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OXYS > SEC Filings for OXYS > Form 10-K/A on 2-Apr-2013All Recent SEC Filings

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Form 10-K/A for OXYSURE SYSTEMS INC


2-Apr-2013

Annual Report


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,
                                                                             Increase/        % Increase/
                                              2012             2011          (Decrease)        (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,
                                                             Increase/        % Increase/
                      2012                   2011            (Decrease)       (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,
                                                                                      Increase/       % Increase/
                                                2012                  2011            (Decrease)       (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,
                                                                                       Increase/      % Increase/
                                                2012                  2011            (Decrease)       (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,
                                                                            Increase/      % Increase/
                                              2012             2011        (Decrease)       (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 %


Other income and expense

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.

. . .

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