “our”) was incorporated on January 15, 2004 as a Delaware corporation. The Company is located in Frisco, Texas and is a medical technology company that focuses on the design, manufacture and distribution of specialty respiratory and emergency medical solutions. The company pioneered a safe and easy to use solution to produce medically pure (USP) oxygen from inert powders. The company owns nine (9) issued patents and patents pending on this technology which makes the provision of emergency oxygen safer, more accessible and easier to use than traditional oxygen provision systems. OxySure's products improve access to emergency oxygen that affects the survival, recovery and safety of individuals in several areas of need: (1) Public and private places and settings where medical emergencies can occur; (2) Individuals at risk for cardiac, respiratory or general medical distress needing immediate help prior to emergency medical care arrival; and (3) Those requiring immediate protection and escape from exposure situations or oxygen-deficient situations in industrial, mining, military, or other "Immediately Dangerous to Life or Health" (IDLH) environments.
In 2008 the Company launched its first product utilizing this technology – a portable emergency oxygen system for lay person use, called the OxySure Model 615. On December 9, 2005, the Company received approval from the Food and Drug Administration (510K, Class II) for Model 615. The FDA approval is for over-the-counter purchase, without the need of a prescription.
The Company has, at the present time, not paid any dividends and any dividends that may be paid in the future will depend upon the financial requirements of the Company and other relevant factors.
On July 19, 2004, the Company affected a 1-for-5 reverse stock split of the Company’s common stock. All share numbers and common stock numbers, including stock options and warrants, have been retroactively adjusted to reflect the reverse stock split.
While the Company has effectively managed its working capital deficit the going concern risk remains an issue for the company to manage. The Company has implemented, and plans to further implement several different strategies in order to help the Company ease the going concern issue. Refer to Note 15, “Going concern” of the Notes to Financial Statements for a partial list of the Company’s plans to mitigate the going concern issue.
Basis of Presentation - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported period. Actual results could differ from those estimates. Management further acknowledges that it is solely responsible for adopting sound accounting practices, establishing and maintaining a system of internal accounting control and preventing and detecting fraud. The Company’s system of internal accounting control is designed to assure, among other items, that (1) recorded transactions are valid; (2) all valid transactions are recorded; and (3) transactions are recorded in the period in a timely manner to produce financial statements which present fairly the financial condition of the Company.
OXYSURE® SYSTEMS, INC.
NOTES TO AUDITED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2012 AND 2011
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Use of estimates - The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amount of revenues and expenses during the reported period. Actual results could differ from those estimated.
Revenue Recognition - 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 $499,225 and $421,713 for the years ended December 31, 2012 and 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, we place our 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.
At December 31, 2012 inventories consisted of the following:
| | | December 31, 2012 | |
| | | | |
| Parts inventory | | $ | 105,647 | |
| Work in process | | | 76,106 | |
| Finished goods | | | 39,591 | |
| Total inventories | | $ | 221,345 | |
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 AUDITED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2012 AND 2011
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 $138,936 and $174,173 for the years ended December 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.
OXYSURE® SYSTEMS, INC.
NOTES TO AUDITED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2012 AND 2011
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Amortization expense for patents and trademarks was $29,861 and $29,566 for the years ended December 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 we 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 years ended December 31, 2012 and 2011.
Other Assets – We record Other Assets net of accumulated amortization. During 2012 we recorded total deferred loan costs in the amount of $249,723. Amortization expense for Other Assets was $24,972 and $0 for the years ended December 31, 2012 and 2011, respectively.
Capitalization of software: The Company accounts for internal-use software and website development costs, including the development of its partner marketplaces in accordance with ASC 350-50 (Intangibles – Website cost). The Company capitalizes internal costs consisting of payroll and direct payroll-related costs of employees who devote time to the development of internal-use software, as well as any external direct costs. It amortizes these costs over their estimated useful lives, which typically range between three to five years. The Company’s judgment is required in determining the point at which various projects enter the stages at which costs may be capitalized, in assessing the ongoing value of the capitalized costs, and in determining the estimated useful lives over which the costs are amortized. The estimated life is based on management’s judgment as to the product life cycle.
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. We recorded bad debt expense of $1,376 and $0 for the years ended December 31, 2012 and 2011, respectively.
Research and Development Costs – Costs associated with the development of our products are charged to expense as incurred. $25,816 and $260 were incurred in the years ended December 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.
OXYSURE® SYSTEMS, INC.
NOTES TO AUDITED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2012 AND 2011
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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 years ended December 31, 2012 and 2011, stock based compensation expense was approximately $7,999 and $104,419 respectively, which consisted primarily of stock-based compensation expense related to stock options recognized under GAAP issued to the employees.
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. We recognize this expense over the period in which the services are provided. For the years ended December 31, 2012 and 2011, stock based compensation expense was approximately $0 and $29,354 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.
OXYSURE® SYSTEMS, INC.
NOTES TO AUDITED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2012 AND 2011
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following table shows the components of our stock based compensation expense for employees, consultants and other non-employees:
| | | Year ended December 31, | |
| | | 2012 | | | 2011 | |
| | | | | | | |
| Common Stock options issued for compensation | | $ | 7,999 | | | $ | 104,419 | |
| Common Stock options and warrants issued for services | | | - | | | | 29,354 | |
| | | | | | | | | |
| Total | | $ | 7,999 | | | $ | 133,773 | |
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. During the years ended December 31, 2012 and 2011 we incurred $76,427 and $15,141 respectively, in advertising and promotion costs.
Litigation and Settlement Costs - Legal costs are expensed as incurred. We record 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, we will accrue the minimum amount in the range. We are not presently involved in any legal proceedings, litigation or other legal actions.
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.
OXYSURE® SYSTEMS, INC.
NOTES TO AUDITED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2012 AND 2011
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A reconciliation of the numerator and denominator used in the calculation of basic and diluted net loss per share follows:
| | | Year ended December 31, | |
| | | 2012 | | | 2011 | |
| Historical net loss per share: | | | | | | |
| | | | | | | |
| Numerator | | | | | | |
| Net loss, as reported | | | (828,271 | ) | | | (1,532,399 | ) |
| Less: Effect of amortization of interest expense on convertible notes | | | - | | | | - | |
| Net loss attributed to common stockholders (diluted) | | | (828,271 | ) | | | (1,532,399 | ) |
| | | | | | | | | |
| Denominator | | | | | | | | |
| Weighted-average common shares outstanding | | | 19,862,088 | | | | 15,930,327 | |
| Effect of dilutive securities | | | - | | | | - | |
| Denominator for diluted net loss per share | | | 19,862,088 | | | | 15,930,327 | |
| Basic and diluted net loss per share | | $ | (0.04 | ) | | $ | (0.10 | ) |
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.
| | | Year ended December 31, | |
| | | 2012 | | | 2011 | |
| | | | | | | |
| Options to purchase common stock | | | 1,461,096 | | | | 1,852,204 | |
| Warrants to purchase common stock | | | 1,877,034 | | | | 2,842,983 | |
| Common shares issuable upon conversion of convertible preferred stock | | | 998,875 | | | | 3,814,249 | |
| Convertible note shares outstanding | | | 350,560 | | | | 1,962,935 | |
Restatements and Reclassifications - Certain financial statement items have been reclassified to conform to the current year’s presentation.
OXYSURE® SYSTEMS, INC.
NOTES TO AUDITED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2012 AND 2011
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent Accounting Pronouncements
In April 2011, the FASB issued ASU 2011-02, “Receivables (Topic 310) A Creditors Determination of Whether a Restructuring Is a Troubled Debt Restructuring.” The update clarifies the guidance on a creditors evaluation of whether it has granted a concession as well as clarifying the guidance when a creditor’s evaluation of whether a debtor is experiencing financial difficulties. The guidance clarifies when a Company should record impairment due to concessions or the financial difficulties of the debtor. The new standard is effective for fiscal years and interim periods ending after June 15, 2011. The guidance should be applied retrospectively to restructurings occurring on or after the beginning of the fiscal year of adoption. The adoption did not have a material effect on our consolidated financial position or results of operations.
In April 2011, the FASB issued ASU 2011-03, “Transfers and Servicing (Topic 860) Reconsideration of Effective Control for Repurchase Agreements.” ASU 2011-03 applies to transactions where the seller transfers financial assets that both entitle and obligate the transferor to repurchase or redeem the financial assets before their maturity. The amendments in this guidance remove from the assessment of effective control the criteria requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms even in the event of default by the transferee and the collateral maintenance guidance related to that criterion. The new standard is effective for fiscal years and interim periods ending after December 15, 2011 and should be applied on a prospective basis. The adoption did not have a material effect on our consolidated financial position or results of operations.
In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820), Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS.” The amendment results in a consistent definition of fair value and ensures the fair value measurement and disclosure requirements are similar between GAAP and International Financial Reporting Standards (“IFRS”). This amendment changes certain fair value measurement principles and enhances the disclosure requirements particularly for Level 3 fair value measurements. This amendment will be effective for the Company on January 1, 2012. The adoption did not have a material effect on our consolidated financial position or results of operations.
In June 2011, the Financial Accounting Standards Board (“FASB”) issued ASU 2011-05, “Comprehensive Income (Topic 220), and Presentation of Comprehensive Income.” ASU 2011-05 amends the presentation of other comprehensive income and the Statement of Consolidated Operations. Under this amendment, entities will be required to present the total 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. Regardless of which reporting option is selected, the Company is required to present on the face of the financial statements, reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statements where the components of net income and the components of other comprehensive income are presented. The current option to report other comprehensive income and its components in the statement of changes in equity has been eliminated. This amendment will be effective for the Company on January 1, 2012 and full retrospective application is required. The amendment did not have a material impact on our financial statements.
Effecting certain sections covered under ASU 2011-05, in December, 2011, the FASB issued ASU 2011-12, “Comprehensive Income (Topic 220),” Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items out of Accumulated Other Comprehensive Income in ASU 2011-05.” The pronouncement is effective for fiscal years and interim periods beginning January 1, 2012 with retrospective application for all comparative periods presented. The Company’s adoption of the new standard did not have a material effect on our consolidated financial position or results of operations.
In September 2011, the Financial Accounting Standards Board (“FASB”) issued ASU 2011-08, “Intangibles – Goodwill and Other (Topic 350), Testing Goodwill for Impairment.” ASU 2011-08 amends the required annual impairment testing of goodwill by providing an entity an option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events and circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test under Topic 350-24 and Topic 350-20-35-9 is unnecessary. However, if an entity concludes otherwise, then it is required to perform the impairment testing under Topic 350-24 by calculating the fair value of the reporting unit and comparing the results with the carrying amount. If the fair value exceeds the carrying amount, then the entity must perform the second step test of measuring the amount of the impairment test under Topic 350-20-35-9.
OXYSURE® SYSTEMS, INC.
NOTES TO AUDITED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2012 AND 2011
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
An entity has the option to bypass the qualitative assessment and proceed directly to the two step goodwill impairment test. Additionally, the entity has the option to resume with the qualitative testing in any subsequent period. The amendment became effective for the Company on January 1, 2012 and did not have a material effect on our consolidated financial position or results of operations.
In December 2011, the FASB issued ASU 2011-11, “Balance Sheet (Topic 210), Disclosures about Offsetting Assets and Liabilities.” The guidance in this update requires us to disclose information about offsetting and related arrangements to enable users of our financial statements to understand the effect of those arrangements on our financial position. The pronouncement is effective for fiscal years and interim periods beginning on or after January 1, 2013 with retrospective application for all comparative periods presented. Our adoption of the new standard is not expected to have a material effect on our consolidated financial position or results of operations.
NOTE 2 - BALANCE SHEET COMPONENTS
| | | December 31, | |
| | | 2012 | | | 2011 | |
| | | | | | | |
| Cash and cash equivalents: | | | | | | |
| Cash | | | 13,514 | | | | 65,118 | |
| Total cash and cash equivalents | | $ | 13,514 | | | $ | 65,118 | |
| | | | | | | | | |
| Inventories: | | | | | | | | |
| Total inventories | | $ | 221,345 | | | $ | 247,956 | |
| | | | | | | | | |
| Accounts Receivable, net of allowances | | $ | 18,487 | | | $ | 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 | | | 236,797 | | | | 203,922 | |
| Software | | | 10,691 | | | | 10,691 | |
| | | | 1,715,080 | | | | 1,682,204 | |
| Accumulated depreciation and amortization | | | (1,687,481 | ) | | | (1,548,545 | ) |
| Total property and equipment, net | | $ | 27,599 | | | $ | 133,659 | |
| | | | | | | | | |
| Other Assets: | | | | | | | | |
| Deferred loan costs, net | | | 224,751 | | | | - | |
| Security deposits | | | 53,274 | | | | 53,274 | |
| Website development, software, URLs | | | 238,348 | | | | - | |
| | | $ | 516,373 | | | $ | 53,274 | |
| | | | | | | | | |
| Accounts payable and accrued expenses: | | | | | | | | |
| Leasehold Improvement Allowance | | | - | | | | 48,969 | |
| Accounts payable | | | 70,141 | | | | 136,263 | |
| Accrued interest | | | - | | | | 40,094 | |
| Accrued expenses for website and software | | | 143,286 | | | | - | |
| Other accrued liabilities | | | 382,228 | | | | 20,015 | |
| Total accounts payable and accrued expenses | | $ | 595,655 | | | $ | 245,340 | |
OXYSURE® SYSTEMS, INC.
NOTES TO AUDITED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 2012 AND 2011
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.
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. During the years ended December 31, 2012 and 2011 we have had no impairment of intangible assets.
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, we acquired certain assets, including certain rights, title and interest to intellectual property, relating to the oxygen method and apparatus, developed by our founder prior to January 15, 2004. As consideration for the purchase, we 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 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 December 31, 2012 and 2011, respectively, are as follows:
| | | December 31, 2012 | | | December 31, 2011 | |
| | | Gross | | | Accumulated Amortization and write off | | | Net | | | Gross | | | Accumulated Amortization and write off | | | Net | |
| | | | | | | | | | | | | | | | | | | |
| Patents | | $ | 613,690 | | | $ | (232,866 | ) | | $ | 380,824 | | | $ | 610,518 | | | $ | (205,694 | ) | | $ | 404,824 | |
| Trademarks | | $ | 45,723 | | | $ | (8,069 | ) | | $ | 37,654 | | | $ | 45,723 | | | $ | (5,379 | ) | | $ | 40,344 | |
| | | $ | 659,413 | | | $ | (240,934 | ) | | $ | 418,479 | | | $ | 656,241 | | | $ | (211,073 | ) | | $ | 445,168 | |
