================================================================================
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 November 30, 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 |X| Non-accelerated
Filer |_|
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 January 9, 2008, there were 21,288,333 shares of the Registrant's
common stock, $0.001 par value per share, outstanding.
1
BSD MEDICAL CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED NOVEMBER 30, 2007
PART I - Financial Information
Item 1. Financial Statements
Condensed Balance Sheets........................................3
Condensed Statements of Operations..............................4
Condensed Statements of Cash Flows..............................5
Notes to Condensed Financial Statements.........................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................13
Item 3. Quantitative and Qualitative Disclosures About Market
Risk...........................................................19
Item 4. Controls and Procedures........................................20
PART II - Other Information
Item 1A. Risk Factors..................................................20
Item 6. Exhibits.......................................................21
Signatures..............................................................22
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
BSD MEDICAL CORPORATION
Condensed Balance Sheets
(Unaudited)
November 30, August 31,
ASSETS 2007 2007
--------------------------------
Current assets:
Cash and cash equivalents $ 731,513 $ 416,540
Investments 15,860,611 19,090,118
Accounts receivable, net of allowance
for doubtful accounts of $20,000 491,130 203,267
Related party trade accounts
receivable 1,036,247 488,200
Income tax receivable 2,162,022 1,759,995
Inventories, net 1,602,503 1,510,067
Deferred tax asset - 387,000
Other current assets 119,776 127,003
--------------------------------
Total current assets 22,003,802 23,982,190
Property and equipment, net 1,451,066 271,077
Patents, net 39,870 19,373
Deferred tax asset - 69,000
-------------------------------
$ 23,494,738 $ 24,341,640
================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 269,305 $ 235,676
Accrued liabilities 560,732 633,090
Customer deposits 83,065 214,638
Deferred revenue - current portion 23,392 26,115
--------------------------------
Total current liabilities 936,494 1,109,519
Deferred revenue - net of current
portion 43,334 48,333
--------------------------------
Total liabilities 979,828 1,157,852
--------------------------------
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,
40,000,000 shares authorized,
21,312,664 and 21,297,446 shares
issued 21,313 21,298
Additional paid-in capital 26,689,279 26,373,637
Treasury stock, 24,331 shares at cost (234) (234)
Other comprehensive loss (729,360) (360,760)
Accumulated deficit (3,466,088) (2,850,153)
--------------------------------
Total stockholders' equity 22,514,910 23,183,788
--------------------------------
$ 23,494,738 $ 24,341,640
================================
See accompanying notes to condensed financial statements
3
BSD MEDICAL CORPORATION
Condensed Statements of Operations
(Unaudited)
Three Months Ended
November 30,
2007 2006
--------------------------------
Revenues:
Sales $ 479,703 $ 648,611
Sales to related parties 908,025 16,044
--------------------------------
Total revenues 1,387,728 664,655
--------------------------------
Operating costs and expenses:
Cost of sales 162,981 436,625
Cost of related party sales 277,874 12,630
Research and development 337,353 332,079
Selling, general and administrative 1,393,947 1,556,441
--------------------------------
Total operating costs and expenses 2,172,155 2,337,775
--------------------------------
Loss from operations (784,427) (1,673,120)
--------------------------------
Other income (expense):
Interest income 189,348 370,213
Other expense (63,856) (27,732)
--------------------------------
Total other income (expense) 125,492 342,481
--------------------------------
Loss before income taxes (658,935) (1,330,639)
Income tax benefit 43,000 468,968
--------------------------------
Net loss (615,935) (861,671)
Other comprehensive income (loss) -
unrealized gain (loss) on investments,
net of income tax (368,600) 30,869
--------------------------------
Net comprehensive loss $ (984,535) $ (830,802)
================================
Loss per common share:
Basic $ (0.03) $ (0.04)
================================
Diluted $ (0.03) $ (0.04)
================================
Weighted average number of shares outstanding:
Basic 21,311,000 21,036,000
Diluted 21,311,000 21,036,000
See accompanying notes to condensed financial statements
4
BSD MEDICAL CORPORATION
Condensed Statements of Cash Flows
(Unaudited)
Three Months Ended
November 30,
2007 2006
--------------------------------
Cash flows from operating activities:
Net loss $ (615,935) $ (861,671)
Adjustments to reconcile net loss
to net cash used
in operating activities:
Depreciation and amortization 26,373 21,116
Stock-based compensation 158,630 234,210
Stock issued for services 30,000 -
Provision for doubtful accounts - 83,700
Decrease (increase) in:
Receivables (835,910) 51,074
Income tax receivable (211,000) (367,967)
Inventories (92,436) (107,983)
Deferred tax assets 168,000 (101,000)
Other current assets 7,227 7,968
Increase (decrease) in:
Accounts payable 33,629 124,860
Accrued liabilities (72,358) (121,131)
Customer deposits (131,573) -
Deferred revenue (7,722) (11,286)
Income taxes payable - (1,500,000)
--------------------------------
Net cash used in operating activities (1,543,075) (2,548,110)
--------------------------------
Cash flows from investing activities:
Sale of investments 3,072,907 1,666,755
Purchase of property and equipment (1,205,892) (23,812)
Increase in patents (20,967) -
--------------------------------
Net cash provided by investing activities 1,846,048 1,642,943
--------------------------------
Cash flows from financing activities:
Proceeds from the sale of common stock 12,000 -
--------------------------------
Net increase (decrease) in cash and cash
equivalents 314,973 (905,167)
Cash and cash equivalents, beginning of
period 416,540 2,179,094
--------------------------------
Cash and cash equivalents, end of period $ 731,513 $ 1,273,927
================================
See accompanying notes to condensed financial statements
5
BSD MEDICAL CORPORATION
Notes to Condensed Financial Statements
(Unaudited)
Note 1. Basis of Presentation
The accompanying unaudited condensed balance sheets of BSD Medical
Corporation (the "Company") as of November 30, 2007 and August 31, 2007 and the
related unaudited condensed statements of operations and of cash flows for the
three months ended November 30, 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 (the "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-K for the year ended August 31, 2007.
All adjustments (consisting only of normal recurring adjustments)
necessary for the fair presentation of our financial position as of November 30,
2007 and August 31, 2007 and our results of operations and cash flows for the
three months ended November 30, 2007 and 2006 have been included. The results of
operations for the three months ended November 30, 2007 may not be indicative of
the results for the year ending August 31, 2008.
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 adopted this Interpretation on September 1, 2007,
with no material impact on our financial statements.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business
Combinations. This statement replaces SFAS No. 141, Business Combinations and
applies to all transactions or other events in which an entity (the acquirer)
obtains control of one or more businesses (the acquiree), including those
sometimes referred to as "true mergers" or "mergers of equals" and combinations
achieved without the transfer of consideration. This statement establishes
principles and requirements for how the acquirer: a) recognizes and measures in
its financial statements the identifiable assets acquired, the liabilities
assumed, and any noncontrolling interest in the acquiree; b) recognizes and
measures the goodwill acquired in the business combination or a gain from a
bargain purchase; and c) determines what information to disclose to enable users
of the financials statements to evaluate the nature and financial effects of the
business combination. This statement will be effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15,
2008, or our fiscal year beginning September 1, 2009. Earlier adoption is
prohibited. We currently are unable to determine what impact the future
application of this pronouncement may have on our financial statements.
In December 2007, the FASB issued SFAS 160, Noncontrolling Interests in
Consolidated Financial Statements. This statement applies to all entities that
prepare consolidated financial statements, except not-for-profit organizations,
and amends Accounting Research Bulletin ("ARB") 51 to establish accounting and
reporting standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. It also amends certain of ARB 51's
6
consolidation procedures for consistency with the requirements of SFAS No. 141
(revised 2007). This statement will be effective for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15, 2008, or
our fiscal year beginning September 1, 2009. Earlier adoption is prohibited. We
currently are unable to determine what impact the future application of this
pronouncement may have on our financial statements.
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,
or our fiscal year beginning September 1, 2008. 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. We have not elected early adoption of this statement, and do
not expect the adoption of this statement will have a material impact on our
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. We adopted SFAS No. 158 on
September 1, 2007, with no material impact on our financial statements since we
currently do not sponsor a defined benefit pension or postretirement plan within
the scope of the standard.
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. In November 2007, the FASB authorized its
staff to draft a proposed FASB Staff Position ("Proposed FSP") that would
partially defer the effective date of SFAS No. 157 for one year for
non-financial assets and liabilities that are recognized or disclosed at fair
value in the financial statements on a non-recurring basis. If the proposed FSP
is approved, SFAS No. 157 will be effective for financial statements issued for
fiscal years beginning after November 15, 2007, or our fiscal year beginning
September 1, 2008, for financial assets and liabilities carried at fair value on
a recurring basis and on September 1, 2009, for non-recurring non-financial
assets and liabilities that are recognized or disclosed at fair value. We do not
expect the adoption of SFAS No. 157 will have a material impact on our 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 adopted SFAS No. 156 on September 1, 2007, with no
material impact on our financial statements.
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)
7
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
adopted SFAS No. 156 on September 1, 2007, with no material impact on our
financial statements.
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.
We adopted this standard on September 1, 2007, with no material impact on our
financial statements.
EITF No. 07-3, Accounting for Nonrefundable Advance Payments for Goods
or Services Received for Use in Future Research and Development Activities, was
issued in June 2007. The EITF reached a consensus that nonrefundable payments
for goods and services that will be used or rendered for future research and
development activities should be deferred and capitalized. Such amounts should
be recognized as an expense as the related goods are delivered and the related
services are performed. Entities should continue to evaluate whether they expect
the goods to be delivered or services to be rendered. If the entity does not
expect the goods to be delivered or services to be rendered, the capitalized
advance payment should be charged to expense. This pronouncement is effective
for financial statements issued for fiscal years beginning after December 15,
2007, our fiscal year beginning September 1, 2008, and interim periods within
those fiscal years. Earlier application is not permitted. Entities are required
to report the effects of applying this pronouncement prospectively for new
contracts entered into on or after the effective date of this pronouncement. The
future application of this pronouncement may have a material effect on the
Company's financial condition and results of operations. We currently are unable
to determine what impact the future application of this pronouncement may have
on our financial statements.
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 ended November 30, 2007 and November 30, 2006,
1,086,918 and 1,174,999 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.
8
The shares used in the computation of the Company's basic and diluted
earnings per share are reconciled as follows:
Three Months Ended
November 30,
2007 2006
--------------------------------
Weighted average number of shares
outstanding - basic 21,311,000 21,036,000
Dilutive effect of stock options - -
--------------------------------
Weighted average number of shares
outstanding - diluted 21,311,000 21,036,000
================================
Note 4. Inventories
Inventories consist of the following:
November 30, August 31,
2007 2007
--------------------------------
Parts and supplies $ 869,778 $ 835,498
Work-in-process 718,919 610,846
Finished goods 53,806 103,723
Reserve for obsolete inventory (40,000) (40,000)
--------------------------------
Inventories, net $ 1,602,503 $ 1,510,067
================================
Note 5. Property and Equipment
Property and equipment consist of the following:
November 30, August 31,
2007 2007
--------------------------------
Equipment $ 968,054 $ 962,162
Furniture and fixtures 298,576 298,576
Leasehold improvements 17,420 17,420
Building 956,000 -
Land 244,000 -
--------------------------------
2,484,050 1,278,158
Less accumulated depreciation (1,032,984) (1,007,081)
--------------------------------
Property and equipment, net $ 1,451,066 $ 271,077
================================
When the lease on the Company's office, production and research
facilities expired in November 2007, the Company exercised its option to
purchase the building and land for a total purchase price of $1,200,000.
9
Note 6. Related Party Transactions
During the three months ended November 30, 2007 and November 30, 2006,
we had sales of $908,025 and $16,044, respectively, to an entity controlled by a
significant stockholder and member of the Board of Directors. These related
party transactions represent approximately 65% and 2% of total sales for each
respective three-month period.
At November 30, 2007 and August 31, 2007, receivables included
$1,036,247 and $488,200, respectively, from this entity.
Note 7. Stock-Based Compensation
We have a stock-based employee plan and a director option plan which
are described more fully in Note 11 in our 2007 Annual Report on Form 10-K. As
of November 30, 2007, we had approximately 502,000 shares of common stock
reserved for future issuance under the stock option plans.
The Company accounts for stock-based compensation in accordance with
SFAS No. 123(R), Share Based Payments. Under the fair value recognition
provisions of this statement, 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.
The stock-based compensation expense for the three-month period ended November
30, 2007 has been allocated to the various categories of operating costs and
expenses in a manner similar to the allocation of payroll expense as follows:
Cost of sales $ 21,148
Research and development 25,495
Selling, general and administrative 111,987
--------------
Total $ 158,630
==============
Stock-based compensation expense for the three-month period ended
November 30, 2006 of $234,210 has been included in selling, general and
administrative expenses.
During the three months ended November 30, 2007, we granted 120,000
options to our directors, with one fifth vesting each year for the next five
years, and 10,000 options to employees, with one third vesting each year for the
next three years. This grant accounts for $25,492 of the total stock-based
compensation expense for the three months ended November 30, 2007.
Unrecognized stock-based compensation expense expected to be recognized
over the estimated weighted-average amortization period of 1.89 years is
approximately $1,912,000 at November 30, 2007.
Our weighted-average assumptions used in the Black-Scholes valuation
model for equity awards with time-based vesting provisions granted during the
three months ended November 30, 2007 are shown below:
Expected volatility 63.38%
Expected dividends 0%
Expected term 6.25 Years
Risk-free interest rate 4.28%
10
The expected volatility rate was estimated based on the historical
volatility of our common stock. The expected term was estimated based on
historical experience of stock option exercise and forfeiture. 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.
A summary of the time-based stock option awards as of November 30,
2007, and changes during the three months then ended, is as follows:
Weighted-
Weighted- Average
Average Remaining Aggregate
Exercise Contract Term Intrinsic
Shares Price (Years) Value
--------------------------------------------------------
Outstanding at
August 31, 2007 1,795,853 $ 2.31
Granted 130,000 6.46
Exercised (11,000) 1.34
Forfeited or expired - -
------------------------
Outstanding at
November 30, 2007 1,914,853 $ 2.60 6.71
========================================================
Exercisable at
November 30, 2007 1,339,712 $ 1.58 5.77 $ 5,253,977
========================================================
The weighted-average grant-date fair value of stock options granted
during the three months ended November 30, 2007 was $4.05.
Note 8. Supplemental Cash Flow Information
The Company paid no amounts for interest during the three months ended
November 30, 2007 and 2006. The Company paid no amounts for income taxes during
the three months ended November 30, 2007, and paid $1,500,000 for income taxes
during the three months ended November 30, 2006.
During the three months ended November 30, 2007, the Company had the
following non-cash financing and investing activities:
o Recorded an increase in additional paid-in capital of $115,027, a
decrease in long-term deferred tax asset of $76,000 and an
increase in income tax receivable of $191,027 related to the tax
benefit from the exercise of stock options.
o Increased other comprehensive loss by $368,600, decreased
investments by $156,600 and decreased short-term deferred tax
asset by $212,000.
o Increased common stock and decreased additional paid-in capital by
$1.
During the three months ended November 30, 2006, the Company had the
following non-cash financing and investing activities:
o Increased other comprehensive income and increased investments by
$30,869.
11
o Transferred deferred compensation of $247,000 to additional
paid-in capital.
o Decreased income taxes payable and decreased income tax receivable
by $39,946.
12
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 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 created a 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 funding that we
can utilize for commercializing our systems used in the treatment of cancer and
in pursuing 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.
13
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. We estimate our financial model in the higher production environment of
established commercial sales could achieve a 60% gross margin on systems and an
80% gross margin on service agreements and disposable applicators used with our
MicroThermX 100 system, although there is no assurance that these results will
be obtained.
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. In August 2007, we successfully concluded a pre-approval and quality
system inspection by the FDA. On December 31, 2007, we received a letter from
the FDA providing guidance regarding amendments needed to make the BSD-2000
submission approvable. 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. We periodically review our inventory levels and
usage, paying particular attention to slower-moving items. If projected sales
14
for fiscal 2008 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.
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 November 30, 2007 and August 31, 2007 we had a
$20,000 balance in this account. 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 - We account for stock-based compensation in accordance
with 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 ended
November 30, 2007 and November 30, 2006, we recorded compensation expense of
$158,630 and $234,210, 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.
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 within two years to offset income taxes previously paid, we
record an income tax receivable and a current income tax benefit.
15
Results of Operations
---------------------
Three Months Ended November 30, 2007 Compared to the Three Months Ended November
30, 2006
Revenues. Total revenues for the three months ended November 30, 2007
were $1,387,728, compared to $664,655, for the three months ended November 30,
2006, an increase of $723,073, or approximately 109%. The increase in total
revenues was due to an increase in the volume of sales to 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 had $908,025, or approximately 65%, of our
revenues in the three months ended November 30, 2007 from sales to related
parties as compared to $16,044 or approximately 2%, in the three months ended
November 30, 2006. These sales for the three months ended November 30, 2007 were
to Medizin-Technik GmbH and consisted of product sales of $879,512, probes of
$8,700 and other revenues of $19,813. All of the related party revenues in the
three months ended November 30, 2006 were from sales of component parts. Dr.
Gerhard Sennewald, one of our stockholders and directors, is also a stockholder,
executive officer and 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.
Non-Related Party Sales. In the three months ended November 30, 2007,
we had $479,703 or approximately 35% of our revenues from sales to unrelated
parties, as compared to $648,611, or approximately 98%, for the three months
ended November 30, 2006. These sales for the three months ended November 30,
2007 consisted of product sales of $435,000, service contracts of $15,371,
probes of $13,847 and other revenues of $15,485. By comparison, non-related
party sales for the three months ended November 30, 2006 consisted of product
sales of $586,612, consulting services of $31,143, service contracts of $14,110,
and probes of $16,746.
Gross Profit. Gross profit for the three months ended November 30, 2007
was $946,873 or 68% of total product sales as compared to $215,400 or 32%, of
total product sales for the three months ended November 30, 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.
Research and Development Expenses. Research and development expenses
were $337,353 for the three months ended November 30, 2007, as compared to
$332,079, for the three months ended November 30, 2006, an increase of $5,274,
or approximately 2%.
Selling General and Administrative Expenses. Selling, general and
administrative expenses decreased to $1,393,947 in the three months ended
November 30, 2007, from $1,556,441 for the three months ended November 30, 2006,
a decrease of $162,494 or approximately 10%. This decrease was primarily due to
a reduction in compensation expense related to the issuance of stock options
charged to selling, general and administrative expenses in the current year. We
anticipate that our selling, general and administrative expenses will continue
at the level reported in the first quarter of the current fiscal year or
increase, at least in the short term.
Interest Income. Interest income decreased to $189,348 for the three
months ended November 30, 2007 as compared to $370,213 for the three months
ended November 30, 2006, due to lower levels of cash and investments in the
16
current fiscal year and due to a lower rate of return recognized on investments
in the current fiscal year.
Income Tax Benefit. For the three months ended November 30, 2007, we
reported an income tax benefit of $43,000, which was comprised of a current
income tax benefit of $211,000, partially offset by a deferred income tax
provision of $168,000. The current income tax benefit of $211,000 represents an
increase to our income tax receivable resulting from our ability to carry-back
our taxable loss in the current period to offset income taxes previously paid.
The deferred income tax provision of $168,000 resulted primarily from our
recording a 100% valuation allowance against our deferred tax assets as of
November 30, 2007. In recording the valuation allowance, we were unable to
conclude that it is more likely than not that our deferred tax assets will be
realized. In reaching this determination, we evaluated factors such as prior
earnings history, expected future earnings and our ability to carry-back
reversing items within two years to offset income taxes paid.
For the three months ended November 30, 2006, we reported an income tax
benefit of $468,968, which was comprised of a current income tax benefit of
$367,968 and a deferred income tax benefit of $101,000.
Net Loss. During the three months ended November 30, 2007, we had a net
loss of $615,935, after recording an income tax benefit of $43,000, as compared
to an after tax net loss of $861,671 in the three months ended November 30,
2006. Our net loss in the first three months of the current fiscal year
decreased $245,736 compared to the net loss in the first three months of the
prior year, primarily due to the increase in related party sales and the
decrease in our total operating costs and expenses in the current year,
partially offset by our recording of a deferred income tax provision of $168,000
in the first three months of the current year, as further discussed above.
Liquidity and Capital Resources
-------------------------------
Since inception through November 30, 2007, we have generated an
accumulated deficit of $3,466,088. We have historically financed our operations
through cash from operations, research grants, licensing of technological
assets, issuance of common stock and the sale of investments in spinoff
operations. As of November 30, 2007, we had cash, cash equivalents and
investments totaling $16,592,124 as compared to cash, cash equivalents and
investments totaling $19,506,658 as of August 31, 2007.
During the three months ended November 30, 2007, we used $1,543,075 of
cash in operating activities, primarily as a result of our net loss of $615,935,
increase in receivables of $835,910, increase in income tax receivable of
$211,000, increase in inventories of $92,436, and decrease in customer deposits
of $131,573, partially offset by a decrease in deferred tax assets of $168,000.
By comparison, net cash used in operating activities was $2,548,110 during the
three months ended November 30, 2006.
Net cash provided by investing activities for the three months ended
November 30, 2007 was $1,846,048, resulting from the sale of investments of
$3,072,907, partially offset by the purchase of property and equipment of
$1,205,892 and an increase in patents of $20,967. For the three months ended
November 30, 2006, net cash provided by investing activities was $1,642,943,
resulting from the sale of investments of $1,666,755, partially offset by the
purchase of property and equipment of $23,812.
Net cash provided by financing activities consisted of proceeds from
the sale of common stock through the exercise of stock options of $12,000 in the
three months ended November 30, 2007. No cash was provided by or used in
financing activities in the three months ended November 30, 2006.
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
17
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 continued expenses related to corporate
governance and compliance with the Sarbanes-Oxley Act of 2002, during fiscal
2008.
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 November 30, 2007, we have no significant commitments for the
purchase of property and equipment.
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.
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;
18
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 our 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 the same or 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.
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 Item entitled "Risk
Factors" included in our Annual Report on Form 10-K for the year ended August
31, 2007 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.
A significant portion of the Company's cash equivalents and short-term
investments bear variable interest rates that are adjusted to market conditions.
Changes in market rates will affect interest earned and potentially the market
value of the principal of these instruments. The Company does not utilize
derivative instruments to offset the exposure to interest rate changes.
Significant changes in interest rates may have a material impact on the
Company's investment income, but not on the Company's consolidated results of
operations.
The Company does have significant sales to foreign customers and is
therefore subject to the effects that changes in foreign currency exchange rates
may have on demand for its products and services. The Company does not utilize
derivative instruments to offset the exposure to changes in foreign currency
exchange rates. To minimize foreign exchange risk, the Company's export sales
are transacted in United States dollars.
19
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 (the "Exchange Act")). Based on this evaluation, the
principal executive officer and principal financial officer concluded that 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
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 factors discussed in Item 1A - "Risk Factors" in
our annual report on Form 10-K for the year ended August 31, 2007, which could
materially affect our business, financial condition or future results of
operations. The information presented below updates these risk factors and
should be read in conjunction with the risk factors and information disclosed in
that Form 10-K. The risks discussed in our annual report on Form 10-K, as
updated in this report, are not the only risks facing us. 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.
We have not yet received pre-market approval for our BSD-2000 and MicroThermx
100 systems, which is necessary for us to commercially market these systems in
the U.S.
We have not yet received pre-market approval for our BSD-2000 and
MicroThermx 100 systems. Obtaining these pre-market approvals from the FDA is
necessary for us to commercially market these systems in the United States.
Obtaining approvals is a lengthy and expensive process. On December 31, 2007, we
received a letter from the FDA providing guidance regarding amendments needed to
make the BSD-2000 submission approvable. We may not be able to obtain these
approvals on a timely basis, if at all, and such failure could harm our business
prospects substantially. Further, even if we are able to obtain the approvals we
seek from the FDA, the approvals granted might include significant limitations
on the indicated uses for which the products may be marketed, which restrictions
could negatively impact our business.
20
Item 6. Exhibits.
The following exhibits are filed as part of this report:
Exhibit No. Description of Exhibit
--------- ---------------------------------------------------------------
3.2 Bylaws of BSD Medical Corporation, as amended
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
21
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: January 9, 2008 /s/ Hyrum A. Mead
-------------------------------------------
Hyrum A. Mead
President (Principal Executive Officer)
Date: January 9, 2008 /s/ Dennis P. Gauger
-------------------------------------------
Dennis P. Gauger
Chief Financial Officer (Principal
Accounting Officer)
22
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