10-Q 1 f10q0313_oxysure.htm QUARTERLY REPORT f10q0313_oxysure.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
x  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2013
 
o  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission File Number: 000-54137
 

OXYSURE SYSTEMS, INC.
(Exact name of registrant as specified in its charter) 
 
Delaware
 
71-0960725
(State or other jurisdiction of
 
(IRS Employer
incorporation or organization)
 
Identification No.)
 
10880 John W. Elliott Drive, Suite 600, Frisco, TX  75033
(Address of principal executive offices)
 
(972) 294-6450
(Registrant’s telephone number)
 
N/A
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  þ  No  o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  þ  No  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
o
Accelerated filer
o
Non-accelerated filer
o
Smaller reporting company
þ
(Do not check if a smaller reporting company)
   
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No þ
 
Our common stock is traded in the over-the-counter market and quoted on the OTCQB under the symbol “OXYS.”
 
The aggregate market value of the issuer’s common stock held by non-affiliates of the registrant as of  May 14, 2013, was approximately $3,126,846 based on $.735, the per share price at which the registrant’s common stock was last sold on that date.
 
The number of shares outstanding of the registrant’s class of $0.0004 par value common stock as of May 14, 2013 was 23,103,996.
 
 
 

 
 
INDEX
   
Page
   
Number
PART I - FINANCIAL INFORMATION
 
     
Item 1.
Financial Statements (Unaudited)
1
 
Condensed Balance Sheets – March 31, 2013 and December 31, 2012
1
 
Condensed Statements of Operations – For the three months ended March 31, 2013 and 2012
2
 
Condensed Statement of Equity – As of and for the three months ended March 31, 2013
3
 
Condensed Statements of Cash Flows – For the three months ended March 31, 2013 and 2012
4
 
Condensed Notes to Financial Statements
5 - 26
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
27
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
36
Item 4.
Controls and Procedures
36
     
PART II - OTHER INFORMATION
 
     
Item 1.
Legal Proceedings
37
Item 1A.
Risk Factors
37
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
37
Item 3.
Defaults upon Senior Securities
37
Item 4.
(Removed and reserved)
37
Item 5.
Other Information
37
Item 6.
Exhibits
37
     
SIGNATURES
38
 
 
 

 
 
PART I - FINANCIAL INFORMATION
ITEM 1.   FINANCIAL STATEMENTS
 
OXYSURE SYSTEMS INC.
 BALANCE SHEETS
 
   
March 31,
   
December 31,
 
   
2013
   
2012
 
             
ASSETS
 
Current assets
           
Cash and cash equivalents
  $ 94,905     $ 13,514  
Accounts receivable, net of allowances for sales returns and allowance for doubtful accounts
    73,029       18,487  
Inventories
    221,486       221,345  
Prepaid expenses and other current assets
    -       -  
Total current assets
    389,420       253,346  
                 
Property and equipment, net
    23,339       27,599  
   Intangible assets, net
    410,990       418,479  
Other assets
    493,136       516,373  
                 
TOTAL ASSETS
  $ 1,316,885     $ 1,215,797  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
Current liabilities
               
Accounts payable and accrued expenses
  $ 687,474     $ 595,655  
Capital leases - current
    308,958       296,116  
Notes payable - current
    448,494       398,589  
Deferred revenue
    374,226       499,225  
Total current liabilities
    1,819,152       1,789,585  
                 
Long-term liabilities
               
Capital leases
  $ 2,304     $ 2,265  
Notes payable
    76,072       76,072  
Total long-term liabilities
    78,375       78,337  
                 
TOTAL LIABILITIES
    1,897,527       1,867,922  
                 
COMMITMENTS AND CONTINGENCY (NOTE 9)
               
                 
STOCKHOLDERS’ EQUITY
 
Preferred stock, par value $0.0005 per share; 25,000,000 shares authorized;
 
768,750 Series A convertible preferred shares issued and outstanding as of March 31, 2013 and 818,750 shares issued and outstanding as of December 31, 2012. 
    384       409  
Common stock, par value $0.0004 per share; 100,000,000 shares authorized;
 
23,101,496 shares of voting common stock issued and outstanding as of March 31, 2013 and 22,548,678 shares issued and outstanding as of December 31, 2012.
    9,237       9,016  
Common stock, subscribed but not issued, par value $0.0004 per share; 100,000,000 shares authorized;
               
415,850 shares of voting common stock subscribed but not issued as of March 31, 2013 and 0 shares subscribed but not issued as of December 31, 2012.
    166       -  
Additional paid-in capital
    13,838,041       13,597,117  
Accumulated deficit
    (14,428,471 )     (14,258,667 )
                 
   TOTAL STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
    (580,642 )     (652,125 )
                 
          TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  $ 1,316,885     $ 1,215,797  
 
See accompanying notes to financial statements
 
 
1

 
 
OXYSURE SYSTEMS INC.
STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
 
   
For the quarter ended March 31,
 
   
2013
   
2012
 
             
Revenues, net
  $ 240,420     $ 27,884  
Cost of goods sold
    53,181       12,703  
Gross profit
    187,239       15,182  
                 
Operating expenses
               
Research and development
    36,711       60  
Sales and marketing
    58,347       2,430  
Other general and administrative
    236,294       280,995  
Loss from operating expenses
    (144,113 )     (268,303 )
                 
Other income (expenses)
               
Other income (expense)
    -       707  
Interest expense
    (25,236 )     (57,855 )
Total other income (expenses)
    (25,236 )     (57,148 )
                 
Net loss
    (169,349 )     (325,451 )
                 
Accumulated deficit - beginning of the period
    (14,258,667 )     (13,430,659 )
Prior period adjustments
    (455 )     -  
                 
Accumulated deficit - end of the period
  $ (14,428,471 )   $ (13,756,109 )
                 
Basic net income (loss) per common share
  $ (0.007 )   $ (0.02 )
Diluted net income (loss) per common share
  $ (0.007 )   $ (0.02 )
                 
Weighted average common shares outstanding:
               
Basic
    22,665,515       17,844,462  
Diluted
    22,665,515       17,844,462  
 
See accompanying notes to financial statements
 
 
2

 
 
OXYSURE SYSTEMS, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
AS OF AND FOR THE QUARTER ENDED MARCH 31, 2013
 
   
Convertible
Preferred Stock
   
Common Stock
          Additional Paid-in Capital -     Additional Paid-in Capital - Warrants     Additional     Other           Accumulated Other     Total Stockholders'  
   
Shares
   
Par Value
   
Shares
   
Par Value
   
Warrant Issuance
   
Preferred Stock
   
and Options
   
Paid-in Capital
   
Stockholder Equity
   
Deficit Accumulated
   
Comprehensive Income/ (Loss)
   
 Equity (Deficit)
 
                                                                         
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 )
                                                                                                 
 - Common stock options exercised
                                                                                               
 - Common stock warrants exercised
                    350,000       140                               3,360                               3,500  
 - Common stock issued upon conversion of convertible preferred stock
    (50,000 )     (25 )     61,000       24.40                               0.60                               -  
 - Common stock issued upon conversion of convertible notes
                    -       -                               -                               -  
 - Common stock issued for cash
                    25,818       10.33                               14,990                               15,000  
 - Common stock issued for services
                    50,000       20.00                               19,003                               19,023  
 - Common stock issued in connection with the acquisition of assets
                    66,000       26                       -       (26 )                             -  
 - Common stock subscribed not issued
                                                            215,658       166                       215,824  
 - Common stock options issued for compensation
                                                    (12,061 )     -                               (12,061 )
 - Common stock options and warrants issued for services
                                                    -                                       -  
 - Common stock warrants issued in connection with deferred loan costs
                                                    -                       -               -  
 - Common stock warrants issued in connection with convertible loans
                                                    -                                       -  
 - Prior period adjustment: correction to accounting error
                                                                            (455 )             (455 )
                                                                                              -  
Net Loss for quarter ending March 31, 2013
                                                                            (169,349 )             (169,349 )
                                                                                                 
Balance as of March 31, 2013
    768,750     $ 384       23,101,496     $ 9,237       47,750     $ 907,871     $ 4,514,352     $ 8,368,066     $ 166     $ (14,428,471 )   $ -     $ (580,642 )
 
See accompanying notes to financial statements
 
 
3

 
 
OXYSURE SYSTEMS INC.
STATEMENTS OF CASH FLOWS
 
   
For the quarter ended March 31,
 
   
2013
   
2012
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net loss
    (169,349 )   $ (325,451 )
Adjustments to reconcile net income to net
               
cash used in operating activities
               
Depreciation
    4,883       41,505  
Amortization of intangible assets
    30,726       7,441  
Prior period adjustment
    (455 )     -  
                 
Amortization of debt discount and warrant fair values related to convertible loans
    21,802       52,305  
Changes in deferred rent and leasehold improvement allowance
    (0 )     (5,370 )
Issuance of common stock options to employees as
               
   compensation
    (12,061 )     9,514  
Issuance of common stock for services
     19,023        -  
Changes in current assets and liabilities:
               
Accounts receivable
    (54,542 )     (5,125 )
Inventory
    (142 )     (17,473 )
Prepaid expenses and other current assets
    -       -  
Accounts payable and accrued liabilities
    91,819       10,536  
Deferred revenue
    (125,000 )     -  
 
               
NET CASH USED IN OPERATING ACTIVITIES
    (193,295 )     (232,118 )
 
               
CASH FLOWS FROM INVESTING ACTIVITIES
               
Purchases of property and equipment
    (623 )     -  
                 
NET CASH USED IN INVESTING ACTIVITIES
    (623 )     -  
                 
CASH FLOWS FROM FINANCING ACTIVITIES
               
Loan proceeds, net
    28,103       172,103  
Payment of capital leases
    12,881       (1,619 )
Issuance of common stock for cash
    15,000       -  
Common stock subscribed
    215,824       -  
Proceeds from exercise of common stock options and warrants
    3,500       -  
                 
NET CASH PROVIDED BY FINANCING ACTIVITIES
    275,308       170,484  
                 
Net change in cash and cash equivalents
    81,391       (61,634 )
                 
Cash and cash equivalents, at beginning of period
    13,514       65,118  
                 
Cash and cash equivalents, at end of period
  $ 94,905     $ 3,484  
                 
Supplemental disclosure of cash flow information:
               
Cash paid during the period for:
               
Interest
  $ 182     $ 446  
Income taxes
  $ -     $ -  
                 
Supplemental non-cash investing and financing activities:
               
Promissory subordinated convertible notes converted to common
  $ -     $ 251,407  
 
See accompanying notes to financial statements
 
 
4

 
 
OXYSURE® SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2013
(Unaudited)
 
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
A summary of significant accounting policies of OxySure® Systems, Inc. (“OxySure” or the “Company”) is presented to assist in understanding the Company’s financial statements. The accounting policies presented in these footnotes conform to accounting principles generally accepted in the United States of America and have been consistently applied in the preparation of the accompanying financial statements. These financial statements and notes are representations of the Company’s management who are responsible for their integrity and objectivity.
 
OxySure Systems, Inc. (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.  The interim financial statements include all adjustments which, in the opinion of management, are necessary in order to make the financial statements not misleading.
 
 
5

 
 
OXYSURE® SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2013
(Unaudited)
 
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 $374,226 and $499,225 as at March 31, 2013 and December 31, 2012, respectively.
 
Cash and Cash Equivalents - Cash consists of all highly liquid investments purchased with maturity of three months or less to be cash equivalents. Cash and cash equivalents may at times exceed Federally-insured limits. To minimize this risk, the Company places its cash and cash equivalents with high credit quality institutions.
 
Inventory – Our inventory consists of raw material and components for our portable oxygen systems as well as completed products and accessories.   Inventories are computed using the lower of cost or market, which approximates actual cost on a first-in first-out basis. Inventory components are parts, work-in-process and finished goods. Finished goods are reported as inventories until the point of title transfer to the customer. We write down our inventory value for estimated obsolescence equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. These factors are impacted by market and economic conditions, technology changes, new product introductions and changes in strategic direction and require estimates that may include uncertain elements. Actual demand may differ from forecasted demand, and such differences may have a material effect on recorded inventory values. Management has established inventory reserves to cover estimated inventory losses for all work-in-process and finished goods related to products we manufactured, as well as raw material and components for those products that had no potential use in products to be manufactured in the future. Management is required to make judgments about the future benefit of our raw materials and components. Actual reserve requirements could differ significantly from Management’s estimates, which could have a significant unfavorable impact on our future gross margins.
 
At March 31, 2013 inventories consisted of the following:
 
   
March 31,
2013
 
       
Parts inventory
 
$
92,786
 
Work in process
   
97,785
 
Finished goods
   
30,915
 
Total inventories
 
$
221,486
 
 
Concentration of Credit Risk – We sell our products throughout the United States as well as in certain other countries.  Sales to our 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.
 
 
6

 
 
OXYSURE® SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2013
(Unaudited)
 
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
We invest our cash in deposits and money market funds with major financial institutions.  We place our cash investments in instruments that meet high credit quality standards, as specified in our investment policy guidelines. These guidelines also limit the amount of credit exposure to any one issue, issuer or type of instrument.
 
Fair Value of Financial Instruments - Our financial instruments consist principally of cash and cash equivalents, accounts receivable and accounts payable.  We believe that the recorded values of all of our other financial instruments approximate their fair values because of their nature and respective maturity dates or durations. The fair value of our long-term debt is determined by using estimated market prices. Assets and liabilities measured at fair value are categorized based on whether or not the inputs are observable in the market and the degree that the inputs are observable. The categorization of financial instruments within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The hierarchy is prioritized into three levels (with Level 3 being the lowest) defined as follows:
 
Level 1: Inputs are based on quoted market prices for identical assets or liabilities in active markets at the measurement date.
Level 2: Inputs include quoted prices for similar assets or liabilities in active markets and/or quoted prices for identical or similar assets or liabilities in markets that are not active near the measurement date.
Level 3:Inputs include management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. The inputs are unobservable in the market and significant to the instrument’s valuation.
 
The fair value of the majority of our cash equivalents was determined based on “Level 1” inputs. We do not have any marketable securities in the “Level 2” and “Level 3” category. We believe that the recorded values of all our other financial instruments approximate their current fair values because of their nature and respective relatively short maturity dates or durations.
 
Property and Equipment – Property and equipment are recorded at cost with depreciation and amortization provided over the shorter of the remaining lease term or the estimated useful life of the improvement ranging from three to seven years. Renewals and betterments that materially extend the life of an asset are capitalized. Expenditures for maintenance and repairs are charged to expense when incurred. Furniture and fixtures are depreciated over five years. Machinery and equipments are depreciated over five to seven years. Software is depreciated over three years.  Leasehold improvements are computed using the shorter of the estimated useful lives of the assets or the lease terms.  Depreciation expense was $4,883 and $41,505 for the three month periods ended March 31, 2013 and 2012, respectively.
 
Other Long-Lived Assets – We have two types of intangible assets – patents and trademarks.  Intangible assets are carried at cost, net of accumulated amortization.  Amortization expense for patents and trademarks was $7,489 and $7,489 for the three month periods ended March 31, 2013 and 2012, respectively.
 
Intangible assets with definite useful lives and other long-lived assets are tested for impairment if certain impairment indicators are identified.  Management evaluates the recoverability of its identifiable intangible assets in accordance with applicable accounting guidance, which requires the assessment of these assets for recoverability when events or circumstances indicate a potential impairment exists. Certain events and circumstances the Company considered in determining whether the carrying value of identifiable intangible assets may not be recoverable include, but are not limited to: significant changes in performance relative to expected operating results; significant changes in the use of the assets; significant negative industry or economic trends; and changes in its business strategy.  In determining if impairment exists, we estimate the undiscounted cash flows to be generated from the use and ultimate disposition of these assets.  If impairment is indicated based on a comparison of the assets’ carrying values and the undiscounted cash flows, the impairment loss is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets. Impairment charges for patents were $0 for each of the three month periods ended March 31, 2013 and 2012.
 
 
7

 
 
OXYSURE® SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2013
(Unaudited)
 
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
Other Assets – We record Other Assets net of accumulated amortization. Total amortization expense for Other Assets was $23,237 and $0 for the three month periods ended March 31, 2013 and 2012, respectively.

Capitalization of software: We account for internal-use software and website development costs, including the development of our partner marketplaces in accordance with ASC 350-50 (Intangibles – Website cost). We capitalize 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. We amortize these costs over their estimated useful lives, which typically range between three to five years. Our 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.
 
Amortization expense for websites and URLs was $10,751 and $0 for the three month periods ended March 31, 2013 and 2012, respectively.
 
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 $0 for each of the three month periods ended March 31, 2013 and 2012.
 
Research and Development Costs – Costs associated with the development of our products are charged to expense as incurred.  $36,711 and $60 were incurred in the three month periods ended March 31, 2013 and 2012, 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.
 
 
8

 
 
OXYSURE® SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2013
(Unaudited)
 
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
The expected term is based on the observed and expected time to exercise and post-vesting cancellations of options by employees.  Upon the adoption of the accounting guidance, we continued to use historical volatility in deriving its expected volatility assumption as allowed under GAAP because we believe that future volatility over the expected term of the stock options is not likely to differ materially from the past. The risk-free interest rate assumption is based on 5-year U.S Treasury zero-coupon rates appropriate for the expected term of the stock options. The expected dividend assumption is based on the history and expectation of dividend payouts.  The fair values generated by the Black-Scholes model may not be indicative of the actual fair values of the equity awards, as we do not consider other factors important to those awards to employees, such as continued employment, periodic vesting requirements and limited transferability.  The amount of stock based compensation expenses is net of an estimated forfeiture rate, which is also based on historical data. For the three month periods ended March 31, 2013 and 2012, stock based compensation expense was approximately $(12,061) and $9,514, respectively, which consisted primarily of stock-based compensation expense related to stock options issued to the employees and recognized under GAAP.
 
The Company follows ASC Topic 505-50, formerly EITF 96-18, “Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling Goods and Services,” for stock options and warrants issued to consultants and other non-employees. In accordance with ASC Topic 505-50, these stock options and warrants issued as compensation for services to be provided to the Company are accounted for based upon the fair value of the services provided or the estimated fair market value of the option or warrant, whichever can be more clearly determined. The Company recognizes this expense over the period in which the services are provided. For the three month periods ended March 31, 2013 and 2012, stock based compensation expense was approximately $0 and $0, respectively which consisted primarily of stock-based compensation expense related to stock options and warrants recognized under GAAP issued to consultants and other non-employees.
 
The following table shows the components of the Company’s stock based compensation expense for employees, consultants and other non-employees:
 
   
Three months ended March 31,
 
   
2013
   
2012
 
             
Common Stock options issued for compensation
  $
(12,061)
    $
9,514
 
Common Stock options and warrants issued for services
   
-
     
-
 
                 
Total
  $
(12,061)
    $
9,514
 
 
Shipping and Handling Costs - Shipping and handling charges to customers are included in net revenues, and the associated costs incurred are recorded in cost of revenues.
 
Advertising Costs - Advertising costs are charged to operations when incurred.  We incurred $58,347 and $2,430 in advertising and promotion costs during the three month periods ended March 31, 2013 and 2012, respectively.
 
 
9

 
 
OXYSURE® SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2013
(Unaudited)
 
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
Litigation and Settlement Costs - Legal costs are expensed as incurred. The Company records a charge equal to at least the minimum estimated liability for a loss contingency when both of the following conditions are met: (i) information available prior to issuance of the financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements and (ii) accrue the best estimate within a range of loss if there is a loss or, when there is no amount within a range that forms a better estimate, the Company will accrue the minimum amount in the range. The Company was not involved in any legal proceedings, litigation or other legal actions during the three months ended March 31, 2013.
 
Loss Per Share - Basic loss per share, which excludes anti-dilutive securities, is computed by dividing loss available to common shareholders by the weighted-average number of common shares outstanding for that particular period. In contrast, diluted loss per share considers the potential dilution that could occur from other equity instruments that would increase the total number of outstanding shares of common stock. Such amounts include shares potentially issuable under outstanding options, warrants, convertible preferred stock and convertible notes.
 
A reconciliation of the numerator and denominator used in the calculation of basic and diluted net loss per share follows:
 
   
Three months ended March 31,
 
   
2013
   
2012
 
Historical net loss per share:
           
             
Numerator
           
Net loss, as reported
    (169,349 )     (325,451 )
Less: Effect of amortization of interest expense on convertible notes
    -       -  
Net loss attributed to common stockholders (diluted)
    (169,349 )     (325,451 )
                 
Denominator
               
Weighted-average common shares outstanding
    22,665,515       17,844,462  
Effect of dilutive securities
    -       -  
Denominator for diluted net loss per share
    22,665,515       17,844,462  
Basic and diluted net loss per share
  $ (0.007 )   $ (0.02 )
 
The following outstanding options, warrants, convertible preferred shares and convertible note shares were excluded from the computation of basic and diluted net loss per share for the periods presented because including them would have had an anti-dilutive effect.
 
   
Three months ended March 31,
 
   
2013
   
2012
 
             
Options to purchase common stock
    1,444,921       1,943,754  
Warrants to purchase common stock
    1,519,534       2,754,650  
Common shares issuable upon conversion of convertible preferred stock
    937,875       1,608,875  
Convertible note shares outstanding
    411,985       1,696,330  
 
Restatements and Reclassifications - Certain financial statement items have been reclassified to conform to the current periods’ presentation.  These reclassifications had no impact on previously reported net loss. 
 
 
10

 
 
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
 
Recent Accounting Pronouncements
 
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.
 
 
11

 
 
OXYSURE® SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2013
(Unaudited)
 
NOTE 2 – BALANCE SHEET COMPONENTS
 
   
March 31,
   
December 31,
 
   
2013
   
2012
 
             
Cash and cash equivalents:
           
Cash
  $ 94,905       13,514  
Total cash and cash equivalents
  $ 94,905     $ 13,514  
                 
Inventories:
               
Total inventories
  $ 221,486     $ 221,345  
                 
Accounts Receivable, net of allowances
  $ 73,029     $ 18,487  
                 
Property and equipment, net:
               
Machinery and equipment
    919,736       919,736  
Leasehold improvements
    547,856       547,856  
Computer equipment and furniture and fixtures
   
237,420
      236,797  
Software
    10,691       10,691  
      1,715,703       1,715,080  
Accumulated depreciation and amortization
    (1,692,364 )     (1,687,481 )
Total property and equipment, net
  $ 23,339     $ 27,599  
                 
Other Assets:
               
Deferred loan costs, net
   
212,265
      224,751  
Security deposits
    53,274       53,274  
Website development, software, URLs, net
    227,597       238,348  
    $ 493,136     $ 516,373  
                 
Accounts payable and accrued expenses:
               
Leasehold Improvement Allowance
    -       -  
Accounts payable
    110,997       70,141  
Accrued interest
    -       -  
Accrued expenses for website and software
    143,286       143,286  
Stockholder advances
    242,483       207,472  
Other accrued liabilities
    190,709       174,756  
Total accounts payable and accrued expenses
  $ 687,474     $ 595,655  
 
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.
 
 
12

 
 
OXYSURE® SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2013
(Unaudited)
 
NOTE 3 – INTANGIBLE ASSETS (CONTINUED)
 
Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable in accordance with applicable accounting guidance. Impairment charges for patents were $0 for each of the three month periods ended March 31, 2013 and 2012.
 
On January 15, 2004, the Company executed an Asset Purchase and Stock Transfer Agreement with entities controlled by the founder of the Company. In connection with this agreement, the Company acquired certain assets, including certain rights, title and interest to intellectual property, relating to the oxygen method and apparatus, developed by the founder of the Company prior to January 15, 2004. As consideration for the purchase, the Company issued 14,000,000 shares of common stock and a promissory note for $150,000 to these entities. The common stock was valued at $7,000 using the par value of the common stock on the date of issuance, which approximates these entities’ basis (which is not indicative of fair value). The non-recourse promissory note bore interest at 6.5% per annum and was paid in full during 2006.
 
The carrying values of our amortized acquired intangible assets as of the March 31, 2013 are as follows:
 
   
March 31, 2013
 
   
Gross
   
Accumulated Amortization and write off
   
Net
 
                   
Patents
  $ 613,690     $ (239,682 )   $ 374,008  
Trademarks
  $ 45,723     $ (8,741 )   $ 36,982  
    $ 659,413     $ (248,423 )   $ 410,990  
 
Of the net amount of $410,990 in intangible assets as of March 31, 2013, approximately 91% is in patents and approximately 9% is in trademarks.  Included in the $659,413 gross amount for patents and trademarks is $157,000 acquired from entities controlled by the founder of the Company in January 2004. The remaining $502,413 represents amounts paid to third parties for legal fees, application fees and other direct costs incurred in the filing and prosecution of patent and trademark applications.
 
NOTE 4 – NOTES PAYABLE
 
We have issued warrants for the purchase of shares of our restricted common stock in connection with raising equity and debt financing and for other professional services.  The fair value of warrants issued is determined in accordance with Codification topic 470-20.
 
Frisco Promissory Note  On April 3, 2007 we entered into a note agreement with the City of Frisco, Texas for $243,000 (the “Frisco Note”) pursuant to an economic incentive package provided through the Frisco Economic Development Corporation (“FEDC”). The note required varying annual principal payments through August 2012.  The note was non-interest bearing; however, interest has been imputed at 12.18% per annum. The unamortized discount at December 31, 2010 was $66,198. Individual annual payments were to be forgiven if certain performance targets are achieved, which include the number of full time employees, square feet occupied in the city of Frisco and the taxable value of business and personal property in the City of Frisco. The first annual payment for 2008 in the amount of $30,000 was forgiven and we recognized the entire $30,000 under “Other income” in the Statement of Operations and Accumulated Deficit for the year ended December 31, 2008.  On March 22, 2011 we entered into an Amended and Restated Performance Agreement with the FEDC. In terms of the Amended and Restated Performance Agreement, the FEDC provided us with economic assistance in the form of the renewal and extension of the outstanding forgivable loan of $213,000 together with revised performance credits over 5 years, commencing on March 22, 2011 and ending on the earlier to occur of: (i) the full payment of the economic incentives; or (ii) March 31, 2016.
 
 
13

 
 
OXYSURE® SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2013
(Unaudited)
 
NOTE 4 – NOTES PAYABLE (CONTINUED)
 
The renewed Frisco Note requires varying annual principal payments through December 2015. The face value of the renewed note is $213,000, and the note is non-interest bearing; however, interest has been imputed at 12.34% per annum.
 
On December 1, 2011 we received the first performance credit from the FEDC in the amount of $26,000 pursuant to the Amended and Restated Performance Agreement. 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 March 31, 2013 was $37,237, and the net amount of the Frisco Note as at March 31, 2013 was $110,763.
 
Future principal payments of this note payable are as follows:
 
2013
 
$
44,000
 
2014
   
52,000
 
2015
   
52,000
 
   
$
148,000
 
 
Sinacola Subordinated, Convertible Notes.
 
Third Landlord Note; Fourth Landlord Note:
 
On December 10, 2009 we entered into a Rent Satisfaction Agreement (the “2009 RSA”) with our landlord, Sinacola Commercial Properties, Ltd. (“Sinacola”). In terms of the 2009 RSA we issued Sinacola two Promissory Notes pursuant to the 2009 RSA – the First Landlord Note and the Second Landlord Note – both of which were subsequently converted to our common stock.
 
On December 31, 2010 we entered into a second Rent Satisfaction Agreement (the “2010 RSA”) with our landlord, Sinacola. In terms of the 2010 RSA, all of our outstanding rent obligations for the 2010 financial year under our lease agreement, up to and including December 31, 2010 including, but not limited to, base rent, deferred rent, and our share of operating costs, are satisfied in full.
 
We issued Sinacola two Promissory Notes pursuant to the 2010 RSA, as follows:
 
Third Landlord Note:  The first note (the “Third Landlord Note”) is a subordinated convertible note in the principal amount of $110,000. The Third Landlord Note carries no interest and is convertible, at Sinacola’s option, into the common stock of the Company at an exercise price of $1.00 per common share on the maturity date.
 
Fourth Landlord Note:  The second note (the “Fourth Landlord Note”) is a subordinated convertible note in the principal amount of $110,715. The Fourth Landlord Note carries no interest and is convertible into the common stock of the Company at an exercise price of $1.50 per common share on the maturity date.  However, if the common stock has traded at $1.50 or above for four (4) consecutive weeks on a nationally recognized market (based on daily closing prices) then the Fourth Landlord Note is convertible at the Company’s option.
 
Maturity Date – Each of the Third Landlord Note and the Fourth Landlord Note had a maturity date of October 31, 2012.
 
We also issued Sinacola with 143,465 penny warrants pursuant to the 2010 RSA (the “2010 Landlord Warrant”).  The 2010 Landlord Warrant is convertible into 143,465 shares of our common stock, and is exercisable in whole or in part at any time on or before December 31, 2015 at an exercise price of $.01 per share.
 
In accordance with ASC 470-20, Debt with conversions and other options, the proceeds from the Third Landlord Note and the Fourth Landlord Note were allocated based on the relative fair values of the notes without the warrants issued in conjunction with the notes and of the warrants themselves at the time of issuance. We recorded the relative fair value of the warrant issued pursuant to the Third Landlord Note in the amount of $70,853 as a debt discount upon issuance, and amortized this debt discount as interest expense over the life of the note.  Additionally, as a result of issuing the warrant with the subordinated convertible promissory note, a beneficial conversion option was recorded as a debt discount reflecting the incremental conversion option intrinsic value benefit of $39,147, at the time of issuance provided to the holder of the note, which was also amortized as interest expense over the life of the note. We recorded interest expense in the amounts of $0 and $15,000 for the three month periods ended March 31, 2013 and 2012, respectively in connection with the Third Landlord Note.  We recorded the relative fair value of the warrant issued pursuant to the Fourth Landlord Note in the amount of $71,314 as a debt discount upon issuance, and amortized this debt discount as interest expense over the life of the note.  Additionally, as a result of issuing the warrant with the subordinated convertible promissory note, a beneficial conversion option was recorded as a debt discount reflecting the incremental conversion option intrinsic value benefit of $34,409, at the time of issuance provided to the holder of the note, which was also amortized as interest expense over the life of the note. We recorded interest expense in the amounts of $0 and $14,417 for the three month periods ended March 31, 2013 and 2012, respectively in connection with the Fourth Landlord Note.
 
 
 
14

 
 
OXYSURE® SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2013
(Unaudited)
 
NOTE 4 – NOTES PAYABLE (CONTINUED)
 
Fifth Landlord Note; Sixth Landlord Note:
 
On March 23, 2011 we entered into a third rent satisfaction agreement (the “2011 RSA”) with our landlord, Sinacola. In terms of the 2011 RSA, certain of our rent obligations for the period January 1, 2011 through June 30, 2011 under our lease agreement, including base rent and deferred rent, are satisfied in full.
 
We issued Sinacola two Promissory Notes pursuant to the 2011 RSA, as follows:
 
Fifth Landlord Note:  The first note (the “Fifth Landlord Note”) is a subordinated convertible note in the principal amount of $50,000. The Fifth Landlord Note carries no interest and is convertible, at Sinacola’s option, into the common stock of the Company at an exercise price of $1.00 per common share on the maturity date.

Sixth Landlord Note:  The second note (the “Sixth Landlord Note”) is a subordinated convertible note in the principal amount of $50,000. The Sixth Landlord Note carries no interest and is convertible into the common stock of the Company at an exercise price of $1.50 per common share on the maturity date.  However, if the common stock has traded at $1.50 or above for four (4) consecutive weeks on a nationally recognized market (based on daily closing prices) then the Sixth Landlord Note is convertible at the Company’s option.
 
Maturity Date – Each of the Fifth Landlord Note and the Sixth Landlord Note has a maturity date of September 30, 2013.
 
We also issued Sinacola with 65,000 penny warrants pursuant to the 2011 RSA (the “2011 Landlord Warrant”).  The 2011 Landlord Warrant is convertible into 65,000 shares of our common stock, and is exercisable in whole or in part at any time on or before March 23, 2016 at an exercise price of $.01 per share.
 
In accordance with ASC 470-20, Debt with conversions and other options, the proceeds from the Fifth Landlord Note and the Sixth Landlord Note were allocated based on the relative fair values of the notes without the warrants issued in conjunction with the notes and of the warrants themselves at the time of issuance. We recorded the relative fair value of the warrant issued to Fifth Landlord Note in the amount of $32,207 as a debt discount upon issuance, and amortized this debt discount as interest expense over the life of the note.  Additionally, as a result of issuing the warrant with the subordinated convertible promissory note, a beneficial conversion option was recorded as a debt discount reflecting the incremental conversion option intrinsic value benefit of $17,793, at the time of issuance provided to the holder of the note, which we also amortize as interest expense over the life of the note. We recorded interest expense in the amounts of $5,694 and $6,250 for the three months ended March 31, 2013 and March 31, 2012, respectively in connection with the Fifth Landlord Note.  We recorded the relative fair value of the warrant issued to Sixth Landlord Note in the amount of $32,207 as a debt discount upon issuance, and amortized this debt discount as interest expense over the life of the note.  Additionally, as a result of issuing the warrant with the subordinated convertible promissory note, a beneficial conversion option was recorded as a debt discount reflecting the incremental conversion option intrinsic value benefit of $15,540, at the time of issuance provided to the holder of the note, which we also amortize as interest expense over the life of the note. We recorded interest expense in the amounts of $5,437 and $5,968 for the three months ended March 31, 2013 and March 31, 2012, respectively in connection with the Sixth Landlord Note.
 
Seventh Landlord Note; Eighth Landlord Note:
 
On August 15, 2011 we entered into a fourth rent satisfaction agreement (the “Second 2011 RSA”) with our landlord, Sinacola. In terms of the Second 2011 RSA, certain of our rent obligations for the period July 1, 2011 through December 31, 2011 under our lease agreement, including base rent and deferred rent, are satisfied in full.
 
We issued Sinacola two Promissory Notes pursuant to the Second 2011 RSA, as follows:
 
Seventh Landlord Note:  The first note (the “Seventh Landlord Note”) is a subordinated convertible note in the principal amount of $50,050. The Fifth Landlord Note carries no interest and is convertible, at Sinacola’s option, into the common stock of the Company at an exercise price of $1.00 per common share on the maturity date.
 
Eighth Landlord Note:  The second note (the “Eighth Landlord Note”) is a subordinated convertible note in the principal amount of $50,050. The Eighth Landlord Note carries no interest and is convertible into the common stock of the Company at an exercise price of $1.50 per common share on the maturity date.  However, if the common stock has traded at $1.50 or above for four (4) consecutive weeks on a nationally recognized market (based on daily closing prices) then the Sixth Landlord Note is convertible at the Company’s option.
 
 
15

 
 
OXYSURE® SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2013
(Unaudited)
 
NOTE 4 – NOTES PAYABLE (CONTINUED)
 
Maturity Date – Each of the Seventh Landlord Note and the Eighth Landlord Note has a maturity date of November 30, 2013.
 
We also issued Sinacola with 65,065 penny warrants pursuant to the Second 2011 RSA (the “Second 2011 Landlord Warrant”).  The Second 2011 Landlord Warrant is convertible into 65,065 shares of our common stock, and is exercisable in whole or in part at any time on or before August 15, 2016 at an exercise price of $.01 per share.
 
In accordance with ASC 470-20, Debt with conversions and other options, the proceeds from the Seventh Landlord Note and the Eighth Landlord Note were allocated based on the relative fair values of the notes without the warrants issued in conjunction with the notes and of the warrants themselves at the time of issuance. We recorded the relative fair value of the warrant issued to Seventh Landlord Note in the amount of $32,223 as a debt discount upon issuance, and we amortize this debt discount as interest expense over the life of the note.  Additionally, as a result of issuing the warrant with the subordinated convertible promissory note, a beneficial conversion option was recorded as a debt discount reflecting the incremental conversion option intrinsic value benefit of $17,827, at the time of issuance provided to the holder of the note, which we also amortize as interest expense over the life of the note. We recorded interest expense in the amounts of $5,460 and $5,460 for the three months ended March 31, 2013 and March 31, 2012, respectively in connection with the Seventh Landlord Note.  We recorded the relative fair value of the warrant issued to Eighth Landlord Note in the amount of $32,223 as a debt discount upon issuance, and we amortize this debt discount as interest expense over the life of the note.  Additionally, as a result of issuing the warrant with the subordinated convertible promissory note, a beneficial conversion option was recorded as a debt discount reflecting the incremental conversion option intrinsic value benefit of $15,540, at the time of issuance provided to the holder of the note, which we also amortize as interest expense over the life of the note. We recorded interest expense in the amounts of $5,210 and $5,210 for the three months ended March 31, 2013 and March 31, 2012, respectively in connection with the Eighth Landlord Note.
 
 
16

 
 
OXYSURE® SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2013
(Unaudited)
 
NOTE 4 – NOTES PAYABLE (CONTINUED)
 
The following table reflects the carrying values of our short-term and long-term notes payable as of March 31, 2013:
 
   
Effective Interest Rate
   
Principal
   
Discount
   
March 31, 2013
 
                         
Current notes payable
                       
Sinacola, Third Landlord Note
    0 %   $ 110,000       -     $ 110,000  
Sinacola, Fourth Landlord Note
    0.00 %     110,715       -       110,715  
Sinacola, Fifth Landlord Note
    45.55 %     50,000       -       50,000  
Sinacola, Sixth Landlord Note
    43.50 %     50,000       -       50,000  
Sinacola, Seventh Landlord Note
    43.64 %     50,050       16,380       33,670  
Sinacola, Eighth Landlord Note
    41.64 %     50,050       15,631       34,419  
Beaufort Ventures, PLC
    12 %     25,000       -       25,000  
Frisco EDC
    12.34 %     44,000       9,309       34,691  
                                 
Total short-term notes payable
          $ 489,815       41,321     $ 448,494  
                                 
Long-term notes payable
                               
Frisco EDC
    12.34 %   $ 104,000       27,928     $ 76,072  
                                 
Total long-term notes payable
          $ 104,000     $ 27,928     $ 76,072  
Total short-term and long-term notes payable
          $ 593,815     $ 69,249     $ 524,566  
 
 
17

 

OXYSURE® SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2013
(Unaudited)
 
NOTE 4 – NOTES PAYABLE (CONTINUED)
 
The following table summarizes our outstanding notes payable as of March 31, 2013 and December 31, 2012:
 
   
March 31, 2013
   
December 31, 2012
 
             
Current portion of notes payable
  $ 59,691     $ 31,588  
Current portion of convertible notes payable
    388,804       367,001  
Current portion of notes payable, net
  $ 448,494     $ 398,589  
                 
Long-term portion of notes payable
  $ 104,000     $ 104,000  
Less: Unamortized discount
    (27,928 )     (27,928 )
      76,072       76,072  
                 
                 
Long-term portion of convertible notes payable
  $ -     $ -  
Less: Unamortized discount
    -       -  
      -       -  
                 
Long-term portion of notes payable, net
  $ 76,072     $ 76,072  
 
 
18

 
 
OXYSURE® SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2013
(Unaudited)
 
NOTE 5 - SHAREHOLDERS’ EQUITY
 
Preferred Shares Rights
 
On December 31, 2005, the Company’s Board of Directors adopted a Preferred Shares Rights Agreement (the “Original Rights Agreement”).   Pursuant to the Agreement, the Board authorized the issuance of up to 5,000,000 shares of preferred stock, par value $0.0005 per share. As of December 31, 2005, the Company had authorized the issuance of 2,000,000 shares of preferred stock designated as Series A Convertible Preferred Stock (“Series A Preferred”). On March 22, 2006 the Company authorized an increase in the issuance of the Series A Preferred to 3,100,000 shares of preferred stock. On July 2, 2008 the Company further authorized an increase in the issuance of the Series A Preferred to 3,143,237 shares of preferred stock. The original issue price of the Series A Preferred is $1.00 per share. There were 768,750 and 818,750 Series A Preferred shares issued and outstanding as of March 31, 2013 and December 31, 2012, respectively.
 
During the three months ended March 31, 2013 the Company did not issue any shares of the Series A Preferred. During the three months ended March 31, 2013 approximately 50,000 shares of the Series A Preferred have been converted into approximately 61,000 shares of our common stock at a conversion ratio of 1.22:1.
 
A summary of the designations and preferences of its Series A Preferred stock is as follows:
 
Ranking – The Series A Preferred ranks senior to common stock.
 
Dividends – Series A Preferred may be entitled to receive a quarterly non-cumulative dividend in the amount of $.01 per share upon approval from the Board of Directors.
 
Liquidation Preference – In the event of any liquidation, dissolution, or winding up of the Company, the holders of Series A Preferred are entitled to receive 100% of the original issue price of $1.00 per share.
 
Conversion Rights – Each share of Series A Preferred is convertible at any time, at the option of the holder into 1.22 shares of common stock, subject to adjustment. Series A Preferred are subject to automatic conversion upon consummation of underwritten offering by the Company of shares of common stock to the public, in which the aggregate cash proceeds are at least $3 million and the price paid per share is at least $5.00.
 
Redemption Rights – All of the Series A Preferred may be called at any time by the Company within ten years, but not prior to two years after issuance. The redemption value is $1.00 per share, plus an amount equal to all unpaid dividends thereon.
 
Voting Rights – The holder of each share of Series A Preferred has the right to one vote for each share of common stock into which such share of Series A Preferred could be converted.
 
 
19

 
 
OXYSURE® SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2013
(Unaudited)
 
NOTE 5 - SHAREHOLDERS’ EQUITY (CONTINUED)
 
Common Stock
 
The Company has authorized 100,000,000 shares of $0.0004 par value common stock.
 
During the three months ended March 31, 2013:
 
·  
We issued approximately 61,000 shares of our common stock pursuant to the cashless conversion of approximately 50,000 shares of our Series A Convertible Preferred Stock at a conversion ratio of 1.22:1.   
 
·  
We issued approximately 25,818 shares of common stock for $15,000 in cash at an aggregate price of $.58 per share.
  
·  
We received proceeds of approximately $3,500 from the issuance of 350,000 shares of common stock pursuant to the exercise of 350,000 warrants (issued in March 2008 to Agave Resources, LLC, an affiliate of us, in connection with a $750,000 convertible note, which was subsequently – in December 2012 – converted to our common stock at an aggregate exercise price of $1.50 per share).
 
·  
We issued approximately 50,000 shares of common stock for services valued at approximately $19,023.
  
·  
We issued approximately 66,000 shares of common stock in connection with the acquisition of assets valued at approximately $191,048.
 
As of March 31, 2013 we had approximately 415,850 shares of voting common stock subscribed for but not issued for a total aggregate consideration of $215,824.
 
As of March 31, 2013 we had approximately 23,101,496 shares of common stock issued and outstanding.
 
NOTE 6 - STOCK OPTIONS AND WARRANTS
 
Equity Incentive Plans
 
In April 2004, our Board of Directors and the stockholders at that time approved the adoption of a Voting Stock Option Plan (“the Plan”), which provides for the issuance of stock options to eligible employees, consultants, Board members and Advisory Board members of the Company to acquire up to a maximum of 5,000,000 shares of common stock.
 
Our Board of Directors, which determines the number of options that will be granted, the effective dates of the grants, the option process and the vesting schedules, administers the Plan. In the absence of an established market for the common stock of the Company, the Board of Directors determines the fair market value of our common stock. Options generally expire between five and ten years from the date of grant and automatically terminate 90 days after such optionee ceases to be an eligible individual under the Plan other than by reason of death or disability.
 
The portion of options granted that is not exercisable on the date the optionee ceases to be an eligible individual under the Plan by reason other than death, shall terminate and be forfeited to the Company on the date of such cessation. An optionee has no right as a stockholder with respect to any shares covered by the options granted to him until a certificate representing such shares is issued to them.
 
Stock Options
 
The following table summarizes information about the number and weighted average of the options that were forfeited or expired under the Plan as at March 31, 2013:
 
   
Employee
   
Non-Employee
       
         
Weighted
         
Weighted
       
   
Number
   
Average
   
Number
   
Average
   
Combined
 
   
Of
   
Exercise
   
Of
   
Exercise
   
Total
 
   
Options
   
Price
   
Options
   
Price
   
Options
 
Outstanding at December 31, 2012
    1,442,916     $ 0.37       18,180     $ 1.15       1,461,096  
Granted
    -     $ -       -     $ -       -  
Exercised
    -     $ -       -     $ -       -  
Forfeited/Cancelled
    (16,175 )   $ 1.24       -     $ -       (16,175 )
Outstanding at March 31, 2013
    1,426,741     $ 0.37       18,180     $ 1.15       1,444,921  
 
 
20

 
 
OXYSURE® SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2012
(Unaudited)
 
NOTE 6 - STOCK OPTIONS AND WARRANTS (CONTINUED)
 
We used the following assumptions to estimate the fair value of options granted under the Plan for the three months ended March 31, 2013 and 2012:
 
   
Equity Incentive Plans for the Three months ended March 31,
 
   
2013
   
2012
 
             
Expected terms (in years)
    5-10       5-10  
Volatility (weighted ave.)
    30 %     26 %
Risk-free interest rate (weighted ave.)
    0.77 %     1.04 %
Expected dividend rate
    0 %     0 %
 
Risk-Free Interest Rate
 
The risk-free interest rate assumption was based on U.S. Treasury instruments with a term that is consistent with the expected term of our stock options.
Expected Volatility
We use historical volatility in deriving our expected volatility assumption because we believe that future volatility over the expected term of the stock options is not likely to differ from the past.
 
Expected Term
The expected term of stock options represents the weighted average period the stock options are expected to remain outstanding. The expected term is based on the observed and expected time to exercise and post-vesting cancellations of options by optionees.  We use historical volatility in deriving our expected volatility assumption because it believes that future volatility over the expected term of the stock options is not likely to differ from the past.
 
Expected Dividend Yield
The expected dividend yield of 0% is based on our history and expectation of dividend payouts. We have not paid and do not anticipate paying any dividends in the near future.
 
Forfeitures
FASB ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.  We only record stock-based compensation expense for awards that are expected to vest. While we generally consider historical forfeitures in our estimates, judgment is also required in estimating the amount of stock-based awards that are expected to be forfeited. Our estimate for forfeitures may differ from actual forfeitures. If actual results differ significantly from these estimates, stock-based compensation expense and our results of operations could be materially impacted when we record a true-up for the difference in the period that the awards vest.  We adjust stock-based compensation expense based on our actual forfeitures on an annual basis, if necessary.
 
As of March 31, 2013, there were unrecognized compensation costs of approximately $0 related to non-vested stock option awards granted after April 2004.
 
Stock compensation cost, using the graded vesting attribute method in accordance with Codification topic 718, is recognized over the requisite service period, generally 5 years, during which each tranche (one fifth) of shares is earned (zero, one, two, three, and four years).  The value of each tranche is amortized on a straight-line basis.  For the three months ended March 31, 2013, stock based compensation expense was approximately $(12,061), which consisted primarily of stock-based compensation expense related to stock options recognized under GAAP issued to employees.  For the three months ended March 31, 2013, there were no options exercised.
 
 
21

 
 
OXYSURE® SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2013
(Unaudited)
NOTE 6 - STOCK OPTIONS AND WARRANTS (CONTINUED)
 
Warrants.
 
The following table summarizes our warrant activities for the three months ended March 31, 2013:
 
         
Weighted
 
   
Number
   
Average
 
   
Of
   
Exercise
 
   
Warrants
   
Price
 
Outstanding at December 31, 2012
    1,877,034     $ 0.80  
Granted
    -     $ -  
Exercised
    (350,000 )   $ 0.01  
Forfeited/Cancelled
    (7,500 )   $ 1.00  
Outstanding at March 31, 2013
    1,519,534     $ 0.80  
 
NOTE 7 – INCOME TAXES
 
Removed and reserved.

NOTE 8 – LICENSE AND SERVICE AGREEMENTS
 
We did not enter into any new license agreements during three months ended March 31, 2013.
 
NOTE 9 – COMMITMENTS AND CONTINGENCY
 
Leases
 
Operating Lease –   During 2007, we entered into a long-term non-cancelable lease for office space, which expired in October 2012.  As at March 31, 2013 we were not subject to any lease agreement. We accrued an amount of $10,313 as deferred rent for the three months ended March 31, 2013.
 
Capital leaseDuring 2006 we entered into a master lease agreement with a VenCore Solutions, LLC (“Vencore”) that allowed us to lease up to $750,000 of equipment (the “Vencore Master Lease”). This maximum amount available under this lease was subsequently increased to $805,000. The Vencore Master Lease required a security deposit of 10% of the amount of each individual lease schedule, a payment of Series A Convertible Preferred Stock shares equal to 5% of the lease divided by $1.00, and 36 monthly payments of 3.33% of the lease. We have the option to purchase the equipment at the end of each lease term at the lesser of 12% of the original equipment cost or the fair market value. On March 4, 2011 Vencore agreed to a payment moratorium, which was to continue until the earlier to occur of (i) the execution and completion of a mutually agreed upon cash settlement ("Settlement"), or (ii) the execution of a mutually agreed upon repayment plan ("Plan") or February 29, 2012.
 
On July 9, 2012 we entered into a second moratorium agreement (“Second Payment Moratorium”) with Vencore. The Second Payment Moratorium provides for the following:
 
a)  The balance outstanding to Vencore remains the balance outstanding at the end of the first payment moratorium, which was $307,661.83 (“Debt Obligation”);
b)  The term of the Second Payment Moratorium (the “Moratorium Period”) shall expire on the earlier to occur of: (i) July 1, 2013;  (ii) a cash settlement or repayment plan being entered into; or (iii) a merger or acquisition of OxySure or the sale of substantially all of its assets (collectively a “Sale”);
c)  We will not be obligated to make any payments during the Moratorium Period;
d)  No late charges or interest will accrue during the Moratorium Period;
e)  Any amounts we may pay towards the Debt Obligation during the Moratorium Period shall reduce the Debt Obligation;
f)  In the event of a Sale the entire Debt Obligation shall immediately become due and payable; and
g)  Vencore shall make no demands or take any actions against us during the Moratorium Period.
 
In exchange for the Second Payment Moratorium, we issued to Vencore two warrants (the “Warrants”) as follows:
 
(a)  A warrant as to 22,500 common shares at an exercise price per share of $0.82; and
(b)  A warrant as to 32,500 common shares at an exercise price per share of $1.00.
 
The terms of the Warrants are 5 years each and Vencore has the ability to exercise the Warrants on a cashless/net-issuance basis.
 
 
22

 
 
OXYSURE® SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2012
(Unaudited)
 
NOTE 9 – COMMITMENTS AND CONTINGENCY (CONTINUED)
 
Between 2007 and 2012, we entered into agreements with other finance companies (other than Vencore) to acquire equipment with interest rates ranging from 7% to 19% with three to five-year lease terms. Minimum non-cancellable lease payments required under all capital leases as at March 31, 2013 are as follows:
 
2013
  $ 308,958  
2014
    1,728  
2015
    576  
Total
    311,261  
         
Less amounts representing interest
    (646 )
         
Total
  $ 310,616  
 
Legal Proceedings
 
The Company is subject to litigation in the normal course of business, none of which management believes will have a material adverse effect on the Company’s financial statements. As of March 31, we were not a party to any ongoing litigation.
 
Indemnification
 
Under the indemnification provisions of our customer agreements, we routinely agree to indemnify and defend our customers against infringement of any patent, trademark, or copyright of any country or the misappropriation of any trade secret, arising from the customers’ legal use of our products or services. The exposure to us under these indemnification provisions is generally limited to the total amount paid by the customers under pertinent agreements. However, certain indemnification provisions potentially expose us to losses in excess of the aggregate amount received from the customer. To date, there have been no claims against us or our customers pertaining to such indemnification provisions and no amounts have been recorded.
 
NOTE 10 – RELATED PARTY TRANSACTIONS
 
A summary of the related party financings and notes as at March 31, 2013 is as follows:
 
   
Shareholder advances
 
Related party
 
Julian Ross (1)
   
Other
 
Amount
 
$
242,483
   
$
0
 
Stated interest rate
   
0
%
   
0
%
Maturity
   
n/a
     
n/a
 
 
(1) Our CEO, Mr. Ross provides us shareholder cash advances and other consideration from time to time to fund working capital.
 
 
23

 
 
OXYSURE® SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2013
(Unaudited)
 
NOTE 11 – NET INCOME (LOSS) PER SHARE
 
The following table sets forth the computation of net basic and diluted net income (loss) per share:
 
   
Quarter ended March 31,
 
   
2013
   
2012
 
             
Net income (loss)
    (169,349 )     (325,451 )
Shares used in computing basic per share amounts (weighted ave.)
    22,665,515       17,844,462  
Net income (loss) per share:
               
Basic and Diluted
  $ (0.007 )   $ (0.02 )
 
NOTE 12 – FAIR VALUE MEASUREMENTS
 
Effective January 1, 2009, the Company adopted new fair value accounting guidance. The adoption of the guidance was limited to financial assets and liabilities and did not have a material effect on the Company’s financial condition or results of operations.
 
The guidance defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which the Company would transact business and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance. The guidance establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The guidance establishes three levels of inputs that may be used to measure fair value:
 
Level 1 — Quoted prices in active markets for identical assets or liabilities.
 
Level 2 — Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.
 
 
24

 
 
OXYSURE® SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2013
(Unaudited)
 
NOTE 12 – FAIR VALUE MEASUREMENTS (CONTINUED)
 
Level 3 — Unobservable inputs to the valuation methodology that is significant to the measurement of fair value of assets or liabilities.
 
Assets Measured at Fair Value on a Recurring Basis
 
The following table presents the Company’s financial assets and liabilities that are measured at fair value on a recurring basis which were comprised of the following types of instruments as of March 31, 2013:
 
   
Total
   
Level 1
   
Level 2
   
Level 3
 
                         
Cash (1)
 
$
94,905
   
$
94,905
     
-
     
-
 
Total cash equivalents as of March 31, 2013
 
$
94,905
   
$
94,905
   
$
-
   
$
-
 
 
(1) Included in cash and cash equivalents on the Company's Balance Sheet.
 
NOTE 13 – OFF BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
 
We have not entered into any transactions with unconsolidated entities whereby we have financial guarantees, subordinated retained interests, or other contingent arrangements that expose us to material continuing risks, contingent liabilities, or any other obligation under a variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to us.
 
NOTE 14 – SEGMENT INFORMATION
 
We are organized as, and operate in, one reportable segment: the development, distribution and sale of specialty respiratory products and related medical products, accessories and services. Our chief operating decision-maker is our Chief Executive Officer. Our Chief Executive Officer reviews financial information presented on a consolidated basis for purposes of evaluating financial performance and allocating resources, accompanied by information about revenue by geographic regions. Our assets are primarily located in the United States of America and not allocated to any specific region and we do not measure the performance of our geographic regions based upon asset-based metrics. Therefore, geographic information is presented only for revenue. Revenue by geographic region is based on the ship to address on our customer orders.
 
 
25

 
 
OXYSURE® SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 2013
(Unaudited)
 
NOTE 14 – SEGMENT INFORMATION (CONTINUED)
 
The following presents total revenue by geographic region for the three month periods ended March 31, 2013 and 2012:
 
   
Three months ended March 31,
 
   
2013
   
2012
 
             
Product Revenue:
           
United States - product sales
  $ 115,420     $ 27,884  
ROW - license fees/service revenue
  $ 125,000     $ -  
        Totals
  $ 240,420     $ 27,884  
 
NOTE 15 – GOING CONCERN
 
Our financial statements are prepared using accounting principles generally accepted in the United States of America applicable to a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business.  We have been suffering from recurring losses from operations. We have an accumulated deficit of $14,428,471 and $14,258,667 at March 31, 2013 and December 31, 2012, respectively, and stockholders’ deficits of $580,642 and $652,125 as of March 31, 2013 and December 31, 2012, respectively. We require substantial additional funds to manufacture and commercialize our products. Our management is actively seeking additional sources of equity and/or debt financing; however, there is no assurance that any additional funding will be available.
 
In view of the matters described above, recoverability of a major portion of the recorded asset amounts shown in the accompanying March 31, 2013 balance sheet is dependent upon continued operations of the Company, which in turn is dependent upon the Company’s ability to meet its financing requirements on a continuing basis, to maintain present financing, and to generate cash from future operations. These factors, among others, raise substantial doubt about our ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should we be unable to continue in existence.
 
 
26

 
 
 
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion and analysis summarizes the significant factors affecting our results of operations, financial conditions and liquidity position for the three months ended March 31, 2013 and 2012, and should be read in conjunction with our financial statements, including the notes thereto, appearing elsewhere in this report.
 
Forward-Looking Statements
 
Statements and information included in this Quarterly Report on Form 10-Q 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 Quarterly Report on Form 10-Q 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.
 
Highlights
 
Some of our key financial performance statistics for the first quarter of 2013, as compared to the same metric for the first quarter of 2012, include the following:
 
Total revenue increased by approximately 762.2%;
 
General and administrative expense declined by approximately 3%;
 
Interest expense declined by approximately 56%;
 
Net loss declined by approximately 48%;
 
Stockholder deficit declined by approximately $2,261,027; and
 
Net loss per share declined from $.02 per share to $.007 per share.
 
Some of our key non-financial highlights and milestones achieved during the first quarter of 2013 include the following:
 
We signed distribution agreements with Aero Health Holdings Limited to distribute our products in Australia and New Zealand, and with Aero Healthcare Limited to distribute our products in the United Kingdom, and for the CE Marking of our products;
 
We added Jeremy M. Jones, former Chairman & CEO of Apria Healthcare as a new independent Director;
 
We expanded our product offerings with the addition of six AED brands, including Philips, Zoll, Physio Control (formerly Medtronic), Cardiac Science, Defibtech and Heartsine; and
 
We reached a significant milestone in that our flagship product, the OxySure Model 615 emergency oxygen device was used in connection with in excess of 2,000 saves.
 
Overview
 
OxySure Systems, Inc. was formed on January 15, 2004 as a Delaware “C” Corporation for the purpose of developing products with the capability of generating medical grade oxygen “on demand,” without the necessity of storing oxygen in compressed tanks.  Our technology, process and methodologies involve the creation of medically pure (USP) oxygen from two dry, inert powders.  We believe that other available chemical oxygen generating technologies contain hazards that make them commercially unviable for broad-based emergency use by lay rescuers or the general public.  Our launch product is the OxySure Model 615 portable emergency oxygen system.  We believe that the OxySure Model 615 is currently the only product on the market that can be safely pre-positioned in public and private venues for emergency administration of medical oxygen by lay persons, without the need for training.
 
To date, we have been issued 9 patents and we have other patents pending on this process and technology that we believe is revolutionizing the emergency/short duration oxygen supply marketplace. We believe that OxySure makes the delivery devices lighter, safer, more affordable and easier to use. We believe our products can 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.
 
The OxySure Model 615 emergency oxygen device was cleared by the Food and Drug Administration (“FDA”) (510k, Class II) for over-the-counter purchase in December 2005. We believe it bridges the gap between the onset of a medical emergency and the time first responders arrive on the scene. We believe it allows a lay rescuer – a bystander or loved one – to administer medical oxygen during those first, critical minutes after an emergency occurs, improving medical outcomes and saving lives in the process.
 
 
27

 
 
The OxySure Strategy
 
The following summarizes the principal elements of our strategy:
 
We launched the OxySure Model 615 into the K-12 education market in the United States in 2008. Subsequently, we diversified into other commercial markets, such as colleges, churches, manufacturing facilities and other commercial and municipal buildings. We plan to continue to pursue institutional customers in these and other vertical markets, both in the United States and internationally.
 
We believe that Model 615 is a natural complement and companion product to an Automated External Defibrillator (AED). We plan to continue to market Model 615 as a companion product to AEDs, and our goal in the foreseeable future is to pursue the placement of the OxySure Model 615 next to as many AEDs as possible, in the United States as well as internationally. We believe in the long term, however, Model 615 has the potential to become a standard issue item for public and private settings, just like a fire extinguisher.
 
We plan to leverage our core competencies in oxygen, breathing technologies, research and manufacturing to pursue revenue opportunities in new vertical markets.
 
Our channel strategy includes leveraging distribution partnerships to enhance market penetration, and we plan to increase our efforts to partner with distributors, including distributors of AEDs, safety products and medical devices.  We plan to invest resources in training and tools for our distribution partners’ sales, systems and support organizations, in order to improve the overall efficiency and effectiveness of these partnerships.
 
We plan to continue our increasing efforts to promote market awareness and education of our products and their critical need, and our efforts may include partnerships with industry, medical thought leaders, and community and advocacy organizations.
 
We plan to pursue market catalysts such as a legislative agenda for state and federal mandates, medical reimbursement for at risk markets, and insurance underwriting benefits and discounts for product users.
 
We plan to continue to diversify our product offerings through the addition of complimentary or additive products and solutions that enhance our core product usability, feasibility, appeal or application, or that enhances our ability to access or add value to existing and new customers. In addition, we plan to continue our development efforts focused on developing new products incorporating our core “oxygen from powder” technology for other vertical markets, such as aviation, mining, and sports and recreation as applicable.
 
We plan to implement technologies and processes that enhance the performance, appeal and functionality of our product family, enhance manufacturing scalability and reduce manufacturing and operating cost. We will seek to leverage new technologies as they become available.
 
Critical Accounting Policies
 
The SEC defines critical accounting policies as those that are, in management's view, most important to the portrayal of our financial condition and results of operations and those that require significant judgments and estimates.
 
The discussion and analysis of our financial condition and results of operations is based upon our financial statements which have been prepared in accordance with accounting principles generally accepted in the United States.  The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities.  On an on-going basis, we evaluate our estimates including the allowance for doubtful accounts, the salability and recoverability of inventory, income taxes and contingencies.  We base our estimates on historical experience and on other assumptions that we believe to be reasonable under the circumstances, the results of which form our basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions.
 
We cannot predict what future laws and regulations might be passed that could have a material effect on our results of operations.  We assess the impact of significant changes in laws and regulations on a regular basis and update the assumptions and estimates used to prepare our financial statements when we deem it necessary.
 
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.
 
 
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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 $374,226 and $499,225 as at March 31, 2013 and December 31, 2012, respectively.
 
Cash and Cash Equivalents - Cash consists of all highly liquid investments purchased with maturity of three months or less to be cash equivalents. Cash and cash equivalents may at times exceed Federally-insured limits. To minimize this risk, the Company places its cash and cash equivalents with high credit quality institutions.
 
Inventory – Our inventory consists of raw material and components for our portable oxygen systems as well as completed products and accessories.   Inventories are computed using the lower of cost or market, which approximates actual cost on a first-in first-out basis. Inventory components are parts, work-in-process and finished goods. Finished goods are reported as inventories until the point of title transfer to the customer. We write down our inventory value for estimated obsolescence equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. These factors are impacted by market and economic conditions, technology changes, new product introductions and changes in strategic direction and require estimates that may include uncertain elements. Actual demand may differ from forecasted demand, and such differences may have a material effect on recorded inventory values. Management has established inventory reserves to cover estimated inventory losses for all work-in-process and finished goods related to products we manufactured, as well as raw material and components for those products that had no potential use in products to be manufactured in the future. Management is required to make judgments about the future benefit of our raw materials and components. Actual reserve requirements could differ significantly from Management’s estimates, which could have a significant unfavorable impact on our future gross margins.
 
At March 31, 2013 inventories consisted of the following:
 
   
March 31,
2013
 
       
Parts inventory
 
$
92,786
 
Work in process
   
97,785
 
Finished goods
   
30,915
 
Total inventories
 
$
221,486
 
 
Concentration of Credit Risk – We sell our products throughout the United States as well as in certain other countries.  Sales to our 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.
 
 
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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 $4,883 and $41,505 for the three month periods ended March 31, 2013 and 2012, respectively.
 
Other Long-Lived Assets – We have two types of intangible assets – patents and trademarks.  Intangible assets are carried at cost, net of accumulated amortization.  Amortization expense for patents and trademarks was $7,489 and $7,489 for the three month periods ended March 31, 2013 and 2012, respectively.
 
Intangible assets with definite useful lives and other long-lived assets are tested for impairment if certain impairment indicators are identified.  Management evaluates the recoverability of its identifiable intangible assets in accordance with applicable accounting guidance, which requires the assessment of these assets for recoverability when events or circumstances indicate a potential impairment exists. Certain events and circumstances the Company considered in determining whether the carrying value of identifiable intangible assets may not be recoverable include, but are not limited to: significant changes in performance relative to expected operating results; significant changes in the use of the assets; significant negative industry or economic trends; and changes in its business strategy.  In determining if impairment exists, we estimate the undiscounted cash flows to be generated from the use and ultimate disposition of these assets.  If impairment is indicated based on a comparison of the assets’ carrying values and the undiscounted cash flows, the impairment loss is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets. Impairment charges for patents were $0 for each of the three month periods ended March 31, 2013 and 2012.
 
 
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Other Assets – We record Other Assets net of accumulated amortization. Total amortization expense for Other Assets was $23,237 and $0 for the three month periods ended March 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.
 
Amortization expense for websites and URLs was $10,751 and $0 for the three month periods ended March 31, 2013 and 2012, respectively. 
 
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 $0 for each of the three month periods ended March 31, 2013 and 2012.
 
Research and Development Costs – Costs associated with the development of our products are charged to expense as incurred.  $36,711 and $60 were incurred in the three month periods ended March 31, 2013 and 2012, 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.
 
 
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The expected term is based on the observed and expected time to exercise and post-vesting cancellations of options by employees.  Upon the adoption of the accounting guidance, we continued to use historical volatility in deriving its expected volatility assumption as allowed under GAAP because we believe that future volatility over the expected term of the stock options is not likely to differ materially from the past. The risk-free interest rate assumption is based on 5-year U.S Treasury zero-coupon rates appropriate for the expected term of the stock options. The expected dividend assumption is based on the history and expectation of dividend payouts.  The fair values generated by the Black-Scholes model may not be indicative of the actual fair values of the equity awards, as we do not consider other factors important to those awards to employees, such as continued employment, periodic vesting requirements and limited transferability.  The amount of stock based compensation expenses is net of an estimated forfeiture rate, which is also based on historical data. For the three month periods ended March 31, 2013 and 2012, stock based compensation expense was approximately $(12,061) and $9,514, respectively, which consisted primarily of stock-based compensation expense related to stock options issued to the employees and recognized under GAAP.
 
The Company follows ASC Topic 505-50, formerly EITF 96-18, “Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling Goods and Services,” for stock options and warrants issued to consultants and other non-employees. In accordance with ASC Topic 505-50, these stock options and warrants issued as compensation for services to be provided to the Company are accounted for based upon the fair value of the services provided or the estimated fair market value of the option or warrant, whichever can be more clearly determined. The Company recognizes this expense over the period in which the services are provided. For the three month periods ended March 31, 2013 and 2012, stock based compensation expense was approximately $0 and $0, respectively which consisted primarily of stock-based compensation expense related to stock options and warrants recognized under GAAP issued to consultants and other non-employees.
 
The following table shows the components of the Company’s stock based compensation expense for employees, consultants and other non-employees:
 
   
Three months ended March 31,
 
   
2013
   
2012
 
             
Common Stock options issued for compensation
  $
(12,061)
    $
9,514
 
Common Stock options and warrants issued for services
   
-
     
-
 
                 
Total
  $
(12,061)
    $
9,514
 
 
Shipping and Handling Costs - Shipping and handling charges to customers are included in net revenues, and the associated costs incurred are recorded in cost of revenues.
 
Advertising Costs - Advertising costs are charged to operations when incurred.  We incurred $58,347 and $2,430 in advertising and promotion costs during the three month periods ended March 31, 2013 and 2012, respectively.
 
Litigation and Settlement Costs - Legal costs are expensed as incurred. The Company records a charge equal to at least the minimum estimated liability for a loss contingency when both of the following conditions are met: (i) information available prior to issuance of the financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements and (ii) accrue the best estimate within a range of loss if there is a loss or, when there is no amount within a range that forms a better estimate, the Company will accrue the minimum amount in the range. The Company was not involved in any legal proceedings, litigation or other legal actions during the three months ended March 31, 2013.
 
Restatements and Reclassifications - Certain financial statement items have been reclassified to conform to the current periods’ presentation.  These reclassifications had no impact on previously reported net loss.