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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------------
FORM 10-Q
(Mark One)
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended May 31, 2007
|_| Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ___________ to ___________
Commission File No. 001-32526
------------------------------------
BSD Medical Corporation
(Exact Name of Registrant as Specified in Its Charter)
Delaware 75-1590407
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2188 West 2200 South
Salt Lake City, Utah 84119
(Address of principal executive offices, including zip code)
(801) 972-5555
(Registrant's telephone number, including area code)
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 |X| No |_|
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer or non-accelerated filer. See definition of
accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.
(Check one): Large Accelerated Filer |_| Accelerated Filer |_| Non-accelerated
Filer |X|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
As of July 16, 2007, there were 21,284,353 shares of the registrant's
common stock, $0.001 par value per share, outstanding.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
BSD MEDICAL CORPORATION
Condensed Balance Sheets
(Unaudited)
May 31, August 31,
Assets 2007 2006
------ -------------- ---------------
Current assets:
Cash and cash equivalents $ 1,139,397 $ 2,179,094
Investments 19,633,218 22,556,106
Receivables, net 748,649 1,186,800
Related party trade receivables 565,964 261,543
Income tax receivable 1,075,667 -
Inventories, net 1,285,688 1,366,264
Deferred tax asset 359,000 178,000
Other current assets 224,755 120,277
-------------- ---------------
Total current assets 25,032,338 27,848,084
Property and equipment, net 294,760 303,034
Note receivable - 137,500
Patents, net 19,842 21,250
-------------- ---------------
$ 25,346,940 $ 28,309,868
================ ===============
Liabilities and Stockholders' Equity
------------------------------------
Current Liabilities:
Accounts payable $ 331,608 $ 365,396
Accrued liabilities 443,497 545,113
Income taxes payable - 1,539,946
Deferred revenue - current portion 28,838 17,912
-------------- ---------------
Total current liabilities 803,943 2,468,367
Deferred revenue - less current portion 53,333 217,500
-------------- ---------------
Total liabilities 857,276 2,685,867
-------------- ---------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value;
10,000,000 authorized, no shares
issued and outstanding - -
Common stock, $.001 par value;
40,000,000 shares authorized;
21,279,353 and 21,023,668 shares
issued and outstanding 21,280 21,024
Additional paid-in capital 26,155,108 25,452,231
Deferred compensation - (247,700)
Treasury stock , 24,331 shares at cost (234) (234)
Other comprehensive income (loss) 24,562 (99,362)
Retained earnings (deficit) (1,711,052) 498,042
-------------- ---------------
Total stockholders' equity 24,489,664 25,624,001
-------------- ---------------
$ 25,346,940 $ 28,309,868
================ ===============
See accompanying notes to condensed financial statements.
1
BSD MEDICAL CORPORATION
Condensed Statements of Operations
(Unaudited)
Three Months Nine Months
Ended May 31, Ended May 31,
--------------------------- --------------------------
2007 2006 2007 2006
------------- ------------ ------------ ------------
Sales $ 432,123 $ 264,050 $ 1,258,808 $ 1,004,272
Related party sales 521,053 448,721 1,019,680 669,041
------------- ------------ ------------ ------------
Total sales 953,176 712,771 2,278,488 1,673,313
------------- ------------ ------------ ------------
Costs and expenses:
Cost of sales 200,620 167,464 703,006 680,918
Cost of related party sales 279,911 245,250 650,097 393,026
Research and development 451,721 380,623 1,292,578 945,527
Selling, general, and administrative 1,400,170 1,329,282 4,287,870 3,553,103
------------- ------------ ------------ ------------
Total costs and expenses 2,332,422 2,122,619 6,933,551 5,572,574
------------- ------------ ------------ ------------
Operating loss (1,379,246) (1,409,848) (4,655,063) (3,899,261)
------------- ------------ ------------ ------------
Other income
Interest income 331,579 411,777 1,044,249 960,990
Other income (expense) 180,384 5,935,315 106,048 17,750,601
------------- ------------ ------------ ------------
Total other income 511,963 6,347,092 1,150,297 18,711,591
------------- ------------ ------------ ------------
Income (loss) before income taxes (867,283) 4,937,244 (3,504,766) 14,812,330
Income tax (provision) benefit 232,645 (1,949,621) 1,295,672 (5,506,785)
------------- ------------ ------------ ------------
Net income (loss) $ (634,638) $ 2,987,623 $ (2,209,094) $ 9,305,545
============= ============ ============ ============
Net income (loss) per common share:
Basic $ (0.03) $ 0.14 $ (0.10) $ 0.45
============= ============ ============ ============
Diluted $ (0.03) $ 0.13 $ (0.10) $ 0.42
============= ============ ============ ============
Weighted average number of
shares outstanding:
Basic 21,135,000 20,926,000 21,071,000 20,683,000
============= ============ ============ ============
Diluted 21,135,000 22,163,000 21,071,000 22,148,000
============= ============ ============ ============
See accompanying notes to condensed financial statements.
2
BSD MEDICAL CORPORATION
Condensed Statements of Cash Flows
(Unaudited)
Nine Months
Ended May 31,
------------------------------
2007 2006
------------ ---------------
Cash flows from operating activities:
Net income (loss) $ (2,209,094) $ 9,305,545
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Provision for doubtful accounts 83,700 -
Depreciation and amortization 70,111 64,195
Loss on disposition of property and
equipment 2,577 -
Stock compensation expense 673,678 48,471
Amortization of deferred compensation - 75,950
Gain on sale of investment in TherMatrx (202,223) (17,413,342)
(Increase) decrease in:
Receivables 491,951 (335,760)
Related party receivables (304,421) (105,745)
Income tax refund receivable (1,068,164) -
Inventories 80,576 (383,857)
Deferred tax asset (181,000) (111,000)
Other current assets (104,478) (1,028)
Increase (decrease) in:
Accounts payable (33,788) 411,138
Accrued expenses (101,616) 221,055
Income taxes payable (1,500,000) 4,998,125
Deferred revenue (153,241) 10,219
Deferred tax liability - (13,000)
------------ ---------------
Net cash used in operating
activities (4,455,432) (3,229,031)
------------ ---------------
Cash flows from investing activities:
Proceeds from sale of investment in
TherMatrx 202,223 17,413,342
(Purchase) sale of investments 3,046,812 (14,770,709)
Purchase of property and equipment (63,006) (194,866)
------------ ---------------
Net cash provided by
investing activities 3,186,029 2,447,767
------------ ---------------
Cash flows from by financing activities:
Proceeds from sale of common stock 229,706 415,036
------------ ---------------
Decrease in cash and cash equivalents (1,039,697) (366,228)
Cash and cash equivalents, beginning
of period 2,179,094 908,674
------------ ---------------
Cash and cash equivalents, end of
period $ 1,139,397 $ 542,446
============ ===============
Supplemental Disclosure of Cash Flow Information
------------------------------------------------
o The Company paid no cash for interest during the nine months ended
May 31, 2007 and 2006 and $1,798,676 and $392,311 for income taxes
during the nine months ended May 31, 2007 and 2006, respectively.
3
o The Company issued 349,368 stock options during the nine months
ended May 31, 2006, which resulted in an increase to deferred
compensation of $363,200.
o The Company had an income tax benefit from the exercise of stock
options of $47,449 and $972,282 during the nine months ended May
31, 2007 and 2006, respectively, which was recorded as an increase
to additional paid-in capital and a reduction in income taxes
payable.
o The Company had an unrealized gain of $123,924 during the nine
months ended May 31, 2007 on available-for-sale securities. The
Company had an unrealized loss of $115,305 during the nine months
ended May 31, 2006 on available-for-sale securities.
o The Company transferred deferred compensation of $247,700 to
additional paid-in capital during the nine months ended May 31,
2007.
o The Company decreased income taxes payable and decreased income
tax receivable by $39,946 during the nine months ended May 31,
2007.
o The Company increased common stock and decreased additional
paid-in capital by $50 during the nine months ended May 31, 2007.
See accompanying notes to condensed financial statements
4
BSD MEDICAL CORPORATION
Notes to Condensed Financial Statements
Note 1. Basis of Presentation
The accompanying unaudited condensed balance sheets of BSD Medical
Corporation (the "Company") as of May 31, 2007 and August 31, 2006 and the
related unaudited condensed statements of operations and of cash flows for the
three months and nine months ended May 31, 2007 and 2006 have been prepared in
accordance with U.S. generally accepted accounting principles for interim
financial reporting and pursuant to the rules and regulations of the Securities
and Exchange Commission (SEC). The condensed financial statements do not include
all of the information and footnotes required by U.S. generally accepted
accounting principles for complete financial statements. These condensed
financial statements should be read in conjunction with the notes thereto, and
the financial statements and notes thereto included in our annual report on Form
10-KSB for the year ended August 31, 2006.
All adjustments (consisting only of normal recurring adjustments)
necessary for the fair presentation of our financial position as of May 31, 2007
and August 31, 2006 and our results of operations and cash flows for the three
months and nine months ended May 31, 2007 and 2006 have been included. The
results of operations for the three months and nine months ended May 31, 2007
may not be indicative of the results for the year ending August 31, 2007.
Note 2. Recent Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation (FIN) 48, Accounting for Uncertainty in Income Taxes. FIN 48
clarifies the accounting for uncertainty in income taxes recognized in financial
statements in accordance with Statement of Financial Accounting Standards (SFAS)
No. 109, Accounting for Income Taxes. This Interpretation prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. FIN 48 also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure and
transition. We are currently evaluating the impact this Interpretation will have
on our financial statements. This Interpretation will be effective in the
Company's financial statements for the fiscal year beginning September 1, 2007.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option
for Financial Assets and Financial Liabilities - Including an Amendment of FASB
Statement No. 115. This statement permits entities to choose to measure many
financial instruments and certain other items at fair value. Most of the
provisions of SFAS No. 159 apply only to entities that elect the fair value
option. However, the amendment to SFAS No. 115 Accounting for Certain
Investments in Debt and Equity Securities applies to all entities with
available-for-sale and trading securities. SFAS No. 159 is effective as of the
beginning of an entity's first fiscal year that begins after November 15, 2007.
Early adoption is permitted as of the beginning of a fiscal year that begins on
or before November 15, 2007, provided the entity also elects to apply the
provision of SFAS No. 157, Fair Value Measurements. The adoption of this
statement is not expected to have a material effect on the Company's financial
statements.
In September 2006, the FASB issued SFAS Statement No. 158, Employers'
Accounting for Defined Benefit Pension and Other Postretirement Plans. This new
standard will require employers to fully recognize the obligations associated
with single-employer defined benefit pension, retiree healthcare and other
postretirement plans in their financial statements. The Company anticipates
adopting SFAS No. 158 on August 31, 2007, and does not believe the adoption of
the new accounting standard will result in a material impact on the consolidated
financial statements of the Company since the Company currently does not sponsor
the defined benefit pension or postretirement plans within the scope of the
standard.
5
In September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements. SFAS No. 157 defines fair value, establishes a framework for
measuring fair value, and requires enhanced disclosures about fair value
measurements. SFAS No. 157 requires companies to disclose the fair value of
their financial instruments according to a fair value hierarchy as defined in
the standard. Additionally, companies are required to provide enhanced
disclosure regarding financial instruments in one of the categories, including a
reconciliation of the beginning and ending balances separately for each major
category of assets and liabilities. SFAS No. 157 is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years. We believe that the adoption of SFAS
No. 157 will not have a material impact on the financial statements.
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing
of Financial Assets to simplify accounting for separately recognized servicing
assets and servicing liabilities. SFAS No. 156 amends SFAS No. 140, Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities. Additionally, SFAS No. 156 applies to all separately recognized
servicing assets and liabilities acquired or issued after the beginning of an
entity's fiscal year that begins after September 15, 2006, although early
adoption is permitted. We do not expect our adoption of this new standard to
have a material impact on our financial position, results of operations or cash
flows.
In February 2006, the FASB issued SFAS No. 155, Accounting for Certain
Hybrid Instruments, which amends SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, and SFAS No. 140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No.
155 allows financial instruments that have embedded derivatives to be accounted
for as a whole (eliminating the need to bifurcate the derivative from its host)
if the holder elects to account for the whole instrument on a fair value basis.
SFAS No. 155 also clarifies and amends certain other provisions of SFAS No. 133
and SFAS No. 140. This statement is effective for all financial instruments
acquired or issued in financial years beginning after September 15, 2006. We do
not expect our adoption of this new standard to have a material impact on our
financial position, results of operations or cash flows.
On December 21, 2006, the FASB issued FASB Staff Position (FSP)
Emerging Issues Task Force (EITF) 00-19-2, Accounting for Registration Payment
Arrangements, which requires an issuer to account for a contingent obligation to
transfer consideration under a registration payment arrangement in accordance
with FASB Statement No. 5, Accounting for Contingencies and FASB Interpretation
14, Reasonable Estimation of the Amount of Loss. Registration payment
arrangements are frequently entered into in connection with issuance of
unregistered financial instruments, such as equity shares or warrants. A
registration payment arrangement contingently obligates the issuer to make
future payments or otherwise transfer consideration to another party if the
issuer fails to file a registration statement with the SEC for the resale of
specified financial instruments or fails to have the registration statement
declared effective within a specific period. The FSP requires issuers to make
certain disclosures for each registration payment arrangement or group of
similar arrangements. The FSP is effective immediately for registration payment
arrangements and financial instruments entered into or modified after the FSP's
issuance date. For previously issued registration payment arrangements and
financial instruments subject to those arrangements, the FSP is effective for
financial statements issued for fiscal years beginning after December 15, 2006.
To the extent that we enter into financing arrangements in the future that
include registration payment arrangements, the future application of this FSP
may have a material effect on our financial condition and results of operations.
In June 2006, the FASB ratified EITF, No. 06-3, How Taxes Collected
from Customers and Remitted to Governmental Authorities Should Be Presented in
the Income Statement (That Is, Gross versus Net Presentation). EITF No. 06-3
requires that, for interim and annual reporting periods beginning after December
6
15, 2006, we disclose our policy related to the presentation of sales taxes and
similar assessments related to our revenue transactions. Early adoption is
permitted. We present revenue net of sales taxes and any similar assessments.
EITF No. 06-3 had no effect on our financial position and results of operations.
Note 3. Net Income (Loss) Per Common Share
The computation of basic earnings per common share is based on the
weighted average number of shares outstanding during the period. The computation
of diluted earnings per common share is based on the weighted average number of
shares outstanding during the period plus the weighted average common stock
equivalents which would arise from the exercise of stock options outstanding
using the treasury stock method and the average market price per share during
the period. When common stock equivalents are anti-dilutive, they are not
included. During the three months and nine months ended May 31, 2007, 1,224,696
and 1,310,551 common stock equivalents related to stock options were not
included in the computation due to their anti-dilutive effect, respectively,
because of the Company's net loss.
The shares used in the computation of the Company's basic and diluted
earnings per share are reconciled as follows:
Three Months Ended Nine Months Ended
May 31, May 31,
--------------------------------------------------
2007 2006 2007 2006
---- ---- ---- ----
Weighted average
number of shares
outstanding - basic 21,135,000 20,926,000 21,071,000 20,683,000
Dilutive effect of
stock options - 1,237,000 - 1,465,000
--------------------------------------------------
Weighted average
number of shares
outstanding - diluted 21,135,000 22,163,000 21,071,000 22,148,000
==================================================
Note 4. Inventories
Inventories consist of the following:
May 31, August 31,
2007 2006
------------------------------
Parts and supplies $ 775,221 $ 711,552
Work-in-process 550,467 641,608
Finished goods - 53,104
Reserve for obsolete inventory (40,000) (40,000)
------------------------------
Inventories, net $ 1,285,688 $ 1,366,264
==============================
Note 5. Related Party Transactions
During the three months ended May 31, 2007 and May 31, 2006, we had
sales of $521,053 and $448,721, respectively, to an entity controlled by a
significant stockholder and member of the Board of Directors. These related
party transactions represent 55% and 63% of total sales for each respective
three-month period.
During the nine months ended May 31, 2007 and May 31, 2006, we had
sales of $1,019,680 and $669,041, respectively, to this related party. These
related party transactions represent 45% and 40% of total sales for each
respective nine-month period.
7
At May 31, 2007 and August 31, 2006, receivables include $565,964 and $261,543
respectively, from this entity.
Note 6. Stock-Based Compensation
On September 1, 2006, we adopted SFAS No. 123 (R), Share-Based Payment,
which requires the measurement and recognition of compensation expense for all
share-based payment awards made to employees and directors including employee
stock options. In accordance with this standard, we recognize the compensation
cost of all share-based awards on a straight-line basis over the requisite
service period for the number of awards that are expected to vest. Prior to
September 1, 2006, we accounted for those plans under the recognition and
measurement provisions of APB Opinion No. 25, and related Interpretations, as
permitted by SFAS No. 123.
Our condensed financial statements as of May 31, 2007 and for the three
months and nine months ended May 31, 2007 reflect the impact of the
implementation of SFAS 123(R). We adopted SFAS 123(R) using the modified
prospective transition method, which requires that compensation expense be
recognized during the three months and nine months ended May 31, 2007 equal to:
(a) amortization related to the compensation cost for all share-based payments
granted prior to, but not yet vested as of September 1, 2006, based on the grant
date fair value estimated in accordance with the original provisions of
Statement 123, and (b) amortization related to compensation cost for all
share-based payments granted subsequent to September 1, 2006, based on the
grant-date fair value estimated in accordance with the provisions of SFAS
123(R). Results for prior periods have not been restated.
We have two stock-based employee plans and a director option plan which
are described more fully in Note 11 in our 2006 Annual Report on Form 10-KSB. As
of May 31, 2007, we had approximately 782,000 shares of common stock reserved
for future issuance under the stock option plans.
The adoption of SFAS 123(R) had a significant impact on our results of
operations. Our statements of operations for the three months and nine months
ended May 31, 2007 include stock-based compensation expense from stock options
in selling, general and administrative expenses of $204,734 and $613,678,
respectively.
During the nine months ended May 31, 2007, we granted 120,000 options
to our directors, with one fifth vesting each year for the next five years. This
grant accounts for $51,488 of the stock-based compensation expense for the nine
months ended May 31, 2007.
Unrecognized stock-based compensation expense expected to be recognized
over the estimated weighted-average amortization period of 1.39 years is
approximately $1,261,000 at May 31, 2007.
Our weighted-average assumptions used in the Black-Scholes valuation
model for equity awards with time-based vesting provisions granted during the
nine months ended May 31, 2007 are shown below:
Expected volatility 67.57%
Expected forfeiture rate 0%
Expected dividends 0%
Expected term 5 Years
Risk-free interest rate 4.68%
The expected volatility rate was estimated based on the four-year
historical volatility of our common stock. The expected term was estimated based
on historical experience of stock option exercise. The risk-free interest rate
is the rate provided by the U.S. Treasury for Daily Treasury Yield Curve Rates
commonly referred to as "Constant Maturity Treasury" rate in effect at the time
of grant with a remaining term equal to the expected option term.
8
The following table illustrates the effect on net income and income per
share if we had applied the fair value recognition provisions of Statement 123
to options granted under our stock option plans and the employee stock purchase
plan for the three months and nine months ended May 31, 2006. For purposes of
this pro-forma disclosure, the value of the options is estimated using a
Black-Scholes option-pricing model and charged to expense over the options'
vesting periods.
Three Months Nine Months
Ended Ended
May 31, 2006 May 31, 2006
------------- -------------
Net income - as reported $ 2,987,623 $ 9,305,545
Add: Stock-based employee
compensation expense
included in reported
net income, net of
related taxes
tax effects - 75,950
Deduct: Stock-based employee
compensation expense
determined under fair
value based method for all
awards, net of related taxes (6,377) (177,175)
------------- -------------
Net income - pro forma $ 2,981,246 $ 9,204,320
============= =============
Income per common share - as reported:
Basic $ .14 $ .45
Diluted $ .13 $ .42
Income per common share - pro forma:
Basic $ .14 $ .44
Diluted $ .13 $ .42
A summary of the time-based stock option awards as of May 31, 2007, and
changes during the nine months then ended, is as follows:
Weighted-
Weighted- Average
Average Remaining Aggregate
Exercise Contract Term Intrinsic
Stock Option Awards Shares Price (Years) Value
Outstanding at August 31,
2006 1,809,051 $ 1.72
Granted 120,000 4.77
Exercised (256,247) 1.18
Forfeited or expired - -
=========
Outstanding at May 31, 2007 1,672,804 $ 2.03
========= =========
Exercisable at May 31, 2007 1,308,022 $ 1.39 6.11 $ 8,578,399
========= ========= ============ ===========
The weighted-average grant-date fair value of stock options granted
during the nine months ended May 31, 2007 was $2.87.
Upon adoption of SFAS No. 123 (R) on September 1, 2006, we reclassified
the balance of deferred compensation of $247,700 to additional paid-in capital.
9
Note 7. TherMatrx Sales Proceeds
In April 2007, we received an additional $202,223 in proceeds from the
sale of TherMatrx, Inc. We previously reported that we had received the last of
the contingency payments from the sale. However, pursuant to the performance of
certain audit procedures requested by the former management of TherMatrx,
additional contingency payments were calculated and distributed.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other parts of this report contain forward-looking
statements that involve risks and uncertainties. Forward-looking statements can
also be identified by words such as "anticipates," "expects," "believes,"
"plans," "predicts," and similar terms. Forward-looking statements are not
guarantees of future performance and our actual results may differ significantly
from the results discussed in the forward-looking statements. Factors that might
cause such differences include, but are not limited to those discussed in the
subsection entitled "Forward-Looking Statements" below. The following discussion
should be read in conjunction with our consolidated financial statements and
notes thereto included in this report. We assume no obligation to revise or
update any forward-looking statements for any reason, except as required by law.
General
-------
BSD Medical Corporation develops, manufactures, markets and services
medical systems that deliver precision-focused radio frequency (RF) or microwave
energy into diseased sites of the body, heating them to specified temperatures
as required by a variety of medical therapies. Our business objectives are to
commercialize our products developed for the treatment of cancer and to further
expand our developments to treat other diseases and medical conditions. Our
product line for cancer therapy has been created to offer hospitals and clinics
a complete solution for thermal treatment of cancer as provided through
microwave/RF systems.
While our primary developments to date have been cancer treatment
systems, we also pioneered the use of microwave thermal therapy for the
treatment of symptoms associated with enlarged prostate, and we are responsible
for much of the technology that has successfully created a substantial new
medical industry using that therapy. In accordance with our strategic plan, we
subsequently sold our interest in TherMatrx, Inc., the company established to
commercialize our technology for treating enlarged prostate symptoms, to provide
substantial funding that we can utilize for commercializing our systems used in
the treatment of cancer and in achieving other business objectives.
In spite of the advances in cancer treatment technology, according to
the American Cancer Society over 40% of cancer patients continue to die from the
disease in the United States, and cancer has now surpassed heart disease as the
number one killer from all causes of death in the United States.
Commercialization of our systems used to treat cancer, including the BSD-2000
and BSD-500 families of systems and the new MicroThermX 100 microwave thermal
ablation system, is our most immediate business objective. Our BSD-2000 and
BSD-500 cancer treatment systems are used to treat cancer with heat while
boosting the effectiveness of radiation and chemotherapy through a number of
biological mechanisms. Our MicroThermX 100 system is used to treat cancers with
heat alone. Current and targeted cancer treatment sites for our systems include
cancers of the prostate, breast, head, neck, bladder, cervix, colon/rectum,
esophagus, liver, brain, bone, stomach and lung, and general pelvic and
abdominal tumors. Our cancer treatment systems have been used to treat thousands
of patients throughout the world, and have been recognized, including the 2005
Frost & Sullivan "Technology Innovation of the Year Award" for cancer therapy
devices.
Our BSD-2000 systems are used to non-invasively treat cancers located
deeper in the body, and are designed to be companions to the estimated 7,500
linear accelerators used to treat cancer through radiation and in combination
with chemotherapy treatments. Our BSD-500 systems treat cancers on or near the
body surface and those that can be approached through body orifices such as the
throat, the rectum, etc., or through interstitial treatment in combination with
interstitial radiation (brachytherapy). BSD-500 systems can be used as
companions to our BSD-2000 systems and the estimated 2,500 brachytherapy systems
installed, as well as with chemotherapy treatments. The MicroThermX 100 system
is used to treat cancers that can be destroyed with heat alone.
11
Based on our management team's knowledge of the market, we believe that
the fully saturated potential market for these developed cancer therapy systems
is in excess of $5 billion. We also project an after-market opportunity based on
service agreements that equates to approximately 15% of the purchase price of
our systems per year. We believe that the replacement cycle for our systems,
based on advances in software, hardware and other components, will average 5-7
years. Our financial model in the higher production environment of established
commercial sales is to achieve a 60% gross margin on systems and an 80% gross
margin on service agreements and disposable applicators used with our
MicroThermX 100 system.
We have received United States Food and Drug Administration, or FDA,
approval to market our commercial version of the BSD-500, and in March 2006, we
completed a submission for FDA approval to sell the BSD-2000 in the United
States. We are currently preparing our FDA submission for the MicroThermX 100
system. We have designed our cancer therapy systems such that together they are
capable of providing treatment for most solid tumors located virtually anywhere
in the body.
Our common stock trades on the American Stock Exchange (AMEX) under the
symbol "BSM."
Critical Accounting Policies and Estimates
------------------------------------------
The following is a discussion of our critical accounting policies and
estimates that management believes are material to an understanding of our
results of operations and which involve the exercise of judgment or estimates by
management.
Revenue Recognition. Revenue from the sale of cancer treatment systems
is recognized when a purchase order has been received, the system has been
shipped, the selling price is fixed or determinable, and collection is
reasonably assured. Most system sales are F.O.B. shipping point; therefore,
shipment is deemed to have occurred when the product is delivered to the
transportation carrier. Most system sales do not include installation. If
installation is included as part of the contract, revenue is not recognized
until installation has occurred, or until any remaining installation obligation
is deemed to be perfunctory. Some sales of cancer treatment systems may include
training as part of the sale. In such cases, the portion of the revenue related
to the training, calculated based on the amount charged for training on a
stand-alone basis, is deferred and recognized when the training has been
provided. The sales of our cancer treatment systems do not require specific
customer acceptance provisions and do not include the right of return, except in
cases where the product does not function as warranted by us. We provide a
reserve allowance for estimated returns. To date, returns have not been
significant.
Revenue from manufacturing services is recorded when an agreement with
the customer exists for such services, the services have been provided, and
collection is reasonably assured. Revenue from training services is recorded
when an agreement with the customer exists for such training, the training
services have been provided, and collection is reasonably assured. Revenue from
service support contracts is recognized on a straight-line basis over the term
of the contract.
Our revenue recognition policy is the same for sales to both related
parties and non-related parties. We provide the same products and services under
the same terms to non-related parties as to related parties. Sales to
distributors are recognized in the same manner as sales to end-user customers.
Deferred revenue and customer deposits payable include amounts from service
contracts as well as cash received for the sales of products, which have not
been shipped.
Inventory Reserves. As of May 31, 2007, we had recorded a reserve for
potential inventory impairment of $40,000. We periodically review our inventory
levels and usage, paying particular attention to slower-moving items. If
projected sales for fiscal 2007 do not materialize or if our hyperthermia
systems do not receive increased market acceptance, we may be required to
increase the reserve for inventory impairment in future periods.
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Product Warranty. We provide product warranties on our BSD-500 and
BSD-2000 systems. These warranties vary from contract to contract, but generally
consist of parts and labor warranties for one year from the date of
installation. To date, expenses resulting from such warranties have not been
material. We record a warranty expense at the time of each sale. This reserve is
estimated based on prior history of service expense associated with similar
units sold in the past.
Allowance for Doubtful Accounts. We maintain allowances for doubtful
accounts for estimated losses resulting from the inability of our customers to
make required payments. As of August 31, 2006 we had a $20,000 balance in this
account. During the nine months ended May 31, 2007, we analyzed our outstanding
accounts receivables and determined that we should increase our allowance for
doubtful accounts by $83,700 to a balance of $103,700 at May 31, 2007. This
allowance is a significant estimate and is regularly evaluated by us for
adequacy by taking into consideration factors such as past experience, credit
quality of the customer base, age of the receivable balances, both individually
and in the aggregate, and current economic conditions that may affect a
customer's ability to pay. If the financial condition of our customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required.
Stock-based Compensation - On September 1, 2006 we adopted SFAS No.
123(R), which requires us to measure the compensation cost of stock options and
other stock-based awards to employees and directors at fair value at the grant
date and recognize compensation expense over the requisite service period for
awards expected to vest. During the three months and nine months ended May 31,
2007, we recorded compensation expense of $204,734 and $613,678, respectively,
for stock options issued to directors and employees. The fair value of stock
options is computed using the Black-Scholes valuation model, which model
utilizes inputs that are subject to change over time, including the volatility
of the market price of our common stock, risk free interest rates, requisite
service periods and assumptions made by us regarding the assumed life and
vesting of stock options and stock-based awards. As new options or stock-based
awards are granted, additional non-cash compensation expense will be recorded by
us. Upon adoption of SFAS No. 123 (R) on September 1, 2006, we reclassified the
balance of deferred compensation of $247,700 to additional paid-in capital.
Results of Operations
---------------------
Three Months Ended May 31, 2007 Compared to the Three Months Ended May 31, 2006
Revenues. Total revenues for the three months ended May 31, 2007 were
$953,176, compared to $712,771, for the three months ended May 31, 2006, an
increase of $240,405, or approximately 34%. The increase in total revenues was
due to an increase in the volume of sales to both unrelated and related parties,
as further discussed below. Our revenues can fluctuate significantly from period
to period because our sales, to date, have been based upon a relatively small
number of systems, the sales price of each being substantial enough to greatly
impact revenue levels in the periods in which they occur. Sales of a few systems
can cause a large change in our revenue from period to period.
Related Party Sales. We earned $521,053, or approximately 55%, of our
revenues in the three months ended May 31, 2007 from sales to related parties as
compared to $448,721 or 63%, in the three months ended May 31, 2006. These sales
for the three months ended May 31, 2007 were to Medizin-Technik GmbH and
consisted of product sales of $468,875, probes of $8,700 and other revenues of
$43,478. All of the related party revenues in the three months ended May 31,
2006 was from sales of systems and component parts. Dr. Gerhard Sennewald, one
of our directors, is a stockholder, executive officer and a director of
Medizin-Technik. Sales to Medizin-Technik may fluctuate significantly from
period to period because our sales, to date, have been based upon a relatively
small number of systems, the sales price of each being substantial enough to
greatly impact revenue levels in the periods in which they occur. Sales of a few
systems can cause a large change in our revenue from period to period.
13
Non-Related Party Sales. In the three months ended May 31, 2007, we
earned $432,123 or 45%, of our revenues from sales to unrelated parties, as
compared to $264,050, or 37%, for the three months ended May 31, 2006. These
sales for the three months ended May 31, 2007 consisted of product sales of
$410,000, service contracts of $12,763, probes of $3,300 and other revenues of
$6,060. By comparison, these sales for the three months ended May 31, 2006
consisted of product sales of $192,334, consulting services of $46,896, service
contracts of $16,161, probes of $2,748 and other revenues of $5,911.
Gross Profit. Gross profit for the three months ended May 31, 2007 was
$472,645 or 50% of total product sales as compared to $300,057 or 42%, of total
product sales for the three months ended May 31, 2006. As sales volumes
increase, we will more fully absorb our fixed overhead costs, thus increasing
our gross profit percentage. The gross margin percentage will also fluctuate
from period to period depending on the mix of revenues reported for the period.
Selling General and Administrative Expenses. Selling, general and
administrative expenses increased to $1,400,170 in the three months ended May
31, 2007, from $1,329,282 for the three months ended May 31, 2006, an increase
of $70,888 or approximately 5%. This increase was primarily due to $204,734 in
compensation expense related to issuance of stock options. We anticipate that
our selling, general and administrative expenses will continue at this increased
level at least in the short term.
Research and Development Expenses. Research and development expenses
were $451,721 for the three months ended May 31, 2007, as compared to $380,623,
for the corresponding period of fiscal 2006, an increase of $71,098, or
approximately 19%. Research and development expenses in the three months ended
May 31, 2007 increased due to expanded activities related to the following:
o Update of our commercial version of the BSD-2000 with complete
modernization of the computer system, including addition of the
Sigma Ellipse phased array applicator.
o Support for field implementation of a complete new design of the
BSD-2000 patient support system, enhancements to the BSD 500 and
2000 systems including language translations of the operating
manuals to German and Chinese and development of various spiral
array applicator systems to compliment the BSD-500.
o Support for Premarket Approval, or PMA, filing for the BSD-2000
system, development of the first model of the MicroThermX 100
microwave ablation system.
o Development of new microwave ablation disposable applicators.
o Technical research to evaluate the various treatment sites and
diseases suitable for the application of the MicroThermX 100.
Interest Income. Interest income decreased to $331,579 for the three
months ended May 31, 2007 as compared to $411,777 for the three months ended May
31, 2006, due to lower levels of cash and investments in the current fiscal
year.
Net Income (Loss). During the three months ended May 31, 2007 we had a
net loss of $634,638 after recording a tax benefit of $232,645 as compared to an
after tax net income of $2,987,623 in the corresponding period of 2006. The net
income in the previous fiscal year was attributed primarily to the gain on sale
of our investment in TherMatrx.
Nine Months Ended May, 2007 Compared to the Nine Months Ended May 31, 2006
Revenues. Total revenues for the nine months ended May 31, 2007 were
$2,278,488, compared to $1,673,313, for the nine months ended May 31, 2006, an
increase of $605,175, or approximately 36%. The increase in total revenues was
due to an increase in the volume of sales to both unrelated and related parties,
14
as further discussed below. Our revenues can fluctuate significantly from period
to period because our sales, to date, have been based upon a relatively small
number of systems, the sales price of each being substantial enough to greatly
impact revenue levels in the periods in which they occur. Sales of a few systems
can cause a large change in our revenue from period to period.
Related Party Sales. We earned $1,019,680, or approximately 45%, of our
revenues in the nine months ended May 31, 2007 from sales to related parties as
compared to $669,041 or 40%, in the nine months ended May 31, 2006. These sales
for the nine months ended May 31, 2007 were to Medizin-Technik and consisted of
product sales of $837,750, probes of $34,080 and other revenues of $147,850. All
of the related party revenues in the nine months ended May 31, 2006 was from
sales of systems and component parts.. Sales to Medizin-Technik may fluctuate
significantly from period to period because our sales, to date, have been based
upon a relatively small number of systems, the sales price of each being
substantial enough to greatly impact revenue levels in the periods in which they
occur. Sales of a few systems can cause a large change in our revenue from
period to period.
Non-Related Party Sales. In the nine months ended May 31, 2007, we
earned $1,258,808 or 45%, of our revenues from sales to unrelated parties, as
compared to $1,004,272, or 60%, for the nine months ended May 31, 2006. These
sales for the nine months ended May 31, 2007 consisted of product sales of
$1,172,887, consulting services of $36,309, service contracts of $33,616, probes
of $3,300 and other revenue of $12,696. By comparison, these sales for the nine
months ended May 31, 2006 consisted of product sales of $886,954, consulting
services of $89,268, and service contracts of $28,050.
Gross Profit. Gross profit for the nine months ended May 31, 2007 was
$925,385 or 40% of total product sales, as compared to $599,369 or 36% of total
product sales for the nine months ended May 31, 2006. As sales volume increases,
we will more fully absorb our fixed overhead costs, thus increasing our gross
profit percentage. The gross margin percentage will also fluctuate from period
to period depending on the mix of revenues reported for the period.
Selling General and Administrative Expenses. Selling, general and
administrative expenses increased to $4,287,870 in the nine months ended May 31,
2007, from $3,553,103 for the nine months ended May 31, 2006, an increase of
$734,767 or approximately 21%. This increase was primarily due to an increase in
sales and marketing costs supporting new product sales and market development
activities and $613,678 in compensation expense related to issuance of stock
options. We anticipate that our selling, general and administrative expenses
will continue at this increased level at least in the short term.
Research and Development Expenses. Research and development expenses
were $1,292,578, for the nine months ended May 31, 2007, as compared to
$945,527, for the corresponding period of fiscal 2006, an increase of $347,051,
or approximately 37%. Research and development expenses in the nine months ended
May 31, 2007 increased due to expanded activities related to the following:
o Update of our commercial version of the BSD-2000 with complete
modernization of the computer system, including addition of the
Sigma Ellipse phased array applicator.
o Support for field implementation of a complete new design of the
BSD-2000 patient support system, enhancements to the BSD 500 and
2000 systems including language translations of the operating
manuals to German and Chinese and development of various spiral
array applicator systems to compliment the BSD-500.
o Support for PMA filing for the BSD-2000 system, development of the
first model of the MicroThermX 100 microwave ablation system.
o Development of new microwave ablation disposable applicators.
o Technical research to evaluate the various treatment sites and
diseases suitable for the application of the MicroThermX 100.
Interest Income. Interest income increased to $1,044,249 for the nine
months ended May 31, 2007, as compared to $960,990 for the nine months ended May
31, 2006, due to higher average levels of cash and investments and higher rates
in the current fiscal year.
Net Income (Loss). During the nine months ended May 31, 2007 we had a
net loss of $2,209,094 after recording a tax benefit of $1,295,672 as compared
to an after tax net income of $9,305,545 in the corresponding period of 2006.
The net income in the previous fiscal year was attributed primarily to the gain
on sale of our investment in TherMatrx.
Liquidity and Capital Resources
-------------------------------
Since inception through May 31, 2007, we have generated an accumulated
deficit of $1,711,052. We have historically financed our operations through cash
from operations, research grants, licensing of technological assets, issuance of
common stock and sale of investments in spinoff operations. As of May 31, 2007,
we had cash, cash equivalents and investments totaling $20,772,615 as compared
to cash, cash equivalents and investments totaling $24,735,200 as of August 31,
2006.
During the nine months ended May 31, 2007, we used $4,455,432 of cash
in operating activities, primarily as a result of our net loss of $2,209,094,
decrease in income tax payable of $1,500,000, increase in income tax receivable
of $1,068,164, and deferred tax asset of $181,000, offset by decreases in
receivables of $491,951 and in inventories of $80,576. Cash provided from
investing activities resulted from the sale of investments of $3,046,812,
additional proceeds from the sale of our investment in TherMatrx of $202,223,
partially offset by the purchase of property and equipment of $63,006. Cash
provided by financing activities consisted of proceeds from exercise of stock
options of $229,706.
We expect to incur additional expenses related to the commercial
introduction of our systems, due to additional participation at trade shows,
expenditures on publicity, additional travel, increased sales salaries and
commissions and other related expenses. In addition, we anticipate that we will
incur increased expenses related to seeking governmental and regulatory
approvals for our products and corporate governance and compliance with the
Sarbanes-Oxley Act of 2002, during fiscal 2007.
We believe we can cover any cash requirements with cost cutting or
available cash. If we cannot cover any such cash shortfall with cost cutting or
available cash, we would need to obtain additional financing. We cannot be
certain that any financing will be available when needed or will be available on
terms acceptable to us. If we raise equity capital our stockholders will be
diluted. Insufficient funds may require us to delay, scale back or eliminate
some or all of our programs designed to facilitate the commercial introduction
of our systems or entry into new markets.
As of May 31, 2007, we have no significant commitments for the purchase
of property and equipment.
The Company has no off balance sheet arrangements as of May 31, 2007.
We believe that our current cash and cash equivalents, investments, and
expected cash provided from operating activities will be sufficient to fund our
operations for the next twelve months.
15
FORWARD-LOOKING STATEMENTS
With the exception of historical facts, the statements contained in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" are forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995, which reflect our current expectations
and beliefs regarding our future results of operations, performance and
achievements. These statements are subject to risks and uncertainties and are
based upon assumptions and beliefs that may or may not materialize. These
forward-looking statements include, but are not limited to, statements
concerning:
o our belief about the market opportunities for our products;
o our anticipated financial performance and business plan;
o our expectations regarding the commercialization of the BSD-2000,
BSD 500 and MicroThermX 100 systems;
o our expectations to further expand our developments to treat other
diseases and medical conditions;
o our expectations that in a higher production environment of
established commercial sales we could achieve a 60% gross margin
on system sales and an 80% gross margin on service agreements and
disposable applicators used with our MicroThermX 100 system;
o our belief concerning the market potential for developed cancer
therapy systems;
o our expectations related to the after-market opportunity for
service agreements;
o our expectations related to the replacement cycle for our systems;
o our expectations that we will incur increased expenses related to
seeking governmental and regulatory approvals for our products;
o our expectations and efforts regarding FDA approvals relating to
the BSD-2000 and MicroThermX 100 systems;
o our belief that our technology has application for additional
approaches to treating cancer and for other medical purposes;
o our expectations related to the amount of expenses we will incur
for the commercial introduction of the BSD-2000 and MicroThermX
100 systems;
o our expectation that we will incur increased expenses related to
our corporate governance and compliance with the Sarbanes-Oxley
Act of 2002;
o our expectation that our selling, general and administrative
expenses will continue at increased levels at least in the short
term;
o our belief that we can cover any cash shortfall with cost cutting
or available cash; and
o our belief that our current working capital, investments and cash
from operations will be sufficient to finance our operations
through working capital and capital resources needs for the next
twelve months.
16
We wish to caution readers that the forward-looking statements and our
operating results are subject to various risks and uncertainties that could
cause our actual results and outcomes to differ materially from those discussed
or anticipated, including the factors set forth in the subsection entitled
"Risks Related to Our Business" included in our Annual Report on Form 10-KSB for
the year ended August 31, 2006 and our other filings with the Securities and
Exchange Commission. We also wish to advise readers not to place any undue
reliance on the forward-looking statements contained in this report, which
reflect our beliefs and expectations only as of the date of this report. We
assume no obligation to update or revise these forward-looking statements to
reflect new events or circumstances or any changes in our beliefs or
expectations, other than as required by law.
Item 3. Quantitative and Qualitative Disclosure About Market Risk.
As of May 31, 2007, our investments consist primarily of highly-liquid
mutual funds, which are considered available-for-sale securities. These
investments are not held for speculative or trading purposes. Our investments
may be exposed to market risk from changes in interest rates and other security
market conditions that could impact our results of operations and financial
position. Changes in interest rates or other market factors may materially
affect the investment income we earn on cash, cash equivalents and investments.
We do not have material foreign operations and are not currently
exposed to material risks from changes in foreign currency.
Item 4. Controls and Procedures.
Evaluation of disclosure controls and procedures.
Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the
Securities Exchange Act of 1934 (the "Exchange Act")). Based upon that
evaluation, the principal executive officer and principal financial officer
concluded that for the reasons described below, as of the end of the period
covered by this report, our disclosure controls and procedures were not
effective and adequately designed to ensure that information required to be
disclosed by us in the reports we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in applicable rules and forms.
In connection with the completion of its review of our financial
statements for the fiscal quarter ended November 30, 2006, Tanner LC identified
deficiencies that existed in the design or operation of our internal control
over financial reporting. These deficiencies included a lack of segregation of
duties in our accounting department and a lack of controls over reporting and
accounting for deferred income taxes, deferred compensation and stock options.
These deficiencies have been disclosed to our audit committee and to our
auditors. During the nine months ended May 31, 2007, we have devoted substantial
efforts to fully remedy these deficiencies, including increasing the size of our
financial department, and hiring of more experienced financial management with
experience in accounting for deferred income taxes, deferred compensation and
stock options. We are continuing our efforts to improve and strengthen our
control processes and procedures. Our management, audit committee, and directors
continue to work with our auditors and other outside advisors to ensure that our
controls and procedures are adequate and effective.
Changes in internal controls over financial reporting.
During the fiscal quarter covered by this report, with the exception of
the matters described above, there has been no change in our internal control
over financial reporting (as defined in Rule 13a-15(f) or 15d-15(f) under the
Exchange Act) that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
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PART ii - OTHER INFORMATION
Item 1A. Risk Factors.
In addition to the other information set forth in this report, you
should carefully consider the factors discussed under the heading "Risks Related
to Our Business" in Item 1 - Description of Business in our Annual Report on
Form 10-KSB for the year ended August 31, 2006, which could materially affect
our business, financial condition or future results of operations. The risks
discussed in our Annual Report on Form 10-KSB are not the only risks facing our
Company. Additional risks and uncertainties not currently known to us or that we
currently deem to be immaterial also may materially adversely affect our
business, financial condition and/or results of operations.
Item 6. Exhibits.
The following exhibits are filed as part of this report:
Exhibit No. Description of Exhibit
---------- -----------------------------------------------------------
10.1 Independent Contractor Agreement with Dennis P. Gauger
dated May 1, 2007. (Incorporated by reference to Exhibit
10.1 of our Form 8-K filed May 2, 2007).
31.1 Certification of Principal Executive Officer Required
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Principal Financial Officer Required
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Principal Executive Officer Required
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Principal Financial Officer Required
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BSD MEDICAL CORPORATION
Date: July 16, 2007 /s/ Hyrum A. Mead
---------------------------------------------
Hyrum A. Mead
President (Principal Executive Officer)
Date: July 16, 2007 /s/ Dennis P. Gauger
---------------------------------------------
Dennis P. Gauger
Chief Financial Officer (Principal Accounting
Officer)
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