We see clear signs of progress and building momentum over the past few quarters at OxySure Systems (OXYS). Revenues in the second quarter 2013 more than doubled our forecast. We believe that the company’s Model 615 Emergency Oxygen System is a potential breakthrough product for the delivery of medical oxygen in a medical emergency requiring supplemental oxygen, such as a cardiac arrest or acute asthma attack. We see several distinctive advantages of the Model 615 over portal oxygen cylinders, which are typically not designed for emergency use. We think that OxySure can turn cash flow positive in 2016, and generate over $10 million in operating cash flow in 2018. Accordingly, we rate the stock ‘Outperform’ with a $1.75 target.
Big Second Quarter Shows OxySure On The Right Path
On August 13, 2013, OxySure Systems, Inc. reported financial results for the second quarter ended June 30, 2013. Total revenues in the quarter were $476K, an increase of a whopping 657% over the same period in 2012 and 98% sequentially from the first quarter 2013. Revenues more than doubled our expectations for $200K. Revenues consisted of $364K in products sales and $113K in revenues under licensing and service agreements. Top-line growth at OxySure is being driven by a combination of new customer wins, repeat business with existing customers, a new and growing military business, and signing new distribution partners both in the U.S. and internationally.
We expect the momentum to continue in 2013 with respect to signing new partnerships and distribution agreements. The company has been very active on this front over the past two quarters. Examples include:
- In March 2013, the company signed a deal with Aero Healthcare for Australia, New Zealand, and the U.K. The deal with Aero includes a minimum purchase order of 4,500 units of the Model 615 during the first two years subsequent to CE Marking and TGA approval.
- In May 2013, the company signed a deal with Medizon B.V. Medizon distributes Automated External Defibrillators (AEDs) in the Netherlands, Belgium, and Luxembourg, and will now distribution the Model 615 as well. The deal comes with a minimum purchase order of 2,250 units.
- In May 2013, OxySure received approval to market the Model 615 and related accessories in Israel.
- In June 2013, OxySure signed a non-exclusive distribution agreement with Aventric Technologies to sell the company’s full portfolio of products. The Madison Heights, Michigan-based Aventric Technologies has a strong presence in the K-12 education market, and also sells imaging and medical equipment, including AEDs, to hospitals, clinics and other alternative point-of-care facilities.
In total, OxySure has now signed distribution agreements for nine countries outside the U.S. We see the Aero Healthcare and Medizon deals as the model for future international distribution partners in 2013 and beyond. The deal with Aventric Technologies is a testament to the company’s goal to aggressively grow revenues in the coming year. In July 2013, the company launched a new Double Wall Cabinet for AED’s and OxySure’s Model 615 (shown below).
We remind investors that in February 2013, the company announced it had expanded its product offering to include six brands of AEDs, as well as all related AED accessories. We view this as an astute and highly strategic move by the company. The AED market is large and growing handsomely, and OxySure's Model 615 emergency oxygen device is the ideal counterpart to an AED purchase order. There are an estimated 2.0 million AEDs placed in the U.S., and another 1.0 million outside the U.S. AED market growth is near 10% per year, and Frost & Sullivan estimated it will hit $1.7 billion in the U.S. alone by 2015.
Making available the leading AEDs allows these commission-based independent agents to offer a full solution of life-saving devices that includes both AEDs and emergency oxygen products. The company should benefit from both increased sales of its own Model 615 device and accessories, along with distribution payments on the six brands of AEDs that will become available through the company's expanded network.
We believe growth in the top-line can be accomplished at minimal upfront cost to OxySure. New products and orders from the military was a strong contributor to the top-line in the second quarter. We believe the positive momentum clearly evident in the first half of the year should carry over to the third and fourth quarter.
Operating expenses in the quarter totaled $664K, consisting of $152K in cost of goods sold, $133K in sales and marketing, $195K in general and administrative, and $183K in research and development. We note this was the first quarter with significant R&D in some time for OxySure. The company is working diligently on developing a new portable OxySure product for military use on the battlefield. Gross margin in the quarter was 68% in the second quarter, up from 60% in the same period in 2012.
Operating expenses continue to remain under control at the company. Net loss for the quarter totaled $193K, an improvement of $25K from the second quarter 2012. Revenues are growing and net loss is shrinking. Although still not yet profitable, OxySure is clearly moving in the right direction.
The company exited the second quarter ended June 30, 2013 with $96K in cash. Operating and investing cash burn during the second quarter totaled $293K; however, the company saw a number of warrants exercised during the quarter to provide approximately $294K in cash. The company continues to fund operations through warrant exercising and small equity “drip” financings.
Over the past year, the total number of derivative securities outstanding was reduced by approximately 2.038 million. We note the company also has $288K in inventory on the books as of the end of the second quarter 2013. Total assets increased to $1.37 million as of June 30, 2013, up from $1.21 million at the end of December 2012.
We believe fundamentals at OxySure are moving in the right direction. The financial results clearly point to this over the past few quarters. An interesting specialty medical device play is starting to emerge. The company has a very low valuation given the potential size of the market for a product like the Model 615 device. Management has been articulate in mapping out the future growth (see picture below) and executing on plan - the news flow averages about one press release per month announcing a new distributor, product launch, or strategic acquisitions.
Based on our model, if the growth seen in the previous three quarters continues, OxySure should be an attractive investment at today's price of $0.80. We see fair-value at $1.75.
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