Edgar Filing: BSD MEDICAL CORP

bsdmedical.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_______________________________

FORM 10-Q

(Mark One)

ý	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

	For the quarterly period ended May 31, 2013

o	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 incorporation or organization)		(I.R.S. Employer 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 ý 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 ý 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. (Check one):

	Large accelerated filer o	Accelerated filer ý
	Non-accelerated filer o	Smaller reporting company o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes o No ý

As of July 10, 2013, there were 33,981,871 shares of the Registrant’s common stock, $0.001 par value per share, outstanding.

BSD MEDICAL CORPORATION

FORM 10-Q

FOR THE QUARTER ENDED MAY 31, 2013

PART I - Financial Information

Item 1. Financial Statements

	Condensed Balance Sheets (Unaudited)	3
	Condensed Statements of Comprehensive Loss (Unaudited)	4
	Condensed Statements of Cash Flows (Unaudited)	5
	Notes to Condensed Financial Statements (Unaudited)	6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		12

Item 3. Quantitative and Qualitative Disclosures About Market Risk		26

Item 4. Controls and Procedures		26

PART II - Other Information

Item 1A. Risk Factors		27

Item 6. Exhibits		27

Signatures		28

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

BSD MEDICAL CORPORATION
Condensed Balance Sheets
(Unaudited)
ASSETS	May 31, 2013			August 31, 2012
Current assets:
Cash and cash equivalents	$	10,882,122		$	11,102,508
Accounts receivable, net of allowance for doubtful accounts of $20,000		1,199,843			289,587
Related party trade accounts receivable		24,823			33,257
Inventories, net		2,309,299			2,403,957
Other current assets		201,609			120,069
Total current assets		14,617,696			13,949,378

Property and equipment, net		1,333,289			1,412,639
Patents, net		-			4,032

	$	15,950,985		$	15,366,049

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Accounts payable	$	385,334		$	195,754
Accrued liabilities		423,419			424,698
Customer deposits		876,230			24,980
Deferred revenue – current portion		133,309			96,865
Total current liabilities		1,818,292			742,297

Deferred revenue – net of current portion		59,216			126,420

Total liabilities		1,877,508			868,717

Commitments and contingencies

Stockholders’ equity:
Preferred stock, $.001 par value; 10,000,000 shares authorized, no shares issued and outstanding		-			-
Common stock, $.001 par value, 80,000,000 shares authorized, 34,006,202 and 29,777,522 shares issued, respectively		34,006			29,778
Additional paid-in capital		57,466,759			51,845,035
Treasury stock, 24,331 shares at cost		(234	)		(234	)
Accumulated deficit		(43,427,054	)		(37,377,247	)
Total stockholders’ equity		14,073,477			14,497,332

	$	15,950,985		$	15,366,049

See accompanying notes to condensed financial statements (unaudited)

BSD MEDICAL CORPORATION

Condensed Statements of Comprehensive Loss

(Unaudited)

	Three Months Ended May 31,						Nine Months Ended May 31,
	2013			2012			2013			2012
Revenues:
Sales	$	1,256,583		$	611,730		$	2,540,281		$	1,165,655
Sales to related parties		230			13,757			76,776			315,163
Equipment rental		59,900			25,900			178,700			101,450

Total revenues		1,316,713			651,387			2,795,757			1,582,268

Cost of Revenues:
Cost of sales		713,383			435,656			1,533,618			934,070
Cost of related party sales		81			12,180			66,527			226,363
Cost of equipment rental		2,947			2,947			8,841			8,841

Total cost of revenues		716,411			450,783			1,608,986			1,169,274

Gross margin		600,302			200,604			1,186,771			412,994

Operating costs and expenses:
Research and development		607,690			641,457			1,693,648			1,760,803
Selling, general and administrative		1,967,082			1,667,503			5,562,013			4,580,000

Total operating costs and expenses		2,574,772			2,308,960			7,255,661			6,340,803

Loss from operations		(1,974,470	)		(2,108,356	)		(6,068,890	)		(5,927,809	)

Other income (expense):
Interest income		7,708			13,861			24,374			47,890
Other expense		(2,984	)		(2,371	)		(5,291	)		(6,950	)

Total other income		4,724			11,490			19,083			40,940

Loss before income taxes		(1,969,746	)		(2,096,866	)		(6,049,807	)		(5,886,869	)

Provision for income taxes		-			(988	)		-			(988	)

Net loss and comprehensive loss	$	(1,969,746	)	$	(2,097,854	)	$	(6,049,807	)	$	(5,887,857	)

Net loss per common share:
Basic	$	(0.06	)	$	(0.07	)	$	(0.20	)	$	(0.20	)
Diluted	$	(0.06	)	$	(0.07	)	$	(0.20	)	$	(0.20	)

Weighted average number of shares outstanding:
Basic		32,042,000			29,717,000			30,541,000			29,696,000
Diluted		32,042,000			29,717,000			30,541,000			29,696,000

See accompanying notes to condensed financial statements (unaudited)

BSD MEDICAL CORPORATION

Condensed Statements of Cash Flows

(Unaudited)

	Nine Months Ended May 31,
	2013			2012
Cash flows from operating activities:
Net loss	$	(6,049,807	)	$	(5,887,857	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		101,454			113,207
Stock-based compensation		862,514			891,054
Stock issued for services		180,001			180,000
Loss on disposition of property and equipment		-			118
Decrease (increase) in:
Receivables		(901,822	)		542,204
Inventories		94,658			87,954
Other current assets		(81,540	)		(30,215	)
Increase (decrease) in:
Accounts payable		189,580			(64,597	)
Accrued liabilities		(1,279	)		(132,176	)
Customer deposits		851,250			-
Deferred revenue		(30,760	)		(2,317	)

Net cash used in operating activities		(4,785,751	)		(4,302,625	)

Cash flows from investing activities:
Purchase of property and equipment		(18,072	)		(96,345	)

Cash flows from financing activities:
Net proceeds from the sale of common stock		4,583,437			-

Net decrease in cash and cash equivalents		(220,386	)		(4,398,970	)
Cash and cash equivalents, beginning of the period		11,102,508			17,135,968

Cash and cash equivalents, end of the period	$	10,882,122		$	12,736,998

See accompanying notes to condensed financial statements (unaudited)

BSD MEDICAL CORPORATION

Notes to Condensed Financial Statements

(Unaudited)

Note 1. Basis of Presentation

The interim financial information of BSD Medical Corporation (the “Company”) as of May 31, 2013 and for the three months and nine months ended May 31, 2013 and 2012 is unaudited, and the condensed balance sheet as of August 31, 2012 is derived from our audited financial statements. The accompanying unaudited condensed balance sheets as of May 31, 2013 and August 31, 2012, the related unaudited condensed statements of comprehensive loss for the three months and nine months ended May 31, 2013 and 2012, and the related unaudited condensed statements of cash flows for the nine months ended May 31, 2013 and 2012 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 (the “SEC”). The condensed financial statements do not include all of the information and notes 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-K for the year ended August 31, 2012.

All adjustments (consisting only of normal recurring adjustments) necessary for the fair presentation of our financial position as of May 31, 2013 and August 31, 2012, our results of operations for the three months and nine months ended May 31, 2013 and 2012 and our cash flows for the nine months ended May 31, 2013 and 2012 have been included. The results of operations for the three months and nine months ended May 31, 2013 may not be indicative of the results for our fiscal year ending August 31, 2013.

Certain amounts in the prior periods have been reclassified to conform to the current period presentation.

Note 2. Inventories

Inventories consisted of the following:

	May 31, 2013			August 31, 2012

Parts and supplies	$	1,216,454		$	1,180,428
Work-in-process		986,279			803,049
Finished goods		206,566			520,480
Reserve for obsolete inventory		(100,000	)		(100,000	)

Inventories, net	$	2,309,299		$	2,403,957

Note 3. Property and Equipment

Property and equipment consisted of the following:

	May 31, 2013			August 31, 2012

Equipment	$	1,384,520		$	1,368,183
Rental equipment		58,940			58,940
Furniture and fixtures		300,061			298,576
Building improvements		54,736			54,736
Building		956,000			956,000
Land		244,000			244,000

		2,998,257			2,980,435
Less accumulated depreciation		(1,664,968	)		(1,567,796	)

Property and equipment, net	$	1,333,289		$	1,412,639

Note 4. Stockholders’ Equity

The Company has 10,000,000 authorized shares of $.001 par value preferred stock. As of May 31, 2013 and August 31, 2012, there were no shares of preferred stock outstanding. The Company also has 80,000,000 authorized shares of $.001 par value common stock.

Shelf Registration Statement

On September 28, 2012, we filed a universal shelf registration statement (form S-3; file number 333-184164) with the SEC for the issuance of common stock, preferred stock, warrants, senior debt, subordinated debt and units up to an aggregate amount of $50.0 million. On October 11, 2012, the universal shelf registration statement was declared effective by the SEC. We may periodically offer one or more of these securities in amounts, prices and terms to be announced when and if the securities are offered. At the time any of the securities covered by the registration statement are offered for sale, a prospectus supplement will be prepared and filed with the SEC containing specific information about the terms of any such offering.

April 2013 Stock Offering

On April 9, 2013, we entered into a placement agency agreement (the “Agency Agreement”) with Roth Capital Partners, LLC (the “Placement Agent”), pursuant to which the Placement Agent agreed to use its reasonable efforts to arrange for the sale of up to 4,065,042 shares of our common stock and warrants to purchase up to 3,048,782 shares of our common stock in a registered direct public offering (the “Offering”). The Placement Agent was entitled to a cash fee of 6.5% of the gross proceeds paid to us for the securities sold in the Offering. We also reimbursed the Placement Agent for all reasonable and documented out-of-pocket expenses incurred by the Placement Agent in connection with the Offering, not to exceed the lesser of (i) $35,000 or (ii) 8% of the gross proceeds of the Offering, less the Placement Agent’s placement fee.

The Agency Agreement contains customary representations, warranties and covenants by us. It also provides for customary indemnification by us and the Placement Agent for losses or damages arising out of or in connection with the sale of the securities being offered. We agreed to indemnify the Placement Agent against liabilities under the Securities Act of 1933, as amended. We also agreed to contribute to payments the Placement Agent may be required to make in respect of such liabilities.

Also on April 9, 2013, we and certain institutional investors entered into a securities purchase agreement (the “Purchase Agreement”) in connection with the Offering, pursuant to which we agreed to sell an aggregate of 4,065,042 shares of our common stock and warrants to purchase a total of 3,048,782 shares of our common stock to such investors for aggregate gross proceeds, before deducting fees to the Placement Agent and other estimated offering expenses payable by us, of approximately $5.0 million. The common stock and warrants were sold in fixed combinations, with each combination consisting of one share of common stock and a warrant to purchase 0.75 shares of common stock. The purchase price was $1.23 per fixed combination. The warrants will become exercisable six months and one day following the closing date of the Offering and will remain exercisable for five years thereafter at an exercise price of $1.65 per share. The exercise price of the warrants is subject to adjustment in the case of stock splits, stock dividends, combinations of shares and similar recapitalization transactions.

The exercisability of the warrants may be limited if, upon exercise, the holder or any of its affiliates would beneficially own more than 4.9% of our common stock.

We agreed with each of the purchasers that, subject to certain exceptions, we will not, within the 30 trading days following the closing of the Offering (which period may be extended in certain circumstances), enter into any agreement to issue or announce the issuance or proposed issuance of any securities.

We also agreed with each of the purchasers that while the warrants are outstanding, we will not affect or enter into an agreement to affect a “Variable Rate Transaction,” which means a transaction in which we:

●	issue or sell any convertible securities either (A) at a conversion, exercise or exchange rate or other price that is based upon and/or varies with the trading prices of, or quotations for, the shares of our common stock at any time after the initial issuance of such convertible securities, or (B) with a conversion, exercise or exchange price that is subject to being reset at some future date after the initial issuance of such convertible securities or upon the occurrence of specified or contingent events directly or indirectly related to our business or the market for our common stock, other than pursuant to a customary “weighted average” anti-dilution provision; or

●	enter into any agreement (including, without limitation, an equity line of credit) whereby we may sell securities at a future determined price (other than standard and customary “preemptive” or “participation” rights).

We also agreed with each of the purchasers if we issue securities within the 12 months following the closing of the Offering, the purchasers shall have the right to purchase all of the securities on the same terms, conditions and price provided for in the proposed issuance of securities.

We also agreed to indemnify each of the purchasers against certain losses resulting from our breach of any of our representations, warranties, or covenants under agreements with each of the purchasers, as well as under certain other circumstances described in the Purchase Agreement.

We closed the Offering on April 12, 2013. The net proceeds to us from the Offering, after deducting placement agent fees and the offering expenses borne by us, were approximately $4.6 million.

The Offering was completed using our shelf registration statement on Form S-3, pursuant to a prospectus supplement filed with the SEC.

Warrants

A summary of the outstanding warrants issued in the Offering and prior stock offerings as of May 31, 2013, and changes during the nine months then ended, is as follows:

	Shares		Weighted- Average Exercise Price		Weighted- Average Remaining Contract Term (Years)

Outstanding as of August 31, 2012		2,408,523	$	4.56
Issued		3,048,782		1.65
Exercised		-		-
Forfeited or expired		-		-

Outstanding as of May 31, 2013		5,457,305	$	2.93		4.21

Exercisable as of May 31, 2013		2,408,523	$	4.56		2.74

Note 5. Net 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 and warrants outstanding using the treasury stock method and the average market price per share during the period.

The shares used in the computation of our basic and diluted earnings per share are reconciled as follows (rounded to thousands):

	Three Months Ended May 31,				Nine Months Ended May 31,
	2013		2012		2013		2012

Weighted average number of shares outstanding – basic		32,042,000		29,717,000		30,541,000		29,696,000

Dilutive effect of stock options and warrants		-		-		-		-

Weighted average number of shares outstanding – diluted		32,042,000		29,717,000		30,541,000		29,696,000

No stock options or warrants are included in the computation of diluted weighted average number of shares for the three months and nine months ended May 31, 2013 and 2012 because the effect would be anti-dilutive. As of May 31, 2013, we had outstanding options and warrants to purchase a total of 8,772,544 shares of our common stock that could have a future dilutive effect on the calculation of earnings per share.

Note 6. Related Party Transactions

During the three months ended May 31, 2013 and 2012, we had sales of $230 and $13,757, respectively, to entities controlled by a significant stockholder and member of the Board of Directors. These related party transactions represent approximately 0% and 2% of total sales for each respective three-month period. During the nine months ended May 31, 2013 and 2012, we had sales of $76,776 and $315,163 to these related parties, representing approximately 3% and 20% of total sales for each respective nine-month period.

As of May 31, 2013 and August 31, 2012, receivables included $24,823 and $33,257, respectively, from these related parties.

Note 7. Stock-Based Compensation

We have both an employee and director stock incentive plan, which are described more fully in Note 10 to the financial statements in our 2012 Annual Report on Form 10-K. As of May 31, 2013, we had approximately 2,547,000 shares of common stock reserved for future issuance under the stock incentive plans.

Stock-based compensation cost is measured at the grant date based on the value of the award granted using the Black-Scholes option pricing model, and recognized over the period in which the award vests. For stock awards no longer expected to vest, any previously recognized stock compensation expense is reversed in the period of termination. The stock-based compensation expense has been allocated to the various categories of operating costs and expenses in a manner similar to the allocation of payroll expense as follows:

	Three Months Ended May 31,				Nine Months Ended May 31,
	2013		2012		2013		2012

Cost of sales	$	16,022	$	16,021	$	48,067	$	48,067
Research and development		50,285		44,956		150,855		154,725
Selling, general and administrative		219,875		249,567		663,592		688,262

Total	$	286,182	$	310,544	$	862,514	$	891,054

During the nine months ended May 31, 2013, we granted employees a total of 360,000 stock options at exercise prices ranging from $1.20 to $2.05 with one third vesting each year for the next three years. The estimated weighted average grant date fair value per share of these stock options was $0.77, and our weighted average assumptions used in the Black-Scholes valuation model to determine this estimated fair value are as follows:

Expected volatility	63.43%
Expected dividends	0%
Expected term	7.4 years
Risk-free interest rate	1.19%

Unrecognized stock-based compensation expense expected to be recognized over the estimated weighted-average amortization period of 0.91 years was approximately $1,185,000 as of May 31, 2013.

A summary of the time-based stock option awards as of May 31, 2013, and changes during the nine months then ended, is as follows:

	Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contract Term (Years)		Aggregate Intrinsic Value

Outstanding at August 31, 2012		3,182,239		$	3.54
Granted		360,000			1.43
Exercised		-			-			$	-
Forfeited or expired		(227,000	)		4.00

Outstanding at May 31, 2013		3,315,239		$	3.28		6.33	$	20,779

Exercisable at May 31, 2013		2,058,778		$	3.76		5.34	$	11,779

The aggregate intrinsic value in the preceding table represents the total pre-tax intrinsic value, based on our closing stock price of $1.26 as of May 31, 2013, which would have been received by the holders of in-the-money options had the option holders exercised their options as of that date.

Note 8. Supplemental Cash Flow Information

We paid no amounts for interest expense during the nine months ended May 31, 2013 and 2012. We paid $0 and $988 for income taxes during the nine months ended May 31, 2013 and 2012, respectively.

During the nine months ended May 31, 2013 and 2012, we had no non-cash financing and investing activities.

Note 9. Recent Accounting Pronouncements

No new accounting pronouncements were issued during the nine months ended May 31, 2013 and through the date of filing this report that we believe are applicable to or would have a material impact on our financial statements.

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 quarterly report on Form 10-Q 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 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.

Overview

We develop, manufacture, market, and service systems to treat cancer and benign diseases using heat therapy delivered using focused radiofrequency (RF) and microwave energy. Our product lines include both ablation and hyperthermia treatment systems. Our microwave ablation system has been developed as a stand-alone therapy to employ precision-guided microwave energy to ablate (destroy) soft tissue. Our hyperthermia cancer treatment systems, which have been in use for several years in the United States, Europe and Asia, are used to treat certain tumors with heat (hyperthermia) while increasing the effectiveness of other therapies such as radiation therapy. We have developed extensive intellectual property, multiple products in the market and established distribution in the United States, Europe and Asia. Certain of our products have received regulatory approvals and clearances in the United States, Europe and China.

MicroThermX® Microwave Ablation System

Our MicroThermX® Microwave Ablation System (“MicroThermX®”) is a compact, mobile, state-of-the-art, proprietary system that includes a microwave generator, single-patient-use disposable antennas, and a thermistor-based temperature monitoring system. The innovative design of the MicroThermX® is the first of its kind that allows delivery of higher power levels using a single generator. The MicroThermX® utilizes innovative synchronous phased array technology that was developed and patented by us to provide larger and more uniform zones of ablation during a single procedure.

The MicroThermX® introduces into our product line an innovative SynchroWave disposable antenna that is used in each ablation treatment, which we believe will provide a significant ongoing revenue stream after the sale of the system. We expanded the MicroThermX® market opportunity by introducing a new SynchroWave short tip (“ST”) antenna that can be used to deliver smaller, spherical ablation zones that more accurately target smaller tumors. The existing SynchroWave long tip (“LT”) antenna delivers larger ablation zones, reducing the need for multiple ablations on larger tumors. The multiple configurations of the SynchroWave antenna provide physicians the ability to precisely target the ablation zone to the numerous sizes and shapes of diseased tissue, significantly increasing the number of cases that can be treated with the MicroThermX®. The soft tissue ablation world market potential is estimated to exceed $2.3 billion.

Our Table Top MicroThermX® Microwave Ablation System (“T2”) is designed for our fee-per-use rental program, which is more fully described below. Portability and ease of use are keys to successful implementation of the equipment rental program. The T2 is a small, lightweight, tabletop configuration that has the same advanced features as the original MicroThermX® configuration.

In August 2010, the FDA granted us a 510(k) clearance to market the MicroThermX® for ablation of soft tissue. Clearance from the FDA of the 510(k) Premarket Notification submission authorizes the commercial sale of the MicroThermX® in the United States. We have also received CE Marking for the MicroThermX®, which allows us to market the MicroThermX® in the thirty countries that comprise the European Union (“EU”) and the European Free Trade Association (“EFTA”). CE Marking is also recognized in many countries outside of the EU, providing us the ability to market the MicroThermX® to a number of international markets. As further discussed below, we have established distribution in a number of EU countries and have accepted purchase orders for and have shipped both MicroThermX® systems and SynchroWave antennas.

Clinicians have used microwave ablation systems to treat patients with cancers of the liver, lung, bone, and kidneys.

We have placed a select number of MicroThermX® systems with pivotal, high-profile, interventional oncology opinion leaders. These medical facilities continue to reorder disposable SynchroWave antennas, validating the ongoing revenue stream we anticipate. Existing users of the MicroThermX® continue to report positive clinical results in the treatment of cancerous tumors.

These evaluations represent an important milestone in the MicroThermX® sales cycle. However, with hospital capital budgeting, committee review and other approvals, the sales cycle for the MicroThermX® may extend to well over six months. Political and economic uncertainty in the industry due to recent government healthcare reform is also slowing hospital acquisition of capital equipment at all levels.

To bolster our MicroThermX® sales line and accelerate and maximize revenues, we have a MicroThermX® fee-per-use equipment rental program. The fee-per-use program allows hospitals to purchase disposable SynchroWave antennas and pay a fee-per-use equipment rental for the treatment of patients using the MicroThermX®, dramatically shortening the sales cycle. This rental program has generated a revenue stream from sales of disposable SynchroWave antennas combined with highly profitable equipment rental fees. We continue to aggressively market and sell the rental program throughout the U.S.

We have in place direct sales representatives in key major metropolitan areas who provide “personal service” to new users of the microwave ablation technique. We provide all of our domestic customers with extensive hands-on training to ensure success in clinical use of the MicroThermX® system. Our representatives are experienced interventional sales representatives with seasoned contacts in the field of interventional oncology. Our Vice President of Sales and Marketing has a 37 year history in marketing medical devices and equipment to physicians. His primary focus is on the worldwide sales of our MicroThermX® line of products. Our U.S. sales program also includes one domestic specialty distribution firm.

This sales model allows us to concentrate on major areas of opportunity in the ablation market. We have hired direct sales representatives to cover the following key metropolitan areas: Florida, New York, New Jersey, Philadelphia, Chicago, Phoenix, Las Vegas, Southern California, Dallas and Houston, Ohio, Western Pennsylvania, Northern Kentucky and Oklahoma. We plan to continue to expand the direct sales program into other metropolitan areas in the future.

We also continue our emphasis on Europe and other international markets. In April 2013, we announced an exclusive multi-million dollar master distribution agreement with Terumo Europe NV, a wholly owned subsidiary of Terumo Corporation, for our MicroThermX® line of products in 100 countries in Europe, Western Asia and Northern Africa. Terumo Corporation is a global medical device leader with nearly $5 billion in annual sales and operations in over 160 countries. Terumo Europe NV has established itself as a pioneer in the field of interventional oncology. The potential market size for MicroThermX® in these countries is estimated to be in excess of $1 billion in annual sales. We believe this distribution agreement validates the large market opportunity for MicroThermX® ablation products and is expected to drive market adoption for the MicroThermX® as a leading ablation therapy system and to drive revenue growth toward profitability.

We have entered into other international distribution agreements with specialty distribution firms. These firms have purchased MicroThermX® systems and SynchroWave antennas. We provide all of our international distributors with extensive hands-on training to ensure success in clinical use of the MicroThermX® system.

Hyperthermia Systems

BSD-500. Our BSD-500 Hyperthermia System, or the BSD-500, is used to deliver either superficial hyperthermia therapy, which is non-invasive and delivered externally using antennae placed over the tumor, or interstitial hyperthermia therapy, which is delivered using antennae that are inserted into the tumor, or both. These systems include a touch screen display monitor by which the operator controls the hyperthermia treatment, computer equipment and software that controls the delivery of microwave energy to the tumor, and a generator that creates the needed microwave energy for the treatment. Additionally, the systems include a variety of applicator (radiating antennae) configurations, depending on the system. Various configurations of non-invasive applicators (antennae) are used for superficial hyperthermia treatments. For interstitial hyperthermia treatments, the system may include up to 24 small microwave heat-delivering antennae that are inserted into catheters used for internal radiation therapy (called brachytherapy).

Our primary FDA approval (described as a pre-market approval, or “PMA”, which is the standard FDA approval required to market Class III medical devices in the United States) for the BSD-500 is for the use of hyperthermia and radiation therapy to treat certain tumors using the BSD-500. The BSD-500 is approved for use alone or in conjunction with radiation therapy in the palliative management of certain solid surface and subsurface malignant tumors (i.e., melanoma, squamous- or basal-cell carcinoma, adenocarcinoma, or sarcoma) that are progressive or recurrent despite conventional therapy.

There are some clinical studies that have been published that show the effectiveness and safety for the use of hyperthermia and certain chemotherapy drugs for the treatment of some cancers. However, we do not currently have FDA approval for the use of hyperthermia in conjunction with chemotherapy. Physicians are allowed to utilize medical devices that have been approved or cleared by the FDA, including the BSD-500, for off label indications (indications for use that are not included in the FDA approval or clearance), but a manufacturer cannot promote for an off label use in the United States, as the FDA considers this to be an unproven clinical application.

We have received FDA approval through FDA supplements for implementation of a new operating system and a new power generation system and other commercial upgrades for the BSD-500 configurations.

BSD-2000. The BSD-2000 Hyperthermia System, or the BSD-2000, family of products includes the BSD-2000, the BSD-2000/3D and the BSD-2000/3D/MR. These systems non-invasively deliver localized therapeutic heating (hyperthermia) to solid tumors by applying radiofrequency (RF) energy to certain cancerous tumors, including those located deep within the body. These systems consist of four major subsystems: an RF power generator delivery subsystem; a proprietary, thermistor-based, thermometry subsystem; a computerized monitoring and control subsystem; and an applicator subsystem that includes an applicator and patient support system; as well as various accessories. The BSD-2000 delivers energy to a patient using a power source and an array of multiple antennae that surround the patient’s body. The BSD-2000 systems create a central focusing of energy that can be adjusted to target the shape, size, and location of the tumor, thus providing dynamic control of the heating delivered to the tumor region. The basic BSD-2000 has eight microwave antennae, enabling electronic steering of energy within the patient’s body. The BSD-2000/3D has 24 microwave antennae enabling additional electronic steering along the long axis of the body. The 3D steering is particularly useful when used with a magnetic resonance system that provides non-invasive 3D imaging of the heated regions, thus permitting the clinician to view the heating pattern in the tumor and steer the energy to the tumor site.

We have received CE Marking for the BSD-2000 family of products, which allows us to market the BSD-2000 systems in the thirty countries that comprise the EU and the EFTA. CE Marking is also recognized in many countries outside of the EU, providing us the ability to market the BSD-2000 family of products to a number of international markets. We have also obtained regulatory approval for the sale of the BSD-2000 in the People’s Republic of China.

On May 18, 2009, the FDA granted HUD designation for our BSD-2000 for use in conjunction with radiation therapy for the treatment of cervical carcinoma patients who are ineligible for chemotherapy. This is the first of the two steps required to obtain HDE marketing approval. Subsequent to the FDA granting the HUD for the BSD-2000, which confirms that the intended use population is fewer than 4,000 patients per year, we filed an HDE submission with the FDA.

On November 21, 2011, we announced that the Company had obtained HDE marketing approval for the BSD-2000 from the FDA. The BSD-2000 is approved for use in conjunction with radiation therapy for the treatment of cervical cancer patients who normally would be treated with combined chemotherapy and radiation but are ineligible for chemotherapy due to patient related factors. The HDE approval authorizes the commercial sale of the BSD-2000. An HDE approval is obtained after a company has demonstrated the product’s safety and probable benefit for the treatment of a disease affecting fewer than 4,000 people in the United States every year. In addition, we cannot charge an amount for an HDE approved device that exceeds the costs of research and development, fabrication, and distribution. A device can have both PMA and an HDE approval as long as the approvals are for different indications for use. In addition, a product can have multiple HDE approvals for different applications, and we may decide to pursue a PMA and/or additional HDE approvals for the BSD-2000 in the future.

Development of the BSD-2000, the BSD-2000/3D and the BSD-2000/3D/MR has required substantial effort involving the cooperative work of such United States research institutions as Duke University, Northwestern University, University of Southern California, Stanford University, University of Utah and University of Washington St. Louis. Contributing European research institutions include Daniel den Hoed Cancer Center of the Academisch Ziekenhuis (Rotterdam, Netherlands), Haukeland University Hospital (Bergen, Norway), Dusseldorf University Medical School, Tübingen University Medical School, Essen University Hospital, Charité Medical School of Humboldt University (Berlin), Luebeck University Medical School, Munich University Medical School Grosshadern, Interne Klinik Argirov of the Munich Comprehensive Cancer Center, University of Erlangen (all of Germany), University of Verona Medical Center (Italy), Graz University Medical School (Austria) and Kantonsspital Aarau (Switzerland).

BSD-2000/3D. Through research funded by the National Cancer Institute in the United States and supportive efforts by other domestic and international research institutions, we enhanced the BSD-2000 to create the BSD-2000/3D. The BSD-2000/3D adds three-dimensional steering of deep focused energy, enabling additional electronic steering along the long axis of the body. As part of our international collaborative research efforts, sophisticated treatment planning software for the BSD-2000/3D was developed.

We have not yet submitted to the FDA a marketing application for the BSD-2000/3D. However, we have obtained the CE Mark necessary to export the BSD-2000/3D to certain European countries and other countries requiring CE Mark certification.

BSD-2000/3D/MR. As a further enhancement of the BSD-2000/3D, we have added to it the option of concurrent magnetic resonance imaging, or MRI, used for monitoring the delivery of deep hyperthermia therapy. Using sophisticated microwave filtering and imaging software, the BSD-2000/3D/MR allows an MRI system to be interfaced with and operate simultaneously with a BSD-2000/3D. The development of MRI treatment monitoring is a significant breakthrough in the development of hyperthermic oncology primarily because it allows non-invasive “on-line” review of hyperthermic treatment progress.

We installed and tested the first BSD-2000/3D/MR system at a leading German oncological research institution, the Clinic of Medical Oncology of the Klinikum Großhadern Medical School of Ludwigs-Maximilians-Universität München, in Munich, Germany. We have since installed BSD-2000/3D/MR systems at multiple other locations.

As is the case for the BSD-2000/3D, we have not yet submitted to the FDA a marketing application for the BSD-2000/3D/MR. We can, however, market the BSD-2000/3D/MR in Europe, as we have CE Mark approval for the BSD-2000/3D/MR, provided we interface the system with an MRI system that also is approved in Europe.

Marketing and Distribution of MicroThermX®. As previously discussed, our U.S. network of direct sales representatives and one domestic specialty distribution firm provides nationwide sales coverage for the MicroThermX® line of products.

In addition, we recently entered into an exclusive, long-term master distribution agreement with Terumo Europe NV in 100 countries in Europe, Western Asia and Northern Africa. We have a Director of International Sales and previously entered into agreements with other international specialty distribution firms. Our marketing and distribution strategy for our MicroThermX® business includes seeking out and securing additional master distribution arrangements for our MicroThermX® line of products in other parts of the world.

Marketing and Distribution of Hyperthermia Systems. To support our direct sales and marketing efforts for our hyperthermia systems and products in the United States, we currently utilize independent sales representatives supported by senior management of the Company.

Historically the Company has recognized revenues derived from sales to Dr. Sennewald Medizintechnik GmbH (“Medizintechnik”) located in Munich, Germany, which is our exclusive distributor of hyperthermia systems in Germany, Austria and Switzerland, and to certain medical institutions in Belgium and the Netherlands. This company is owned by Dr. Gerhard W. Sennewald, one of our directors and a significant stockholder. We have also sold systems in Poland and Italy, and have conducted our own direct sales and marketing efforts in India and other countries in Europe and Asia.

In 2005, we entered into an agreement with Dalian Orientech Co. LTD (“Orientech”), a privately owned company, to assist us in obtaining regulatory approval for the sale of the BSD-2000 in the People’s Republic of China, and thereafter to act as our distributor for the sale of the BSD-2000 in that country. We subsequently obtained Chinese regulatory approval, allowing the distributor to begin to market and sell the BSD-2000 system to hospitals in China. We renewed this exclusive distribution agreement in February 2012, which requires Orientech to purchase a minimum number of BSD-2000 Hyperthermia Systems from us each year. Orientech is also leading efforts to renew our Chinese regulatory approval.

In December 2011, we announced that the Company signed an exclusive agreement with CyberKnife Korea (“CKK”) for the sale and distribution of our hyperthermia products in South Korea. CKK is a premier distributor of sophisticated medical devices in South Korea and represents a number of major medical device companies. CKK is a leading distributor of oncology products in South Korea and has established strong relationships with radiation oncologists throughout the country. As part of the agreement, CKK is required to purchase a minimum number of hyperthermia systems from us each year. We are in the process of obtaining regulatory approval for the BSD-2000 in South Korea.

In August 2012, we announced that the Company had obtained approval to market its hyperthermia systems in the Russian Federation. The marketing approval covers all BSD-2000 Hyperthermia System configurations and the BSD-500 Hyperthermia System.

In March 2013, we announced that the Company signed an exclusive agreement with Linden Bioscience Co., Ltd. (“Linden”), a Taiwan Corporation, for the sale and distribution of our hyperthermia products in Taiwan. Linden’s primary focus will be licensing, marketing and selling the BSD-2000 in Taiwan. Per the agreement, Linden is required to purchase a minimum number of BSD-2000 systems annually over a five year period, totaling a cumulative $7.1 million in revenue to us. In May 2013, we received an initial purchase order from Linden, committing to purchase four BSD-2000 Hyperthermia Systems. Shipment of the first hyperthermia systems will coincide with Linden’s receipt of Taiwan FDA import license approval which Linden believes it can obtain by November 2013.

As demonstrated by our recent signing of the master distribution agreement with Terumo Europe NV for our MicroThermX® line of products, our current strategy includes the possibility of entering into additional collaborative arrangements with third parties to expand and improve the commercialization of all our products including our hyperthermia systems. Consistent with this strategy we engaged Roth Capital Partners on June 1, 2013 to serve as our exclusive advisor with the goal to seek out, identify opportunities and, if possible, secure a transaction or transaction(s) relating to BSD’s hyperthermia business including, but not limited to, partnering or other collaborative agreements, a sale of assets and/or other strategic arrangements. There can be no assurance that the exploration of strategic alternatives will result in any agreements or transactions, or that, if completed, any agreements or transactions will be successful or on attractive terms.

Backlog

As of the date of the filing of this report, we had total sales backlog for our hyperthermia systems of $2.3 million.

Results of Operations

Fluctuation in Operating Results

Our results of operations have fluctuated in the past and may fluctuate in the future from year to year as well as from quarter to quarter. Revenue may fluctuate as a result of factors relating to the demand and market acceptance for our ablation and hyperthermia systems and related component parts and services, world-wide economic conditions, availability of financing for our customers, changes in the medical capital equipment market, changes in order mix and product order configurations, competition, regulatory developments, insurance reimbursement and other matters. Operating expenses may fluctuate as a result of the timing of sales and marketing activities, research and development, and general and administrative expenses associated with our potential growth. For these and other reasons described elsewhere, our results of operations for a particular period may not be indicative of operating results for any other period.

Revenues

We recognize revenue from the sale of our ablation and hyperthermia cancer treatment systems and related parts and accessories (collectively, product sales), the sale of disposables used with certain of our systems, training, service support contracts and other miscellaneous revenues. During the three months and nine months ended May 31, 2013 and 2012, we also recognized revenues from equipment rental, including our fee-per-use rental income from our MicroThermX®. Our revenues can fluctuate significantly from period to period because our sales, to date, have been based upon a relatively small number of hyperthermia 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 hyperthermia systems, particularly BSD-2000/3D/MR systems, can cause a large change in our revenues from period to period and the sales cycle for our systems generally extends over multiple financial reporting periods. In addition, differences in the configuration of the hyperthermia systems sold, pricing, and other factors can result in significant differences in the sales price per system and in the total revenues reported in a given period. As a result, there may be quarterly financial reporting periods where we may report no or minimal revenues from the sale of hyperthermia systems. Through fiscal year 2012, we had minimal revenues from our MicroThermX® family of products. However, with our distribution agreement with Terumo Europe NV, the successful introduction of our fee-per-use rental program and accelerating sales of disposable SynchroWave antennas, our revenues from our MicroThermX® family of products continue to grow.

To date, hyperthermia therapy has not gained wide acceptance by cancer-treating physicians. We believe this is due in part to the lingering impression created by the inability of early hyperthermia therapy technologies to focus and control heat directed at specific tissue locations and inaccurate conclusions drawn in early scientific studies that hyperthermia was only marginally effective. Additionally, we do not believe that reimbursement rates from third-party payers have been adequate to promote hyperthermia therapy acceptance in the medical community.

We also believe the continuing worldwide economic downturn has made it difficult for many of our customers to obtain approval for the purchase of our hyperthermia and microwave ablation systems and to arrange related financing.

Political, economic and regulatory influences are subjecting the U.S. healthcare industry to fundamental changes. We may continue to face significant uncertainty in the industry due to recent governmental healthcare reform. We believe the uncertainties regarding the ultimate features of reform initiatives and their enactment and implementation may also have an adverse effect on our customers’ purchasing decisions regarding our products and services.

As a result of these negative factors, we have been unable to sustain a significant increase in the number of hyperthermia systems sold, and we believe these difficulties may negatively impact the sales of our hyperthermia systems and our MicroThermX®, and our operating results.

At times, we have derived a significant portion of our revenues from sales to related parties; however, these related party sales have become less significant in recent periods. All of the related party revenue was for the sale of hyperthermia systems and related component parts and services sold to Dr. Sennewald Medizintechnik GmbH. We derived $230, or approximately 0%, of our total revenue in the three months ended May 31, 2013 from sales to related parties, compared to $13,757, or approximately 2%, in the three months ended May 31, 2012. We derived $76,776, or approximately 3%, of our total revenue in the nine months ended May 31, 2013 from sales to related parties, compared to $315,163, or approximately 20%, in the nine months ended May 31, 2012. We had no sales of hyperthermia systems to related parties in the three months or nine months ended May 31, 2013.

Total revenues for the three months ended May 31, 2013 were $1,316,713 compared to total revenues of $651,387 for the three months ended May 31, 2012, an increase of $665,326, or approximately 102%. Total revenues for the nine months ended May 31, 2013 were $2,795,757 compared to total revenues of $1,582,268 for the nine months ended May 31, 2012, an increase of $1,213,489, or approximately 77%. The increase in total revenues in the current year is due primarily to increases in all sources of revenues from our MicroThermX® line of products, including increased sales of MicroThermX® systems and consumable devices from increasing sales of SynchroWave disposable antennas that are used in each ablation treatment. The following tables summarize the sources of our revenues for the three months and nine months ended May 31, 2013 and 2012:

	Three Months Ended May 31,				Nine Months Ended May 31,
	2013		2012		2013		2012

Non-Related Parties

Product sales	$	819,751	$	485,753	$	1,530,451	$	838,753
Consumable devices		342,730		66,955		771,665		168,625
Service contracts		72,137		52,370		201,974		139,056
Other		21,965		6,652		36,191		19,221

Total	$	1,256,583	$	611,730	$	2,540,281	$	1,165,655

Related Parties

Product sales	$	-	$	-	$	50,000	$	294,850
Consumable devices		-		11,550		2,400		11,550
Other		230		2,207		24,376		8,763

Total	$	230	$	13,757	$	76,776	$	315,163

During the three months ended May 31, 2013 and 29, 2012, we had equipment rental revenues of $59,900 and $25,900, respectively. During the nine months ended May 31, 2013 and 2012, we had equipment rental revenues of $178,700 and $101,450, respectively, with the increase in the current year attributable to increasing fee-per-use rental revenues from our MicroThermX®.

Cost of Revenues

Cost of sales includes raw material, labor and allocated overhead costs. We calculate and report separately cost of sales for both non-related and related party sales, which are sales to Medizintechnik and Dr. Sennewald. Cost of sales as a percentage of sales will fluctuate from period to period depending on the mix of sales for the period and the type and configuration of the hyperthermia systems sold during the period.

Cost of equipment rental includes installation, training, maintenance and support costs and depreciation of rental equipment.

Total cost of revenues for the three months ended May 31, 2013 was $716,411 compared to $450,783 for the three months ended May 31, 2012, an increase of $265,628, or approximately 59%. Total cost of revenues for the nine months ended May 31, 2013 was $1,608,986 compared to $1,169,274 for the nine months ended May 31, 2012, an increase of $439,712, or approximately 38%. These increases resulted primarily from increased sales in the current year.

Gross Margin

Our gross margin and gross margin percentage will fluctuate from period to period depending on the mix of revenues reported for the period and the type and configuration of the hyperthermia systems sold during the period. Our total gross margin was $600,302, or approximately 46% of total revenues, for the three months ended May 31, 2013 and our gross margin was $200,604, or approximately 31%, for the three months ended May 31, 2012. Our total gross margin was $1,186,771, or approximately 42% of total revenues, for the nine months ended May 31, 2013 and $412,994, or approximately 26%, for the nine months ended May 31, 2012. The increase in gross margin and gross margin percentage in the first nine months of the current fiscal year compared to the first nine months of the prior fiscal year resulted from a more favorable mix of products sold, including increasing sales of SynchroWave disposable antennas and fee-per-use rental revenues from our MicroThermX®. In addition, as our sales volume increases, we are more able to fully absorb certain fixed overhead costs that are allocated to cost of sales, thus increasing our gross profit percentage.

Operating Costs and Expenses

Research and Development Expenses – Research and development expenses include expenditures for new product development and development of enhancements to existing products. Research and development expenses for the three months ended May 31, 2013 were $607,690, compared to $641,457 for the three months ended May 31, 2012, a decrease of $33,767 or approximately 5%. Research and development expenses for the nine months ended May 31, 2013 were $1,693,648, compared to $1,760,803 for the nine months ended May 31, 2012, a decrease of $67,155 or approximately 4%.

Selling, General and Administrative Expenses – Selling, general and administrative expenses were $1,967,082 for the three months ended May 31, 2013 compared to $1,667,503 for the three months ended May 31, 2012, an increase of $299,579, or approximately 18%. Selling, general and administrative expenses were $5,562,013 for the nine months ended May 31, 2013 compared to $4,580,000 for the nine months ended May 31, 2012, an increase of $982,013, or approximately 21%. These increases are due primarily to our continuing roll out of the MicroThermX® product line and the support of its global distribution network. We have increased our marketing and sales staff and incurred additional marketing, sales and related operating expenses. Throughout the first nine months of fiscal 2013 we have incurred nonrecurring expenses supporting regulatory requirements in all parts of the world wherein we currently market our products and in markets for which we have contracts to sell products when regulatory approvals are obtained. Also included in the increase for the first nine months of the current fiscal year is $110,740 for severance to be paid to our former Chief Financial Officer. We believe that the level of our selling, general and administrative expenses may continue to increase over the levels reported to date for our current fiscal year, and the increase may be significant.

Other Income (Expense)

During the three months and nine months ended May 31, 2013 and 2012, other income (expense) was not material to our operations.

Liquidity and Capital Resources

Since inception through May 31, 2013, we have generated an accumulated deficit of $43,427,054 where generally our operating revenues have been insufficient to cover our operating expenses. We have financed our operations primarily through the sale of our common stock and the exercise of stock options and warrants. As of May 31, 2013, we had cash and cash equivalents of $10,882,122, comprised primarily of money market funds and savings accounts.

As of May 31, 2013, we had current liabilities totaling $1,818,292, comprised of accounts payable, accrued liabilities, customer deposits and deferred revenue incurred in the normal course of our business. Our long-term liabilities consisted of deferred revenue of $59,216.

Shelf Registration Statements

On October 1, 2009, a universal shelf registration statement was declared effective by the SEC for the issuance of common stock, preferred stock, warrants, senior debt, subordinated debt and units up to an aggregate amount of $50.0 million (the “2009 Shelf Registration Statement”). We completed four stock offerings utilizing the universal shelf registration statement during calendar year 2010, and we received total net proceeds of approximately $19 million, including proceeds from the exercise of warrants issued in the stock offerings.

On September 28, 2012, we filed a universal shelf registration statement with the SEC for the issuance of common stock, preferred stock, warrants, senior debt, subordinated debt and units up to an aggregate amount of $50.0 million. We filed this universal shelf registration statement because the 2009 Shelf Registration Statement was close to its expiration date. On October 11, 2012, the universal shelf registration statement was declared effective by the SEC. We may periodically offer one or more of these securities in amounts, prices and terms to be announced when and if the securities are offered. At the time any of the securities covered by the registration statement are offered for sale, a prospectus supplement will be prepared and filed with the SEC containing specific information about the terms of any such offering.

April 2013 Stock Offering

The exercisability of the warrants may be limited if, upon exercise, the holder or any of its affiliates would beneficially own more than 4.9% of our common stock.

●	issue or sell any convertible securities either (A) at a conversion, exercise or exchange rate or other price that is based upon and/or varies with the trading prices of, or quotations for, the shares of our common stock at any time after the initial issuance of such convertible securities, or (B) with a conversion, exercise or exchange price that is subject to being reset at some future date after the initial issuance of such convertible securities or upon the occurrence of specified or contingent events directly or indirectly related to our business or the market for our common stock, other than pursuant to a customary “weighted average” anti-dilution provision; or

●	enter into any agreement (including, without limitation, an equity line of credit) whereby we may sell securities at a future determined price (other than standard and customary “preemptive” or “participation” rights).

We closed the Offering on April 12, 2013. The net proceeds to us from the Offering, after deducting placement agent fees and the offering expenses borne by us, were approximately $4.6 million

The Offering was completed using our shelf registration statement on Form S-3, pursuant to a prospectus supplement filed with the SEC.

Cash Flows from Operating, Investing and Financing Activities

During the nine months ended May 31, 2013, we used net cash of $4,785,751 in operating activities, primarily as a result of our net loss of $6,049,807, decreased by non-cash expenses totaling $1,143,969, comprised of depreciation and amortization, stock-based compensation and stock issued for services. Net cash used in operating activities also included increases in receivables of $901,822 and other current assets of $81,540 and decreases in accrued liabilities of $1,279 and deferred revenue of $30,760, partially offset by a decrease in inventories of $94,658 and increases in accounts payable of $189,580 and customer deposits of $851,250.

During the nine months ended May 31, 2012, we used net cash of $4,302,625 in operating activities, primarily as a result of our net loss of $5,887,857, decreased by non-cash expenses totaling $1,184,379, comprised of depreciation and amortization, stock-based compensation, stock issued for services and loss on disposition of property and equipment. Net cash used in operating activities also included an increase in other current assets of $30,215, and decreases in accounts payable of $64,597, accrued liabilities of $132,176 and deferred revenue of $2,317, partially offset by decreases in receivables of $542,204 and inventories of $87,954.

Net cash used in investing activities, resulting from the purchase of property and equipment, was $18,072 and $96,345 for the nine months ended May 31, 2013 and 2012, respectively.

During the nine months ended May 31, 2013 net cash provided by financing activities was $4,583,437 comprised of the net proceeds from the sale of common stock. We had no net cash provided by or used in financing activities for nine months ended May 31, 2012.

We believe that our current cash and cash equivalents will be sufficient to fund our operations for the next twelve months.

If we cannot cover any future cash shortfalls with cost cutting or available cash, or our sales are less than projected, we would need to obtain additional financing. Due to adverse conditions in the global financial markets, 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, 2013, we had no significant commitments for the purchase of property and equipment.

We had no material off balance sheet arrangements as of May 31, 2013.

Critical Accounting Policies

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 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. To date, returns have not been significant.

Revenue from the sale of consumable devices is recognized when a purchase order has been received, the devices have been shipped, the selling price is fixed or determinable, and collection is reasonably assured. Currently, our customers are not required to purchase a minimum number of disposable devices in connection with the purchase of our systems.

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, which approximates recognizing it as it is earned.

Revenue from equipment rental under an operating lease is recognized when billed in accordance with the lease agreement.

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 for non-related parties as with related parties.

Sales to distributors are recognized in the same manner as sales to end-user customers.

Deferred revenue and customer deposits include amounts from service contracts as well as cash received for the sales of products, which have not been shipped.

Inventory Reserves: We maintain a reserve for obsolete inventories to reduce excess and obsolete inventories to their estimated net realizable value. This reserve is a significant estimate and we periodically review our inventory levels and usage, paying particular attention to slower-moving items. If projected sales do not materialize or if our hyperthermia systems do not receive increased market acceptance, we may be required to increase the reserve for obsolete inventories in future periods.

Product Warranty: We provide product warranties on our 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 an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. 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: Stock-based compensation cost of stock options and other stock-based awards to employees and directors is measured at the grant date based on the estimated value of the award granted, using the Black-Scholes option pricing model, and recognized over the period in which the award vests. For stock awards no longer expected to vest, any previously recognized stock compensation expense is reversed in the period of termination. The stock-based compensation expense has been allocated to the various categories of operating costs and expenses in a manner similar to the allocation of payroll expense. The Black-Scholes valuation 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.

Income Taxes: We account for income taxes using the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

We maintain valuation allowances where it is more likely than not that all or a portion of a deferred tax asset will not be realized. Changes in valuation allowances are included in our income tax provision in the period of change. In determining whether a valuation allowance is warranted, we evaluate factors such as prior earnings history, expected future earnings and our ability to carry back reversing items within two years to offset income taxes previously paid.

To the extent that we have the ability to carry back current period taxable losses to offset income taxes previously paid, we record an income tax receivable and a current income tax benefit.

Recent Accounting Pronouncements

No new accounting pronouncements were issued during the nine months ended May 31, 2013 and through the date of filing this report that we believe are applicable or would have a material impact on our financial statements.

Medical Device Excise Tax:

A Medical Device Excise Tax (MDET) was enacted into law as part of the Health Care Education Reconciliation Act of 2010 and imposes an excise tax on medical device manufacturers on their sales in the U.S of certain devices after December 31, 2012. The tax is 2.3% of the taxable base. We estimate approximately 80 - 85% of our worldwide sales will be subject to the MDET which commenced on January 1, 2013.

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” and other parts of this quarterly report on Form 10-Q 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:

·	our belief about the market opportunities for our products;

·	our anticipated financial performance and business plan;

·	our belief that the distribution agreement with Terumo Europe NV will drive market adoption of the MicroThermX® ;

·	our expectations that we will continue and grow the successful results from our MicroThermX® fee-per-use equipment rental program throughout the U.S. that we have experienced to date;

·	our expectations that the SynchroWave antennas to be used in conjunction with the MicroThermX® will represent a significant ongoing revenue stream;

·	our expectations that we will reach agreements with additional international distribution firms;

·	our expectations that additional international shipments of the MicroThermX® and supplies of SynchroWave antennas will occur in calendar year 2013;

·	our belief that the level of our operating expenses, including selling, general and administrative expenses, will increase and that the increase may be significant;

·	our belief that our operating results, revenue and operating expenses may fluctuate in the future from year to year as well as from quarter to quarter; and

·	our belief that our current cash and cash equivalents will be sufficient to finance our operations for the next twelve months.

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 Item 1A – “Risk Factors” in our Annual Report on Form 10-K for the year ended August 31, 2012 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 Disclosures About Market Risk

There are no material changes to our market risk as described in our annual report on Form 10-K for the year ended August 31, 2012.

Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures.

As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our management including our principal executive officer and principal financial officer, of 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 (“Exchange Act”). Based on this evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in applicable rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, in a manner that allows timely decisions regarding required disclosure.

Changes in internal controls over financial reporting.

There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the risk factors reported in our Annual Report on Form 10-K for the year ended August 31, 2012.

Item 6. Exhibits

The following exhibits are filed as part of this report:

Exhibit No.	Description of Exhibit
1.1	Placement Agency Agreement, dated as of April 9, 2013, by and among the Company and Roth Capital Partners, LLC. Incorporated by reference to Exhibit 1.1 to the BSD Medical Corporation Form 8-K, filed April 9, 2013.

4.1	Form of Common Stock Purchase Warrant. Incorporated by reference to Exhibit 4.1 to the BSD Medical Corporation Form 8-K, filed April 9, 2013.

10.1	Securities Purchase Agreement, dated as of April 9, 2013, by and between the Company and each of the purchasers identified on the signature pages thereto. Incorporated by reference to Exhibit 10.1 to the BSD Medical Corporation Form 8-K, filed April 9, 2013.

10.2	Employment Agreement with Harold R. Wolcott dated May 22, 2013

31.1	Certification of the Principal Executive Officer Required Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2	Certification of the Principal Accounting 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 Accounting Officer Required Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS*	XBRL Instance Document

101.SCH*	XBRL Taxonomy Extension Schema

101.CAL*	XBRL Taxonomy Extension Calculation Linkbase

101.DEF*	XBRL Taxonomy Extension Definition Linkbase Document

101.LAB*	XBRL Taxonomy Extension Label Linkbase

101.PRE*	XBRL Taxonomy Extension Presentation Linkbase

* The XBRL related information in Exhibit 101 shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability of that section and shall not be incorporated by reference into any filing or other document pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing or document.

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 10, 2013	/s/ Harold R. Wolcott
	Harold R. Wolcott
	President (Principal Executive Officer)

Date: July 10, 2013	/s/ William S. Barth
	William S. Barth
	Chief Financial Officer (Principal Accounting Officer)