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Rescue Ready - Initiating Coverage Of OxySure Systems

By Jason Napodano, CFA

We are initiating coverage of OxySure Systems, Inc. (OTC BB:OXYS) with an Outperform rating and price target of $1.75 per share. 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.

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Firstly, with the Model 615 unit, oxygen is generated on demand from two inert dry powders. There is no storage of oxygen, no compressed tanks, no dials, no valves, no regulatory maintenance, no hydrostatic testing, no batteries, no required training, and none of the hazards associated with traditional oxygen provision systems.

Secondly, the OxySure Model 615 is safe and simple to use, and provides oxygen instantly with the turn of a knob. It can be used by any lay person, and bridges the gap between the onset of a medical emergency and the time that the first responders arrive on the scene. In the U.S., that gap between calling 911 and emergency medical professionals arriving is 6 to 15 minutes, depending on traffic conditions and other factors. If the medical emergency is of a cardiovascular nature, this gap can be critical, since irreparable damage to brain tissue can occur starting after only three minutes of oxygen deprivation.

And finally, the OxySure Model 615 is the perfect adjunct product to be placed next to an automated external defibrillator (AED). AED market growth over the past several years has been impressive. In 2012, we estimate that roughly 140,000 units were sold worldwide, generating revenues of $220 million. The market is expected to growth at a CAGR of 6-7% over the next five years (Frost & Sullivan), with uptake being driven by legislative mandates, an aging population, reimbursement, and risk mitigation strategies. OxySure’s Model 615 is both more affordable and accessible than AEDs, and data shows a person is up to 100x more likely to require supplemental oxygen in their lifetime than external defibrillation. OxySure is currently looking at piggy-backing on AEF legislation and reimbursement to help facilitate uptake of the Model 615 device. With over 3 million AEDs placed worldwide, acceptance of the Model 615 as a logical supplement to an AED has the potential to create a “hockey-stick” like ramp in revenues.

In October 2012, OxySure announced it had retained C.K. Cooper & Company, Inc. (CKCC) as its financial advisor. We suspect that CKCC will be able to help OxySure secure new funding in the next several months that will allow management to execute on its growth strategy, and pursue the expansion of its sales and distribution capabilities and product offerings in 2013 and beyond. We suspect that the company is in the stages of structuring financing to secure long-term funding to the company beyond the “drip financings” that have funded operations for the past several years. To date, the founder, Chairman and CEO, Julian Ross, has put $2.5 million of his own capital into OxySure. The company has an accumulated deficit of $14.1 million, a differed tax asset of $4.4 million, and cumulative net operating loss carry-forwards of $11.5 million. Securing quality long-term funding will allow the company to build out the sales force, increase marketing activities, and fund distribution partnership efforts in 2013 and beyond.

Below we’ve built, an admittedly aggressive, financial model based on surging sales of the Model 615 device, facilitated by the signing of additional distribution agreements, expanded marketing and promotional efforts by the company, and growing penetration into both the placement and “at risk” market thanks to improving reimbursement and legislative mandates. We think that OxySure can turn cash flow positive in 2016, and generate over $10 million in operating cash flow in 2018. We built a 10-year discounted cash flow model that pegs fair-valuation between $1.50 and $2.00 per share (assumption to be narrowed once the company secures long-term financing). Thus, we are initiating coverage today with a target of $1.75 per share.

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