By Jason Napodano, CFA
On March 31, 2015, OxySure Systems, Inc. (OTC:OXYS) reported financial results for the fourth quarter and full year 2014. Revenues in the quarter totaled $0.58 million, which was a 9% increase from the same time period in 2013. This was the 10th consecutive quarter of year-over-year revenue growth for OxySure. Revenues in the full year 2014 were $2.44 million, an increase of 35% over full year 2013 numbers.
Product margin in the quarter was -7.3%; however, we note that the company had an accounting change in the quarter that adjusted the reporting for the gross margin line. The company is now including all employees associated with the manufacturing process and rent of the facility in the cost of goods sold line. Going forward this will negatively impact the gross margin line compared to historic trends but should not have a material impact on the overall profitability of the company, as this is simply shifting around costs for reporting basis. On a pro forma basis, management noted that the gross margin in the fourth quarter was 53%, generally in-line with the historic range.
Shipments of the Model 615 increased by 9% in 2014, whereas shipments of replacement cartridges increased by 35%. Unit cartridge shipments as a percentage of Model 615 shipments increased to 144% in FY2014 from 125% in FY2013. Cartridges as a percentage of the Model 615 installed base as at December 31, 2014 increased to 45%, up from 39.3% as at December 31, 2013. During FY2014, Model 615 shipments increased 18% versus FY2013, and replacement cartridge shipments increased 35% versus FY2013. This continues to be consistent with historical trends of rising reorders as customers become more accustomed to OxySure’s products.
Sales and marketing, R&D, and G&A expenses were all increased substantially in the fourth quarter 2014. Fourth quarter operating expenses totaled $1.04 million, up from $0.89 million in the third quarter 2014. On the company’s fourth quarter earnings call, CEO Julian Ross, noted that the company experiences increases in legal and accounting expenses in the fourth quarter 2014 as a result of the company’s merger with privately-hold Estill Medical Technologies announced in October 2014. We note the deal did not close in the fourth quarter as expected, but we would not be surprised to see the deal done at some point in 2015. OxySure spent on R&D $0.58 million R&D in 2014, largely to support the company’s ongoing work with the U.S. military to develop a battlefield ready version of the device for U.S. Special Forces.
Net loss for the quarter was $1.60 million, or $0.06 per share; however, we note a large portion of this loss was non-cash. For all of 2014, net loss was $2.75 million, or $0.10 per share. However, the company recorded approximately $0.75 million in non-cash interest related to debt discount amortization in 2014. Throughout 2014, the company paid off all outstanding capital lease obligations, making them the full owner of all equipment related to the Model 615 manufacturing and production. Long-term debt decreased by 42% in 2014 to $0.04 million.
OxySure exited 2014 with $0.65 million in cash on the books. Working capital stood at $0.42 million as of the end of the year. In January 2015, the company signed an agreement to raise up to $1.575 million through private placement issuance of new equity to an existing accredited, institutional investor. Under terms of the agreement, the financing comprises three tranches of $525,000 and each tranche consists of a 525 units, with each unit consisting of one share of Series B Convertible Preferred Stock and 1,818 warrants at an exercise price of $1.20 per share. The Series B shares have a par value of $1,000 and are convertible at $0.55 per share. To close the first tranche of the financing, OxySure issued 525 units of Series B Convertible Preferred Stock. Under terms of the agreement, the investor has the option to subscribe for the second and third tranche at any time over the twelve month period expiring December 31, 2015. The company has the right to close additional tranches if the stock trades above $1.05 per share for 10 consecutive trading days, with >25,000 VWAP, for tranche two and above $1.30 per share for 10 consecutive trading days, with >25,000 VWAP, for tranche three.
Actual cash burn in 2014 was $1.16 million, with $0.30 million coming in the fourth quarter of the year. We anticipate burn staying around the $100,000 per month rate for most of 2015. The cash on the books as of the end of the year and the new cash raised in January 2015 should allow the company to execute on its goals well into the second half of the year. We think that potential strategy acquisitions will present an opportunity for the company to close the second and third tranche of the financing above, or enter into new financings to help fund operations to potential cash flow breakeven in the next year or two.
OxySure has made a significant effort over the past several months to expand its U.S. distribution footprint. We believe this is paramount to driving sales of the Model 615 in the coming years. After all, municipalities, office buildings, shopping centers, hospitals, or schools cannot buy the Model 615 device if they do not know about it! In this regard, we are very pleased to see the company adding both territory sales managers and inking new distribution agreements.
In terms of new personnel, the company appointed Clark Hood in September 2014 to position of Vice President, Resuscitation Sales Worldwide. Mr. Hood has over 25 years of experience in healthcare, medical devices and emergency medical equipment, and specifically in sales and sales management. Prior to joining OxySure, Mr. Hood spent over 16 years with Cardiac Science, a global medical device manufacturer of automated external defibrillation (AED) products and management services in over 100 countries. In December 2014, OxySure signed an exclusive contract with Cliff Meidl, a two-time U.S. Olympian and prolific speak and passionate advocate for safety, CPR, emergency preparedness, and leadership topics in the safety industry. Mr. Meidl will become a spokesperson for the Model 615 device and help market and promote the product throughout his various endeavors in 2015, which in the past included appearances on Oprah and NBC’s “Today Show”, as well as at various medical conferences including the American Heart Association annual meeting.
In January 2015, the company announced several new staff additions. Key hires included Kathryn Jayne to the position of Director, Regulatory Affairs & Quality Assurance, Richard Bryant to the position of Manufacturing Manager, and Richard Marcus to the position of Engineer, Innovation Solutions Group. The company also made several new staff additions to the U.S. sales force, including hiring new territory sales managers in Chicago, IL, Phoenix, AZ, Atlanta, GA, Pittsburg, PA, Michigan, and Colorado. The new reps are coming with significant commercial sales experience in the emergency medicine or healthcare industry. We are anticipating a significant ramp in direct sales by the company in 2015 and beyond thanks to the expanded promotion effort. The company’s goal is to have 30 full-time and/or independent representatives in place by the end of 2015. We think it is realistic that each of these representatives can generate up to $500,000 in revenues for the company.
Besides hiring internal sales representatives and territory managers, OxySure is inking new distribution agreements all over the U.S. In December 2014, the company signed a distribution agreement with Cardiac Life, a Rochester, NY distributor of AEDs. Management at OxySure believes that Cardiac Life gives the company strong representation in the northeast. By adding OxySure to its product portfolio, Cardiac Life can now offer a unique and proprietary resuscitation product to their existing and new customers. In January 2015, the company inked a deal with Cardio Partner Resources, an Illinois-based distributor of AED’s and other medical devices throughout the Midwest.
The company signed two more distribution agreements in February 2015. The first was with Chris Gardner and Associates, a Connecticut-based authorized distributor of automated external defibrillators (AEDs) for companies such as Cardiac Science, HeartSine, Philips Medical, Physio-Control, and Zoll. The company is headed up by Chris Gardner, a former EMT and EMS Instructor and American Heart Association BLS (Basic Life Support) Instructor. OxySure’s Model 615 will fit in nicely with the company’s current suite of AED products and gives OxySure its first distribution agreement for the Northeast. Later in February, OxySure signed an agreement with Stop Heart Attack, an Alabama-based distributor of AEDs and other emergency response products. The deal gives OxySure its first key distribution agreement for the Southeast.
In March 2015, OxySure signed its first distribution agreement in California, with Menlo Park-based Health Education Services. Health Education Services (HES) specializes in turn-key implementation of Philips automated external defibrillator (AED) programs and improving health, safety, and quality of life by providing classes, services, and consulting for the lay community and medical professionals. HES brings existing relationships with a diverse group of customers in California, including corporations, health care professionals, non-profits, government agencies, the recreational industry, religious institutions, public utilities, health clubs, child care providers and educational institutions.
International expansion is a primarily focus for OxySure. For instance, in the U.S., an individual suffering a medical emergency can generally expect first responders to arrive within 5-15 minutes of the initial call for help. However, in some areas overseas it may take upwards of 45 min to 1 hour before first responders are able to arrive due to insufficient infrastructure or generally poor traffic conditions. Thus, the value proposition offered by the Model 615 product is likely to resonate even more with individuals in certain overseas communities.
The company recently expanded its distribution footprint into Chile, Hong Kong and Macau, and Singapore. The order from Pacific Medical Systems, Ltd for Hong Kong and Macau, for example, came with a minimum commitment of 11,800 units over the first three years. These deals typically also include ancillary orders of other OxySure products like the wall mounts, travel bags, and replacement cartridges and masks. The deal with HTM Medico Pte Ltd in Singapore requires an annual minimum purchase commitment of 1,250 units of Model 615, valuing the contract at $1.3 million in the first 5 years. We remind investors that in September 2014, the company signed a $2.46 million, 3-year, 18,000 minimum unit contract with Ajad Medical to be the company’s exclusive distributor in Saudi Arabia. We continue to believe there is potential for rapid uptake in overseas markets.
On April 2, 2014, OxySure announced CE Mark approval in Europe for the Model 615 device. We expect that management will begin to roll-out the device to the thirteen EEA member states throughout 2015. As OxySure signs new exclusive agreements for large countries like Germany, France, and Italy, these minimum orders will be significant revenues to OxySure. Above we noted the size and terms of the distribution agreement in Saudi Arabia, a country with a population of around 30 million. Italy, for example, has a population twice that size. The population of Germany (~81 million) is ten-times that of Hong Kong and Macau (~8 million). The population of France (~66 million) is ten-times that of Singapore (~6 million). It is for this reason that we believe international Model 615 sales could skyrocket in the coming years. A minimum commitment from a distributor in Germany alone could be north of $1 million in upfront revenues to OxySure.
OxySure believes it can double its sales in 2015 through signing new distribution agreements in emerging markets, launching the product around Europe, and continuing to focus on “at risk” and “established” markets in the U.S. For 2015, we do not quite model a double from 2014 revenues. Instead, we are conservatively modeling revenues up 52% to $3.7 million. However, we note that our model for 2015 and beyond is expected to change dramatically as the company expands its distribution by making strategy acquisitions. For example, we would not be surprised to see the Estill Medical merger back on the table at some point in 2015. We also see several other markets, including wound care, diagnostics, and respiratory emergency products fitting nicely into the company’s platform.
We think OxySure can eventually get total revenues to the $10 million mark in a few years through a combination of organic growth and M&A activities. The current market capitalization is only $22 million, meaning OxySure is trading at roughly 6x our projected 2015 revenues. By 2016, with an estimated $5.5 million in revenues, we believe OxySure can post breakeven operations. Our target is $1.75 per share, which is a market capitalization of $50 million. Given our projected 50% revenue growth for 2015, we believe this is a fair target.
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