As filed with the Securities and Exchange Commission on January 27, 2004
Registration No. 333- _________
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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BSD MEDICAL CORPORATION
(Exact name of Registrant as specified in its charter)
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Delaware 3845 75-1590407
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
2188 West 2200 South
Salt Lake City, Utah 94119
(801) 972-5555
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
----------------------
Hyrum A. Mead
President
BSD Medical Corporation
2188 West 2200 South
Salt Lake City, Utah 94119
(801) 972-5555
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
----------------------
Copy to:
Nolan S. Taylor, Esq.
Dorsey & Whitney LLP
170 South Main Street, Suite 900
Salt Lake City, Utah 84101
(801) 933-7360
Approximate date of commencement of proposed sale to
the public: from time to time after the effective date of
this registration statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. |X|
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
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CALCULATION OF REGISTRATION FEE
=========================================== ================== ======================= ====================== ===================
Amount Proposed Maximum Proposed Maximum Amount of
Title of Shares to be Offering Price Aggregate Registration
to be Registered Registered(1) per Share(2) Offering Price(2) Fee
------------------------------------------- ------------------ ----------------------- ---------------------- -------------------
Common stock, 2,162,580 $1.25 $2,703,225 $342.50
$0.001 par value per share
=========================================== ================== ======================= ====================== ===================
(1) The amount to be registered consists of 2,162,580 shares of common
stock to be sold by the selling stockholders identified in this
registration statement. Of the 2,162,580 shares of common stock,
2,059,600 are currently outstanding and beneficially owned by the
selling stockholders and 102,980 are issuable upon the exercise of
warrants by the selling stockholders.
(2) Estimated based upon the average of the bid and asked price of the
Registrant's common stock on January 23, 2004, as reported by the OTC
Bulletin Board, pursuant to Rule 457(c) promulgated under the
Securities Act of 1933, as amended.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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The information in this prospectus is not complete and may be changed.
The selling stockholders named herein may not sell these securities until the
registration statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these securities and it is
not soliciting an offer to buy these securities in any state where the offer or
sale is not permitted.
PRELIMINARY PROSPECTUS
(Subject to completion: Dated January 27, 2004)
2,162,580 Shares
BSD MEDICAL CORPORATION
Common Stock
This prospectus relates to the public offering, which is not being
underwritten, of a total of 2,162,580 shares of the common stock of BSD Medical
Corporation by the selling stockholders described herein. The price at which the
selling stockholders may sell the shares will be determined by the prevailing
market price for the shares or in negotiated transactions. We will not receive
any of the proceeds from the sale of these shares.
Our common stock is quoted on the OTC Bulletin Board under the symbol
"BSDM." On January 23, 2004, the last reported sale price for our common stock
on the OTC Bulletin Board was $1.22 per share.
----------------------------
You should carefully consider the risk factors beginning on page 2 of
this prospectus before purchasing any of the common stock offered by this
prospectus.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities, or determined if
this prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is January 27, 2004.
TABLE OF CONTENTS
Page
----
Prospectus Summary............................................................1
Risk Factors..................................................................2
Use of Proceeds...............................................................7
Business......................................................................7
Management...................................................................19
Executive Compensation.......................................................21
Aggregated Option Exercises In Last Fiscal Year And Fiscal
Year-End Option Values..................................................22
Selling Stockholders.........................................................23
Plan of Distribution.........................................................24
Management's Discussion and Analysis of Financial Condition
and Results of Operations...............................................26
Certain Relationships and Related Transactions...............................31
Market for Registrant's Common Equity and Related Stockholder
Matters.................................................................32
Principal Stockholders.......................................................33
Description of Securities....................................................34
Limitation of Liability and Indemnification..................................36
Legal Matters................................................................37
Experts......................................................................37
Where You Can Find More Information..........................................37
Financial Statements.........................................................37
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You should rely only on information contained in this prospectus. We
have not authorized any person to make a statement that differs from what is in
this prospectus. If any person does make a statement that differs from what is
in this prospectus, you should not rely on it. This prospectus is not an offer
to sell, nor is it seeking an offer to buy, these securities in any state in
which the offer or sale is not permitted. The information in this prospectus is
complete and accurate as of its date, but the information may change after that
date.
In this prospectus, the terms "BSD" "company," "we," "us," and "our"
refer to BSD Medical Corporation.
PROSPECTUS SUMMARY
The following summary should be read in conjunction with, and is
qualified in its entirety by, the more detailed information and financial
statements appearing elsewhere in this prospectus.
Company Overview
BSD Medical Corporation develops, manufactures, markets and services
hyperthermia microwave systems used to treat cancer, the second leading cause of
death in the United States according to the National Cancer Society. Our
treatment systems are designed to precisely deliver microwave energy to elevate
the temperature of cancerous tumors, directly killing cancerous cells and
enhancing the effectiveness of certain other cancer therapies. We also
manufacture products and supply services for TherMatrx, Inc., a privately-held
medical device company in which we have ownership.
The focus of our cancer therapy business is to develop and
commercialize systems that can provide hyperthermia treatment for cancerous
tumors that occur anywhere in the body. To accomplish this, we have developed
systems capable of treating both superficial and deep tumors. These systems
consist of two families of products, the BSD-500 and the BSD-2000.
In October 2003, we announced that we had received FDA approval for a
new operating system, allowing us to launch the commercial market introduction
in the United States of a new family of six systems (the BSD-500i-4, BSD-500s-4,
BSD-500c-4, BSD-500i-8, BSD-500s-8 and BSD-500c-8) to treat cancer patients
using superficial and interstitial hyperthermia. We have also obtained CE Mark
certification required to export these systems to Europe. In addition to
treating melanoma, recurring breast cancer and other cancers requiring
superficial therapy, these new systems are used as companions to brachytherapy
systems that treat cancer through interstitial radiation. We believe over 1,500
brachytherapy systems have been installed providing a target customer base for
our systems. These new systems are compact, portable and ergonomically
engineered for use in a demanding hospital environment.
Our BSD-2000 family of systems employs an advanced phased array of
microwave antennae used to focus on and treat tumors located deep in the body.
The BSD-2000 system has not been submitted for FDA pre-market approval, or PMA.
Accordingly, we do not have authority to distribute the BSD-2000 system for sale
in the United States, except as an investigational device. The phase III
clinical trial through which we intend to seek a PMA for this system has already
been completed, and we are underway in developing the commercial version of the
BSD-2000 that we intend to use as the basis of the FDA submission.
In addition to systems for treating cancer, we have also developed a
system used in the therapy of a major benign condition. We currently own
approximately 30% of TherMatrx, which markets a medical device that we developed
for the treatment of benign prostatic hyperplasia, or BPH. BPH results from
enlargement of the prostate as men age, and is a major health condition so
prevalent that its symptoms affect over half of men by age 60 and 90% of men by
age 85, according to data presented in a Mayo Clinic and Mayo Foundation study
published in 1995 in the Archives of Internal Medicine. TherMatrx received FDA
approval to market its TMx-2000 thermotherapy system for treating BPH in July
2001, and since then it has been marketing and selling the TMx-2000. TherMatrx
had sales in excess of $13 million and a net income in excess of $1.5 million in
only its second full fiscal year since the FDA approval. In addition to being an
equity owner of TherMatrx, we provide technical and regulatory support services
for TherMatrx on a consulting basis, and manufacture and test some of its
products. In both fiscal 2002 and 2003, TherMatrx was our largest customer.
1
Our principal executive offices are located at 2188 West 2200 South,
Salt Lake City, Utah 84101, and our telephone number is (801) 972-5555.
The Offering
The selling stockholders identified in this prospectus are selling up
to 2,162,580 shares of our common stock, which they acquired from us in private
placements on November 28, 2003 and December 10, 2003 or will be issued upon the
exercise of warrants issued to a broker-dealer in connection with the private
placements. We will not receive any proceeds from the sale of the shares by the
selling stockholders.
RISK FACTORS
Our future operating results are highly uncertain. Before deciding to
invest in BSD Medical or to maintain or increase your investment, you should
carefully consider the risks described below, in addition to the other
information contained in this prospectus. The risks and uncertainties described
below are not the only ones that we face. Additional risks and uncertainties not
presently known to us or that we currently deem immaterial may also affect our
business and results of operations. If any of these risks actually occur, our
business, financial condition or results of operations could be seriously
harmed. In that event, the market price for our common stock could decline and
you may lose all or part of your investment.
We have a history of significant losses and such losses may continue in
the future.
Since our inception in 1978, our expenses have substantially exceeded
our revenue, resulting in continuing losses and an accumulated deficit of
$20,486,107 at August 31, 2003. In fiscal 2003, we recorded a net loss of
$570,285. Our net loss was primarily due to a write-off of a significant
receivable of approximately $300,000 to bad debt expense, an increase to
inventory reserve of $90,000 and lower overall sales. We may continue to incur
operating losses in the future as we continue to incur costs to develop our
products, protect our intellectual property and expand our sales and marketing
activities. To become profitable we will need to increase significantly the
revenues we receive from sales of our hyperthermia therapy products to sustain
and increase our profitability on a quarterly or annual basis. We may be unable
to do so, and therefore may never achieve profitability.
Our hyperthermia therapy products may not achieve market acceptance,
which could limit our future revenue and ability to achieve profitability.
To date, hyperthermia therapy has not been widely accepted by
cancer-treating physicians as an effective treatment of cancer, either in
combination with other available therapies or alone. We believe this is
primarily due to the inability of early hyperthermia therapy technologies to
focus and control heat directed at specific tissue locations and conclusions
drawn in early scientific studies that hyperthermia was only marginally
effective. Additionally, market acceptance depends upon physicians and hospitals
obtaining adequate reimbursement rates from third-party payers to make our
products commercially viable. If our sales and marketing efforts to promote
hyperthermia therapy acceptance in the medical community fail, or third-party
reimbursement rates for hyperthermia therapy are not adequate to make our
products commercially viable, then our future revenue from sales of our products
may be limited, and we may never sustain profitable operations.
2
We depend upon TherMatrx as our largest customer and, if TherMatrx does
not purchase products and services from us, our revenue will decrease.
For the year ended August 31, 2003, TherMatrx accounted for $1,454,943,
or approximately 56.55% of our net sales and was our largest customer. We
manufacture, assemble and test TherMatrx's TMx-2000 system, and also supply
equipment components and provide consulting services to TherMatrx. During the
quarter ended November 30, 2003 our sales to TherMatrx declined to $20,592, a
decrease of $326,268 from the quarter ended November 30, 2002. We anticipate
revenue from TherMatrx to be less in our second quarter of 2004, and possibly
the third quarter, than it was in the second and third quarter of 2003. In
addition, we currently expect revenue from TherMatrx to be less in fiscal 2004
than it was in fiscal 2003. TherMatrx is under no contractual obligation to
obtain from us products or manufacturing, assembling, testing and other
services, and is free to seek and obtain such products and services from other
sources. We believe TherMatrx purchases a majority of its products from other
sources. We cannot assure you that we will continue to provide products and
services to TherMatrx, and the loss of TherMatrx as a customer may have a
material adverse effect on our business, if we are unsuccessful in our efforts
to increase sales of our cancer treatment systems.
Our common stock ownership in TherMatrx is subject to certain rights
and preferences of TherMatrx's preferred stockholders.
We own 2,520,700 shares of common stock of TherMatrx. As of September
30, 2003, TherMatrx had a total of 3,225,321 shares of common stock outstanding
and 5,175,000 shares of preferred stock outstanding. In addition, TherMatrx had
1,959,478 options to purchase common stock outstanding. The preferred
stockholders of TherMatrx have certain preferential rights to the common
stockholders, including redemption, dividend and approval rights. In connection
with a possible future sale of TherMatrx, the preferred stockholders may require
TherMatrx to redeem 95% of their preferred stock for an amount equal to their
original investment plus any accumulated but unpaid dividends at a rate of 8%
per annum from December 31, 1997 on that amount. The remaining 5% of the
preferred stock held by the preferred stockholders would automatically convert
into 45% of the common stock on a fully diluted basis. Such an election may
reduce the amount of the proceeds from a sale of TherMatrx that we would
otherwise receive.
We depend on distributors for international sales.
Historically, our revenues outside the United States have been derived
from sales of hyperthermia therapy systems through third-party distributors. We
have derived most of our revenue from sales in Europe through our distributor
Medizin-Technik, GmbH, which also purchased equipment components and parts from
us. Medizin-Technik sold none of our hyperthermia therapy systems in Europe in
fiscal 2003, and we can provide no assurance that Medizin-Technik's sales will
improve in the future. The loss, or ineffectiveness, of Medizin-Technik as a
distributor and significant customer could have a material adverse effect on our
business.
Our relationship with Nucletron as our sales representative for our
BSD-500i system may fail to increase our revenue.
In May 2002, we entered into an agreement with Nucletron B.V. under
which Nucletron became our exclusive sales agent in most of the world for our
BSD-500i interstitial hyperthermia therapy system. Either party may terminate
the agreement with 30 days' advance notice, and the agreement does not require
Nucletron to buy a minimum number of systems from us. To date, we have sold only
one BSD-500i through Nucletron. It is unclear whether we will increase our
revenue through our relationship with Nucletron.
3
Government regulation has a significant impact on our business.
Our research and development efforts, our pre-clinical tests and
clinical trials, and the manufacturing, marketing, distribution and labeling of
our products are subject to extensive regulation by the FDA and comparable
international agencies. The process of obtaining FDA and other required
regulatory approvals is lengthy and expensive and our financial resources are
limited.
We have not yet received pre-market approval for our BSD-2000 systems.
Obtaining these pre-market approvals from the FDA are necessary for us to
commercially market these systems in the United States. 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 may include significant
limitations on the indicated uses for which the products may be marketed, which
restrictions could negatively impact our business.
After a product is approved for commercial distribution by the FDA, we
have ongoing responsibilities under the Federal Food, Drug, and Cosmetic Act and
FDA regulations, including regulation of our manufacturing facilities and
processes, labeling and record-keeping, and reporting of adverse experiences and
other information. Failure to comply with these ongoing requirements could
result in the FDA imposing operating restrictions on us, enjoining or
restraining certain violations, or imposing civil or criminal penalties on us.
The FDA can also recommend prosecution to the Department of Justice.
Cancer therapy is subject to rapid technological change, and therapies
that are more effective than ours could render our technology obsolete.
The treatment of cancer is currently subject to extensive research and
development. Many cancer therapies are being researched, and our products may be
rendered obsolete by existing therapies and as a result of therapy innovations
by others. If our products are rendered obsolete, our business will be
substantially impaired.
We depend on adequate protection of our patent and other intellectual
property rights.
We rely on patents, trade secrets, trademarks, copyrights, know-how,
license agreements and contractual provisions to establish and protect our
intellectual property rights. Our success will substantially depend on our
ability to protect our intellectual property rights and maintain rights granted
to us through license agreements. Our intellectual property rights may only
afford us limited protection and may not adequately protect our rights or
remedies to gain or keep any advantages we may have over our competitors, which
could harm our business.
In the past, we have participated in substantial litigation regarding
our patent and other intellectual property rights in the medical device
industry. We have previously filed lawsuits for patent infringement against
three of our competitors and subsequently settled all three of those lawsuits.
Additional litigation against other parties may be necessary in the future to
enforce our intellectual property rights, to protect our patents and trade
secrets, and to determine the validity and scope of our proprietary rights. This
litigation may require more financial resources than are available to us. We
cannot guarantee that we will be able to successfully protect our rights in
litigation. Failure to successfully protect our rights in litigation could harm
our business.
4
Our directors and executive officers own a sufficient number of shares
of our capital stock to control our company, which could discourage or prevent a
takeover, even if an acquisition would be beneficial to our stockholders.
Our directors and executive officers own or control approximately 46%
of our outstanding voting power. Accordingly, these stockholders, individually
and as a group, may be able to influence the outcome of stockholder votes,
involving votes concerning the election of directors, the adoption or amendment
of provisions in our certificate of incorporation and bylaws and the approval of
certain mergers or other similar transactions, such as a sale of substantially
all of our assets. Such control by existing stockholders could have the effect
of delaying, deferring or preventing a change in control of our company.
We are dependent upon key personnel, many of whom would be difficult to
replace.
Our success will be largely dependent upon the efforts of Paul F.
Turner, our Chairman and Senior Vice President, Hyrum A. Mead, our President,
and Dixie T. Sells, our Vice President of Regulatory Affairs and other key
employees. We do not maintain key-person insurance on any of these employees.
Our future success also will depend in large part upon our ability to identify,
attract and retain other highly qualified managerial, technical and sales and
marketing personnel. Competition for these individuals is intense. The loss of
the services of any of our key personnel, the inability to identify, attract or
retain qualified personnel in the future or delays in hiring qualified
personnel, could make it more difficult for us to manage our business and meet
key objectives, such as the sale of our products and the introduction of new
products, which would harm our business, financial condition and operating
results.
Because our common stock is traded on the OTC Bulletin Board, your
ability to sell your shares in the secondary trading market may be limited.
Our common stock currently is traded on the over-the-counter market on
the OTC Bulletin Board. Consequently, the liquidity of our common stock is
impaired, not only in the number of shares that are bought and sold, but also
through delays in the timing of transactions, and lack of coverage by security
analysts and the news media. As a result, prices for shares of our common stock
may be lower than might otherwise prevail if our common stock was quoted on the
Nasdaq Stock Market or traded on a national securities exchange, like The New
York Stock Exchange or American Stock Exchange.
Because our common stock is a "penny stock," you may have difficulty
selling them in the secondary trading market.
Federal regulations under the Securities Exchange Act of 1934 regulate
the trading of so-called "penny stocks," which are generally defined as any
security not listed on a national securities exchange or Nasdaq, priced at less
than $5.00 per share and offered by an issuer with limited net tangible assets
and revenues. Since our common stock currently trades on the OTC Bulletin Board
at less than $5.00 per share, our common stock is a "penny stock" and may not be
traded unless a disclosure schedule explaining the penny stock market and the
risks associated therewith is delivered to a potential purchaser prior to any
trade.
In addition, because our common stock is not listed on Nasdaq or any
national securities exchange and currently trades at less than $5.00 per share,
trading in our common stock is subject to Rule 15g-9 under the Exchange Act.
Under this rule, broker-dealers must take certain steps prior to selling a
"penny stock," which steps include:
5
o obtaining financial and investment information from the investor;
o obtaining a written suitability questionnaire and purchase
agreement signed by the investor; and
o providing the investor a written identification of the shares
being offered and the quantity of the shares.
If these penny stock rules are not followed by the broker-dealer, the
investor has no obligation to purchase the shares. The application of these
comprehensive rules will make it more difficult for broker-dealers to sell our
common stock and our stockholders, therefore, may have difficulty in selling
their shares in the secondary trading market.
Sales of a substantial number of shares of our common stock in the
public market, including the shares offered under this prospectus and under
other registration statements, could lower our stock price and impair our
ability to raise funds in new stock offerings.
Future sales of a substantial number of shares of our common stock in
the public market, including the shares offered under this prospectus, or the
perception that such sales could occur, could adversely affect the prevailing
market price of our common stock and could make it more difficult for us to
raise additional capital through the sale of equity securities. We filed this
registration statement pursuant to an agreement with the holders of the common
stock and warrants purchased in our November and December 2003 private
placements. We are required under this agreement to use our reasonable best
efforts to cause this registration statement to remain effective until the
earlier of (1) the sale of all the shares of our common stock covered by this
registration statement; or (2) such time as the selling stockholders named in
this registration statement become eligible to resell the shares of our common
stock pursuant to Rule 144(k) under the Securities Act.
The market for our stock is limited and our stock price may be
volatile.
The market for our common stock has been limited due to low trading
volume and the small number of brokerage firms acting as market makers. Because
of the limitations of our market and volatility of the market price of our
stock, investors may face difficulties in reselling shares at attractive prices
when they want to. The following factors could impact the market for our stock
and cause further volatility in our stock price:
o announcements of new technological innovations;
o FDA and other regulatory developments;
o changes in third-party reimbursements;
o developments concerning proprietary rights;
o third parties receiving FDA approval for competing products; and
o and market conditions generally for medical and technology stocks.
Anti-takeover provisions in our certificate of incorporation may have a
possible negative effect on our stock price.
6
Certain provisions of our certificate of incorporation and bylaws may
make it more difficult for a third party to acquire, or discourage a third party
from attempting to acquire, control of us. We have in place several
anti-takeover measures that could discourage or prevent a takeover, even if an
acquisition would be beneficial to our stockholders. Increased difficulties for
a third party to acquire us could adversely affect our stock price.
USE OF PROCEEDS
The shares of common stock offered by this prospectus will be sold by
the selling stockholders, and the selling stockholders will receive all of the
proceeds from sales of such shares. We will not receive any proceeds from sales
of the shares offered by this prospectus.
BUSINESS
Overview
We develop, manufacture, market and service hyperthermia microwave
systems used to treat cancer, the second leading cause of death in the United
States according to the National Cancer Society. Our treatment systems are
designed to precisely deliver microwave energy to elevate the temperature of
cancerous tumors, directly killing cancerous cells and enhancing the
effectiveness of certain other cancer therapies. We also manufacture products
and supply services for TherMatrx, Inc., a privately-held medical device company
in which we have ownership.
The focus of our cancer therapy business is to develop and
commercialize systems that can provide hyperthermia treatment for cancerous
tumors that occur anywhere in the body. To accomplish this, we have developed
systems capable of treating both superficial and deep tumors. These systems
consist of two families of products, the BSD-500 and the BSD-2000.
In October 2003, we announced that we had received FDA approval for a
new operating system, allowing us to launch the commercial market introduction
in the United States of a new family of six systems (the BSD-500i-4, BSD-500s-4,
BSD-500c-4, BSD-500i-8, BSD-500s-8 and BSD-500c-8) to treat cancer patients
using superficial and interstitial hyperthermia. We have also obtained CE Mark
certification required to export these systems to Europe. In addition to
treating melanoma, recurring breast cancer and other cancers requiring
superficial therapy, these new systems are used as companions to brachytherapy
systems that treat cancer through interstitial radiation. We believe over 1,500
brachytherapy systems have been installed providing a target customer base for
our systems. These new systems are compact, portable and ergonomically
engineered for use in a demanding hospital environment.
Our BSD-2000 family of systems employs an advanced phased array of
microwave antennae used to focus on and treat tumors located deep in the body.
The BSD-2000 system has not been submitted for pre-market approval from the FDA.
Accordingly, we do not have authority to distribute the BSD-2000 system for sale
in the United States, except as an investigational device. The phase III
clinical trial through which we intend to seek a PMA for this system has already
been completed, and we are underway in developing the commercial version of the
BSD-2000 that we intend to use as the basis of the FDA submission.
In addition to systems for treating cancer, we have also developed a
system used in the therapy of a major benign condition. We currently own
approximately 30% of TherMatrx, which markets a medical device that we developed
for the treatment of benign prostatic hyperplasia, or BPH. BPH results from
7
enlargement of the prostate as men age, and is a major health condition so
prevalent that its symptoms affect over half of men by age 60 and 90% of men by
age 85, according to data presented in a Mayo Clinic and Mayo Foundation study
published in 1995 in the Archives of Internal Medicine. TherMatrx received FDA
approval to market its TMx-2000 thermotherapy system for treating BPH in July
2001, and since then it has been marketing and selling the TMx-2000. TherMatrx
had sales in excess of $13 million and a net income in excess of $1.5 million in
only its second full fiscal year since the FDA approval. In addition to being an
equity owner of TherMatrx, we provide technical and regulatory support services
for TherMatrx on a consulting basis, and manufacture and test some of its
products. In both fiscal 2002 and 2003, TherMatrx was our largest customer.
BSD was originally incorporated under the laws of the State of Utah on
March 17, 1978. In July 1986, BSD was reincorporated in Delaware.
Cancer and Hyperthermia Therapy
Despite the massive attention given to cancer prevention and treatment,
the American Cancer Society projects that 1,334,100 new cancer cases will be
diagnosed and that 556,500 Americans will die from cancer during 2003 (up from
555,500 cancer deaths in 2002). Exceeded only by heart disease, cancer, as a
group of diseases, remains the second leading cause of death in the United
States. Cancer develops when abnormal cells in a part of the body begin to grow
out of control and spread, to other parts of the body.
The primary cancer therapies currently used include:
o Radiation therapy, which is treatment with high-energy rays to
kill or shrink cancer cells. The radiation may come from outside
of the body (external radiation) or from radioactive materials
placed directly in a tumor (internal or implant radiation,
sometimes called brachytherapy).
o Chemotherapy, which is treatment with drugs to destroy cancer
cells.
o Surgery, which is the resection, or removal, of a tumor or other
organ of the body.
Because cancer remains a significant cause of death, these three cancer
therapies are still grossly inadequate, and an enormous need for better
treatment is obvious. Hyperthermia is an emerging cancer therapy that both kills
cancer cells directly and has been shown to be a potent additive treatment
making certain of the major existing cancer therapies more effective for some
cancers.
Cancerous tumors are uncontrolled growths of mutated cells that require
more energy to survive than do cells of normal tissue. As cancer cells grow
rapidly, they tend to outstrip their blood supply, leaving them oxygen starved,
since there is not enough blood to carry sufficient oxygen to these cells.
Oxygen starved cancer cells are resistant to radiation therapy because the
destructive power of radiation therapy depends heavily on tearing apart the
oxygen molecules located in cancer cells. When oxygen molecules are torn apart,
they form oxygen radicals that can attack and destroy cancer cell DNA. Blood
depletion also makes cancer resistant to chemotherapy, where blood transport is
required to deliver the drug. Our hyperthermia therapy systems precisely deliver
microwave energy to elevate the temperature of tumors, usually between
40(degree)C and 45(degree)C. The elevated temperatures draw blood to the tumor
as the body's natural response to the stimulus of heat. The increased blood
supply to the tumor improves delivery of drugs to tumors in chemotherapy. It
also delivers more oxygen to the tumor, increasing the effectiveness of
radiation therapy. Many clinical trials performed at major research institutions
in the United States and Europe have shown strong improvements in the results
from both radiation therapy and chemotherapy when hyperthermia is added to the
treatment.
8
While sensitizing tumors for more effective treatment from radiation
and/or chemotherapy, hyperthermia also destroys cancer cells directly through
damage to the plasma membrane, the cytoskeleton and the cell nucleus, and by
disrupting the stability of cellular proteins. Tumors with poor blood supply
systems lack the natural cooling capacity provided by efficient blood flow in
normal tissues, making them selectively susceptible to the cancer-destructive
effects of hyperthermia therapy. While temperatures between 40(degree)C and
45(degree)C are used to kill cancer cells in combination with radiation and
chemotherapy, higher temperature treatments, called "thermal therapy" or
"thermotherapy," are used when treatment of cancer is accomplished by heat
alone.
Hyperthermia has other therapeutic uses. It can be used to shrink
tumors prior to surgery, potentially making resection easier or even possible.
Research has shown hyperthermia to be an activator for gene therapies, speeding
gene production (heat mediated gene therapy). Hyperthermia may play a role in
the development of new anti-tumor vaccines that are based on the production of
heat shock proteins. Research has shown hyperthermia to be an angiogenesis
inhibitor, which means it helps prevent cancer from inducing growth of new blood
vessels to expand its blood supply. Hyperthermia could also become a follow-up
therapy for other angiogenesis inhibitors, used in the final destruction of
cancer cells depleted of blood by angiogenesis inhibitor therapy. Hyperthermia
has been shown to improve a patient's quality of life. Even in situations where
there is no hope for survival, hyperthermia may provide benefits through
alleviation of such effects as bleeding, pain and infection.
Since 1978, we have been heavily involved in developing technological
advances to expand the use of hyperthermia therapy for the treatment of cancer.
Our efforts have included joint work with many notable cancer research centers
in the United States and Europe. In past years funding for our research efforts
has been provided by such sources as the National Institutes of Health in the
United States and major European government agencies. In recent years, we have
focused our efforts in perfecting the technology required to precisely deliver
deep, non-invasive hyperthermia therapy for the treatment of pelvic and other
deep cancers and to demonstrate effective use of deep hyperthermia through
clinical trials. We believe that our BSD-2000 system has emerged from this
development effort as the world's most advanced system for deep hyperthermia
therapy.
In the opening address at the April 21, 2001 annual meeting of the
North American Hyperthermic Society (sponsored by the Radiologial Society of
North America), P. K. Sneed, M.D. of the University of California at San
Francisco summarized the results of completed randomized clinical trials in
which the effectiveness of radiation therapy combined with hyperthermia therapy
were compared with the results of radiation therapy alone in cancer treatment.
The summary of the report on these trials was that for melanoma, after two
years, local control (local regression or disappearance of the tumor) was 28%
for the control group of patients who received radiation therapy alone versus
46% local control for the patients who received both hyperthermia and radiation
therapy. For recurrent breast cancer, the complete response rate (complete
disappearance of the tumor) increased from 38% for those receiving radiation
therapy alone to 60% for those patients who received both hyperthermia and
radiation therapy. For glioblastoma (brain cancer), the two-year survival rate
for patients who received radiation therapy alone was 15%, compared to 31%
survival rate two years after treatment for those who received both hyperthermia
and radiation therapy. For advanced cervical cancer, the complete response rate
(disappearance of the tumor) rose from 57% for patients who received radiation
treatments alone to 83% for patients receiving both hyperthermia and radiation
therapy. The cervical cancer data was based on the condition of patients three
years after treatment.
9
Our Products and Services
We have developed the technology and products required to approach
hyperthermia therapy through three different techniques, which collectively
allow cancer to be treated virtually anywhere in the body:
o Superficial hyperthermia non-invasively treats cancerous tumors
located within a few centimeters of the surface of the body, such
as melanoma and recurrent breast cancer.
o Internal or interstitial hyperthermia treats tumors in combination
with internal radiation therapy by inserting tiny microwave
antennae that deliver hyperthermic microwave energy to tumors
through the same catheters used to deliver radioactive materials,
or "seeds," to tumors for radiation therapy. This technique can be
employed in treating prostate cancer, breast cancer, head and neck
cancer and a variety of other cancer sites.
o Deep hyperthermia non-invasively treats tumors located deep within
the body, including many problematic cancer sites located in the
pelvis, abdomen and chest areas.
BSD-500 Systems. Our BSD-500 systems are used to deliver either
superficial or interstitial hyperthermia therapy or both. There are six
configurations of the BSD-500. The BSD-500i-4 and BSD-500i-8 provide
interstitial hyperthermia treatment using four or eight channel generators,
respectively. Each channel can control three interstitial applicators. The
BSD-500c-4 and BSD-500c-8 provide both superficial and interstitial hyperthermia
treatments using four or eight channel generators. 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
applicators, depending on each system configuration. Non-invasive superficial
applicators are used for superficial hyperthermia treatments. For interstitial
hyperthermia treatments, the system may include up to 24 tiny microwave
heat-delivering antennae that are inserted into catheters used in the standard
practice for internal radiation therapy (called brachytherapy).
In October 2003, we announced that we had received FDA approval for a
new operating system, allowing us to launch the commercial market introduction
of this new family of six systems. Our FDA approval (described as a pre-market
approval, or PMA, the standard FDA approval required to market Class III medical
devices in the United States) for the BSD-500 family of systems is applicable to
the marketing of all six configurations of the BSD-500 in the United States. We
have also certified the BSD-500 systems for the CE Mark, which is required for
export into some European countries. Obtaining FDA approval and CE Mark for the
new BSD-500 operating systems were major milestones for us.
BSD-2000. 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
hyperthermic microwave energy to cancerous tumors, including those located deep
within the body. These systems include a computer and software that control the
delivery of microwave energy to the tumor, a microwave energy generator, an
amplifier that boosts the microwave power, and a special applicator that
delivers the microwave energy to the patient lying in a prone position on a
specially designed support table. The BSD-2000 systems are able to direct, focus
and deliver microwave energy deep within the body by precisely "steering" the
energy to the tumor from an array of cylindrical antennae. The basic BSD-2000
has eight microwave antennae enabling this 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 implemented with a magnetic resonance system that is
capable of non-invasive 3D imaging showing the heated regions, thus permitting
the 3D steering to more accurately target the energy to the tumor site.
10
The BSD-2000 systems have not yet received pre-market approval from the
FDA for commercial marketing in the United States, but the BSD-2000 has obtained
an investigational device exemption, or IDE, for sale in the United States for
research purposes only. We have also certified the BSD-2000 family for the CE
Mark required for export into certain European countries. We are engaged in the
extensive and time consuming process of preparing an FDA submission requesting a
PMA for the BSD-2000 based on clinical data we have already obtained. While we
believe that this data has great merit and is worthy of submission, due to the
inherent uncertainties of the FDA approval process there can be no assurance
that FDA approval will be obtained through our submissions.
Development of the BSD-2000, the BSD-2000/3D and the BSD-2000/3D/MR has
required a substantial effort involving the cooperative work of such American
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, Tubingen University Medical School, Essen University Hospital, Charite
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 new BSD-2000/3D.
The BSD-2000/3D adds three-dimensional steering of deep focused energy, as
opposed to the two-dimensional steering of energy available in the BSD-2000,
delivering even more precise heating to the tumor. As part of our international
collaborative research efforts, sophisticated treatment planning software for
the BSD-2000/3D has also been developed.
As previously noted, we have not yet submitted to the FDA a pre-market
approval 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 of 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 Gro(beta)hadern Medical School of Ludwigs-Maximilians-Universitat
Munchen, in Munich, Germany. We installed a second BSD-2000/3D/MR system at the
Department of Radiology of Charite University Medical School of Humboldt
University in Berlin, Germany, as part of a collaborative effort with Siemens
Medical Systems. The funding for purchase and development of these systems was
provided by the German government and public foundation funds.
11
As is the case for the BSD-2000/3D, we have not yet submitted to the
FDA a pre-market approval 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 and only need to ensure that we interface the system with an MRI
system that also is approved in Europe.
Other Products and Services. In addition to our hyperthermia therapy
systems, we manufacture for, and supply treatment systems and related equipment
components to, other medical device companies, as described below.
TherMatrx, Inc. We manufacture, assemble and test for TherMatrx its
FDA-approved TMx-2000 thermotherapy system that treats benign prostatic
hyperplasia, or BPH, a condition associated with an enlarged prostate that
commonly affects men over age 50. We also supply TherMatrx with equipment
components used for its TMx-2000 system, including probes, applicators and
temperature components. We also have provided regulatory compliance and other
consulting services to TherMatrx.
In November 1997, we entered into an agreement with Oracle Strategic
Partners and Charles Manker to form TherMatrx as a jointly-owned private
company. In return for an equity interest in TherMatrx, we transferred to
TherMatrx four patents related to the thermal treatment of BPH. Currently, we
own approximately 30% of TherMatrx.
TherMatrx's TMx-2000 system is a non-surgical, catheter-based therapy
that has been shown to provide safe and effective relief from BPH symptoms. The
treatment can be performed in a clinic or physician's office. The therapy avoids
the side effects and complications of surgery. TherMatrx obtained FDA approval
to begin marketing its products in July of 2001 and began marketing the TMx-2000
shortly after receiving FDA approval.
In manufacturing, assembling and testing the TMx-2000 system and
supplying equipment components and providing consulting services to TherMatrx,
TherMatrx has been our largest customer. For the year ended August 31, 2003,
TherMatrx accounted for $1,454,943, or approximately 56.55% of our revenue. Our
product sales to TherMatrx dropped significantly during the first quarter of
fiscal 2004 compared to first quarter of fiscal 2003 because of TherMatrx's
existing excess inventory. TherMatrx is under no contractual obligation to
obtain from us products or manufacturing, assembling, testing or other services,
and is free to obtain such products and services from another source at any
time. We believe TherMatrx purchases majority of its products from other
sources.. We have helped facilitate the availability of this other source of
manufacturing, assembly and testing of the TMx-2000 system, as we believed this
would allow TherMatrx to operate more independently from us. We believe
TherMatrx's increased operational independence from us will increase its value
and that the potential value of our equity ownership in TherMatrx will be more
valuable to us than the revenue we generate from sales of products to TherMatrx.
We cannot assure that we will continue to provide such services to TherMatrx,
and the loss of TherMatrx as a customer would have a material adverse effect on
our business, if we are unsuccessful in our efforts to increase sales of our
cancer treatment systems.
Medizin-Technik GmbH. Additionally, we supply equipment components to
Medizin-Technik located in Munich, Germany, which is a significant distributor
of our hyperthermia therapy systems in Europe. Medizin-Technik purchases
equipment and components to service our hyperthermia therapy systems that it
sells to its customers in Europe. The President and Chief Executive Officer of
Medizin-Technik is Dr. Gerhard W. Sennewald, one of our directors and
significant stockholders. Medizin-Technik was a significant customer for us in
fiscal 2003 with sales of $517,979 or 20.13% of our revenue. Medizin-Technik has
been a significant customer in prior years and we anticipate that it will be a
significant customer for us in the future. The loss of Medizin-Technik as a
distributor and significant customer would have a material adverse effect on our
business. The distribution rights of Medizin-Technik have been in place since
the early 1980s.
12
Sales, Marketing and Distribution
In the United States, our target market includes clinics, hospitals and
institutes in which cancer is treated. In the international market we similarly
target cancer treatment centers in clinics, hospitals and institutes.
We have entered into an agreement with Nucletron B.V., based in the
Netherlands, under which Nucletron became our exclusive worldwide sales agent,
except in Germany, Austria, Switzerland, Italy and China, for our BSD-500i
interstitial hyperthermia therapy system. Nucletron is one of the leading
providers of high-dose internal radiation therapy throughout the world. Because
our interstitial hyperthermia therapy is typically administered in combination
with internal radiation therapy, such as that provided by Nucletron, we believe
our relationship with Nucletron could be strongly complementary. Nucletron has
over 1,500 radiation therapy systems installed in cancer treatment centers
throughout the world, and we anticipate Nucletron will primarily target these
customers as prospective customers for the enhanced BSD-500i. Our agreement with
Nucletron can be terminated by either party on thirty days prior written notice.
Three months prior to the renewal date of the agreement (which extends until May
1, 2004), the parties may negotiate the conditions of the extension of the
agreement or the conversion of the agreement into a full distribution agreement.
Nucletron has a first right of refusal to obtain exclusive distribution rights
to sell our BSD-500i in its current territory as our sales agent if Nucletron
performs adequately under our current sales agent agreement.
For our other products that deliver deep hyperthermia therapy,
including the BSD-2000 and related products, we sell our equipment directly to
end-users in the United States. We make international sales of these products
through distributors located in various foreign countries. Medizin-Technik is a
significant distributor of our hyperthermia therapy systems in Europe.
Our sales and marketing strategy involves three main components:
o promoting acceptance by the scientific community and
cancer-treating healthcare professionals of hyperthermia therapy
as a viable and effective therapy for treating cancer, either in
combination with other therapies or as a stand alone therapy;
o disseminating information about and marketing our hyperthermia
therapy systems to the scientific community, cancer-treating
healthcare professionals, cancer patients and the general public;
and
o working to continuously improve third-party reimbursement for
medical services performed with our products.
We disseminate information about our company and our hyperthermia
therapy systems by encouraging articles about hyperthermia therapy to be
published in scientific journals, periodicals and other publications, and
promoting dissemination of BSD information through television, radio and other
media outlets. We post information about our products on our web site,
www.bsdmc.com, and our materials are also posted on many other sites. We have
developed promotional materials for our products, including product brochures,
patient brochures and newsletters. We also participate actively in trade shows
and scientific symposia, make public presentations delivered by our scientific
staff and by scientists and researchers using our systems, and we actively
participate in a variety of medical associations. We are also co-sponsors of the
annual international BSD Users' Conference in Europe. We also believe that the
anticipated active marketing efforts of Nucletron will improve dissemination of
information about us and our products and improve acceptance of our hyperthermia
therapy systems because Nucletron is well-established as an industry leader in
internal radiation therapy and has established relationships with many
cancer-treating healthcare professionals throughout the world.
13
Third-Party Reimbursement
We view obtaining adequate third-party reimbursement arrangements as
essential to achieving commercial acceptance of our hyperthermia therapy
products. Our products are purchased primarily by clinics, hospitals and other
medical institutions that bill various third-party payers, such as Medicare,
Medicaid, other government programs and private insurance plans for the health
care services provided to their patients using our products. Additionally,
managed care organizations and insurance companies directly pay for services
provided to their patients. The Center for Medicare and Medicaid Services, or
CMS, has established 23 billing codes that allow for third-party reimbursement
and can be used for or in combination with the delivery of hyperthermia therapy,
depending on the circumstances of the treatment. Codes have been established for
billing for superficial and interstitial hyperthermia delivered using our
BSD-500 systems when used in combination with radiation therapy or chemotherapy.
Codes also have been established for providing deep hyperthermia therapy.
Billing codes are available for both institutions and physicians.
Effective November 1995, HCFA, the predecessor agency to CMS,
authorized Medicare reimbursement for certain investigational devices and
certain related services for which underlying questions of safety and
effectiveness of that device type have been resolved, based on categorization by
the FDA. Our BSD-2000 system, which has been given IDE status by the FDA, has
been placed in this category by the FDA, and thus may be reimbursed by Medicare.
General hyperthermia reimbursement has been approved in the United
States, Germany, Holland, Switzerland and Japan. CMS has also provided billing
codes for thermotherapy/thermal therapy treatment of BPH. These billing codes
apply to TherMatrx's TMx-2000 system treatments of BPH.
Even though a new medical device may have been approved for commercial
distribution, we may find limited demand for that product until reimbursement
approval is obtained from governmental and commercial third party payors of
health care. In addition, even after we receive reimbursement approval, or
coverage, of a product, medical reimbursement rates are unpredictable. Both
government and commercial third party payors of health care are seeking to limit
the growth of health care costs. If clinics, hospitals, and other health care
providers are not reimbursed adequately for our product, they may not purchase
our product. We cannot project the extent to which our business may be affected
by future legislative and regulatory developments, and private sector
initiatives, to reduce health care costs. We cannot assure that future health
care legislation or regulation will not have a material adverse effect on the
coverage of our products, our business, financial condition and results of
operations, or that reimbursement, existing or in the future, will be adequate
to ensure that customers continue to purchase our products.
Competition
Competition in the medical products industry is intense. We believe
that established product lines and cancer therapies, FDA approvals, know-how and
reputation in the industry are key competitive factors. Currently, only a few
companies besides BSD have received FDA approval to manufacture and sell
hyperthermia therapy systems within the United States, including U.S.
Labthermics and Celsion Corporation. Celsion is principally involved with
clinical trials related to thermotherapy, hyperthermia and related fields.
Labthermics produces ultrasound based systems which compete with our microwave
hyperthermia systems. Several other companies have received IDEs in the United
States or other international clearance for certain experimental hyperthermia
systems designed to treat both malignant and benign diseases. Additionally,
other companies, particularly established companies that currently manufacture
and sell other cancer therapy systems, could potentially become competitors (in
that they are also engaged in cancer treatment businesses), and they have
significantly greater resources than we do.
14
BSD participates in the BPH market as an investor in TherMatrx. In the
BPH market, competitive companies offering products similar to TherMatrx's
products include Urologix and Dornier (which both have received pre-market
approvals from the FDA for their treatment systems), VidaMed, a subsidiary of
Medtronics (which has 510(k) clearance from the FDA) and other foreign
manufacturers. These competitors have significantly greater resources than
TherMatrx and may be better positioned to compete in TherMatrx's market. In
addition to thermotherapy equipment made by TherMatrx's competitors, there are
other competitive treatments for BPH that are currently being developed,
clinically investigated and/or actively marketed.
Product Service
We provide a 12-month warranty following installation on all cancer
treatment systems and a 90-day limited warranty on individual components. We
install and service the hyperthermia systems we sell to domestic customers. In
addition, we or our consultants provide technical and clinical training to our
customers. Subsequent to the applicable warranty period, we offer our domestic
customers full or limited service contracts.
Generally, our distributors install and service systems sold to foreign
customers and are responsible for managing their own warranty programs for their
customers, including labor and travel expenses. We provide warranties for the
replacement and/or repair of parts for 12 months for systems sold
internationally through distributors and for 90 days for individual components.
Spare parts are generally purchased by the distributors and stored at the
distributors' maintenance facilities to allow prompt repair. Distributor service
personnel are usually trained at customer sites and at our facilities in Salt
Lake City, Utah.
Production
We manufacture and test our systems and products at our facilities in
Salt Lake City, Utah. Our manufacturing facility is ISO 9001-1994 certified and
follows FDA quality systems regulations. Some equipment components we purchase
from suppliers are customized to our specifications. Key factors in our
manufacturing process are assembly and testing. We purchase component parts and
other materials from a variety of suppliers. We do not depend on a single
supplier for any item, and believe we can acquire materials and parts from
multiple sources on a timely basis.
Product Liability Exposure
The manufacturing and marketing of medical devices involves an inherent
risk of product liability. Because our products are intended to be used in
hospitals on patients who may be physiologically unstable and severely ill, we
are exposed to potential product liability claims. We presently carry product
liability insurance with coverage limits of $1 million. However, we cannot
assure you that our product liability insurance will provide adequate coverage
against potential claims that might be made against us. No product liability
claims are presently pending against us; however, we cannot assume that product
liability claims will not be filed in the future or that such claims will not
exceed our coverage limits.
15
Government Regulation
The medical devices that we have developed and are developing are
subject to extensive and rigorous regulation by numerous governmental
authorities, principally by the United States Food and Drug Administration, or
FDA, and comparable foreign agencies. Pursuant to the Federal Food, Drug and
Cosmetic Act, as amended, the FDA regulates and must approve the clinical
testing, manufacture, labeling, distribution, and promotion of medical devices
in the United States.
Most of our hyperthermia treatment systems, including the BSD-500 and
the BSD-2000 and related products, have required or require pre-market approval
from the FDA instead of the simpler 510(k) approval, and we anticipate that our
future systems will similarly require pre-market approval. Pre-market approval
requires that we demonstrate that the medical device is safe and effective. To
do this, we conduct either laboratory and/or clinical testing. The FDA will
grant approval of the product if it determines there is reasonable assurance
that the medical device is safe and effective. FDA approval must be obtained
before commercial distribution of the product. We intend to continue to make
improvements in and to our existing products. Significant product changes must
be submitted to the FDA under investigational device exemptions, or IDEs, or
pre-market approval supplements. As described in the Section entitled "Our
Products and Services" above, we have obtained a PMA for our BSD-500 systems and
IDE status for our BSD-2000 system.
Various foreign countries in which our products are or may be sold,
have regulatory requirements that can vary widely from country to country. Sales
into the European Union, or EU, require compliance with the Medical Devices
Directive, or MDD, and require us to obtain the necessary certifications to have
a CE Mark affixed to our products. We have obtained necessary ISO certification
of our quality, development, and manufacturing processes, and we have
successfully completed the CE Mark testing and Annex II audit. This allows us to
certify our own products and to affix the CE Mark label on them. However, we
must maintain compliance with all current and future directives and requirements
to maintain ISO certification and to continue to affix the CE Mark, and there
can be no assurance that we will continue to maintain compliance with regulatory
requirements imposed on us.
After we receive FDA approval to distribute a medical device, we
continue to have ongoing responsibilities under the Federal Food, Drug, and
Cosmetic Act and FDA regulations. The FDA reviews design and manufacturing
practices, labeling, record-keeping, and required reporting of adverse
experiences. All medical devices must be manufactured in accordance with
regulations specified in the FDA Quality System regulations, or QSR, and in
compliance with the ISO and other applicable standards. In complying with these
regulations, we must continue to expend time, money and effort in the areas of
design control, production, and quality control to ensure full compliance. The
FDA's mandatory Medical Device Reporting regulation requires us to provide
information to the FDA on death or serious injuries alleged to have been
associated with the use of our products, as well as information on product
malfunctions that would likely cause or contribute to a death or serious injury
if the malfunctions were to recur. In Europe, the MDD vigilance system
regulations require that we, through a representative in Europe, provide
information to authorities on death or serious injuries alleged to have been
associated with the use of our products, as well as information on product
malfunctions that would likely cause or contribute to a death or serious injury
if the malfunctions were to recur. If FDA were to assert that we are not in
compliance with applicable laws or regulations, or that any of our medical
devices are ineffective or pose an unreasonable risk to patient health, the FDA
could seize our medical devices, ban such medical devices, or order a recall,
repair, replacement or refund of such devices, and require us to notify health
care professionals and others that the devices present unreasonable risk of
substantial harm to the public. The FDA may also impose operating restrictions,
restrain certain violations of law, and assess civil or criminal penalties
against us. The FDA can also recommend prosecution to the Department of Justice.
Certain regulations are subject to administrative interpretation, and we cannot
assure that future interpretations made by the FDA or other regulatory bodies,
with possible retroactive effect, will not adversely affect us.
16
International sales of medical devices are subject to FDA export
requirements. We have obtained export approvals for all countries into which we
have delivered products. This includes countries in Western Europe and much of
Eastern Europe and many Asian countries.
International sales are subject to the regulatory and safety
requirements of the country into which the sale occurs. There can be no
assurance that all of the necessary approvals will be granted on a timely basis
or at all. Delays in receipt of or failure to receive such approvals would have
a material adverse effect on our financial condition and results of operations.
In addition to FDA regulations, certain U.S. health care laws apply
when a claim for reimbursement for one of our medical devices is submitted to
Medicare, Medicaid, or other federal health care programs. For instance, federal
law prohibits the filing of false or improper claims for federal payments. In
addition, federal law prohibits the payment of anything of value for the purpose
of inducing referrals of business reimbursable under a federal health care
program. Other federal laws prohibit physicians from making referrals for
certain services and items payable under certain federal programs if the
physician has a financial relationship with the entity providing the service or
item.
All of these laws are subject to evolving interpretations. If the
federal government were to conclude that we are not in compliance with any of
these health care laws, we could be subject to substantial criminal and civil
penalties, and could be excluded from participation as a supplier to
beneficiaries in federal health care programs.
The Federal Communications Commission, or FCC, regulates the
frequencies of microwave and radio frequency emissions from medical and other
types of equipment to prevent interference with commercial and governmental
communications networks. The BSD-500 fixed frequency systems and applicators
emit 915 MHz for U.S. and some European installations and 433.92 MHz for some
European installations, which is approved by the FCC for medical applications.
Accordingly, these systems do not require shielding to prevent interference with
communications. Our BSD-2000 deep hyperthermia variable-frequency generators and
applicators require electromagnetic shielding.
Patents, Licenses, and Other Rights
Because of the substantial length of time and expense associated with
bringing new products through development and regulatory approval to the
marketplace, the medical device industry places considerable importance on
obtaining patent and trade secret protection for new technologies, products and
processes. Our policy is to file patent applications to protect significant
technology, inventions and product improvements. We currently own six patents in
the United States and two patents outside the United States. Four additional
patents were assigned to TherMatrx, for which we obtained a license, and one
patent license was obtained by us from University of California San Francisco
and another license was obtained by us from the National Institutes of Health. A
European patent for the BSD-2000/3D system has been issued. We believe that our
patents represent the early pioneering and dominant patents in this field. These
patents along with the advanced product development and leadership in the field
are key elements for our current and future market position.
In July 1979, we entered into an exclusive worldwide license for a
unique temperature probe called the Bowman Probe. The license will remain in
effect as long as the technology does not become publicly known as a result of
actions taken by the licensor. We pay royalties based upon our sales of the
Bowman Probe. The license agreement was amended and renewed in August 2000 and
is currently in effect.
17
On October 21, 1999, we acquired from the University of California San
Francisco (UCSF) the exclusive patent license (U.S. Patent 4,825,880) for small
microwave antennae that can be inserted into cancerous tumors to destroy them
from the inside. The innovative microwave antenna design enables the therapeutic
heating length to be tailored to match the tumor size. This license requires
payment of 2.5% of sales on licensed products sold and payment of patent
maintenance fees and other annual payments of $4,000 to maintain the exclusive
license. We remain current on these payments.
BSD also acquired on December 13, 2001 a patent license from the
National Institutes of Health (NIH) for the U.S. Patent 5,284,114. This patent
is for the combination of magnetic resonance integrated hyperthermia systems,
including our BSD-2000/3D/MR system, and is based on a patent obtained by NIH in
early research of the concept. The license agreement requires annual payment of
$1,000, $4,000 per licensed product sold in the U.S., and $1,000 per licensed
product manufactured in the U.S. and sold outside the U.S. There is also to be a
single payment of $10,000 upon PMA or 510(k) FDA approval.
On July 1, 2001, we acquired the rights to all FDA approvals and the
rights to manufacture all cancer products formerly owned by Clini-Therm Corp.
These products are related to the hyperthermia therapy delivered by our BSD-500
systems, the exclusive patent obtained from UCSF, and our enhancements to such
systems involve incorporating some of the Clini-Therm rights we acquired into
such systems. This involved only a one-time cash payment with no continuing
costs.
From time to time, we have had and may continue to have discussions
with other companies, universities and private individuals concerning the
possible granting of licenses covering technology and/or patents. There can be
no assurance that such discussions will result in any agreements. In the past,
we have granted non-exclusive practice licenses for a few selected patents to
three companies. One of these companies is no longer in business.
We cannot assure that the patents presently issued to us will be of
significant value to us in the future or will be held valid upon judicial
review. Successful litigation against these patents by a competitor would have a
material adverse effect upon our business, financial condition and results of
operations. We believe that we possess significant proprietary know-how in our
hardware and software capabilities. However, we cannot assure that others will
not develop, acquire or patent technologies similar to ours or that such secrecy
will not be breached.
Research and Development
During the fiscal years ended August 31, 2003, and August 31, 2002, we
expended $676,867 and $603,137 respectively for research and development,
representing 26.30% and 22.56% of total revenues. Research and development
expenditures increased in fiscal 2003 due to costs associated with the
development of the BSD-2000/3D/MR system, the continued enhancements of our
BSD-500 systems and the development of new products not yet announced.
Technological changes play an important part in the advancement of our industry.
We intend to continue to devote substantial sums to research and development.
Research and development efforts inherently involve risks and uncertainties that
could aversely affect our projections, outlook and operating results.
Employees
As of January 23, 2004, BSD had 26 employees; 22 of whom were full time
employees. None of our employees is covered by a collective bargaining
agreement. We consider our relations with our employees to be satisfactory. We
depend upon a limited number of key management, manufacturing, and technical
personnel. Our future success will depend in part on our ability to retain these
highly qualified employees.
18
Properties
Our office, production and research facilities are located in Salt Lake
City, Utah. The complete headquarters and production facility occupies
approximately 20,000 square feet. We have leased the building for an annual
rental expense of approximately $78,000. In November 2002, we renewed our lease
for five years, which includes payments of approximately $82,000 per year for
five years adjusted annually for increases in the cost of living based on the
Consumer Price Index for Urban Consumers. We have an option to purchase the
building for $1,000,000 upon 60 days notice for six years beginning December 1,
2002. Thereafter, the purchase price increases by $50,000 each year, and the
option expires at the end of the tenth year. The building lease is accounted for
as an operating lease for financial statement purposes. The building is
currently in good condition, is adequate for our needs, is suitable for all
company functions and provides room for future expansion. We believe that we
carry adequate insurance on the property.
Legal Proceedings
There are no legal proceedings pending against or being taken by us.
MANAGEMENT
The following table sets forth certain information concerning our
directors, executive officers and key employees. The directors have served in
their respective capacities since their election and/or appointment and will
serve until the next annual stockholders' meeting or until their successors are
duly elected and qualified. The executive officers serve at the pleasure of the
Board of Directors. There are no family relationships among any of our directors
or officers.
Initial Date as
Officer or
Name Age Position Director
-------------------------------------------------------------------------------------------------------------
Paul F. Turner, MSEE* 56 Chairman of the Board, Senior Vice President, 1986
and Chief Technology Officer
Hyrum A. Mead, MBA* 56 President and Director 1999
Gerhard W. Sennewald, Ph.D. 67 Director 1994
J. Gordon Short, M.D. 72 Director 1994
Michael Nobel, Ph.D. 63 Director 1997
Dixie Toolson Sells 53 Vice President of Regulatory Affairs 1987
Ray Lauritzen 53 Vice President of Field Service 1988
---------------
*Executive officers of BSD.
Paul F. Turner, MSEE, has served as a director of BSD since 1994 and
currently serves as Chairman of the Board of Directors. Mr. Turner also has
served as the Senior Vice President and Chief Technology Officer of BSD since
August 1999. From October 1995 to August 1999, Mr. Turner also served as the
Acting President of BSD. From 1986 to October 1995, Mr. Turner served in various
19
capacities with BSD, including Staff Scientist, Senior Scientist, Vice President
of Research, and Senior Vice President of Research. Mr. Turner has led the
design of microwave treatment systems for tumors, including the development of
external phased array antenna technology to focus radiated microwave energy deep
into the central area of the body to treat deep tumors. He has also integrated
this technology with magnetic resonance imaging to non-invasively monitor
treatments within the patient's body.
Hyrum A. Mead, MBA, has served as President and a director of BSD since
August 1999. Previously, he served five years as Vice President of Business
Development at ZERO Enclosures, a leading manufacturer in the
telecommunications, computer and aerospace enclosures industry and seven years
as President of Electro Controls, a manufacturer of computer controlled power
systems. Mr. Mead began his career in marketing with IBM where he was involved
with the introduction of many new products.
Gerhard W. Sennewald, Ph.D., has served as a director of BSD since
1994. Dr. Sennewald has served as the President and Chief Executive Officer of
Medizin-Technik GmbH, of Munich, Germany, a firm which is engaged in the
business of distributing hyperthermia equipment and diagnostic imaging equipment
and services, from April 1985 to the present. In connection with his service to
Medizin-Technik GmbH, Dr. Sennewald has been BSD's key European representative
and distributor for 17 years and has been instrumental in obtaining the majority
of BSD's foreign sales. He also serves on the Board of Directors of TherMatrx,
Inc.
J. Gordon Short, M.D., has served as a director of BSD since 1994. From
1978 to 2000, Dr. Short served as President of Brevis Corporation, a
privately-held medical products company that specializes in consumable specialty
supplies and in hand hygiene products, and from 1978 to the present, Dr. Short
has served as the Vice President and Chairman of the Board of Brevis
Corporation. From 1978 to 1982, Dr. Short served BSD as a Medical Director. In
that capacity, he participated in the initial development and establishment of
certain of BSD's products. He also previously served on BSD's Medical Advisory
Board.
Michael Nobel, Ph.D., has served as a director of BSD since January
1998. From 1991 to the present, Dr. Nobel has served as the Executive Chairman
of the MRAB Group, a privately-held company which provides diagnostic imaging
services. From 1995 to the present, Dr. Nobel has served as the Chairman of the
Board of the Nobel Family Society. From 1995 to the present, he also has served
as Chairman of the American Non-Violence Project Inc., and has served as a
consultant to Unesco in Paris and the United Nations Social Affairs Division in
Geneva. Dr. Nobel participated in the introduction of magnetic resonance imaging
as European Vice President for Fonar Corp.
Dixie Toolson Sells has served as Vice President of Regulatory Affairs
of BSD since December 1994. Ms. Sells served as Administrative Director of BSD
from 1978 to 1984; as Director of Regulatory Affairs from 1984 to September
1987; and as Vice President of Regulatory Affairs from September 1987 to October
1993. She served as Director of Regulatory Affairs from October 1993 to December
1994. Ms. Sells has served as Vice President of Regulatory Affairs since 1994.
She served as Corporate Secretary from 1994 to 2002. Ms. Sells also serves on
the Board of Directors of the Intermountain Biomedical Association.
Ray Lauritzen served as Field Service Manager of BSD from 1982 to
January 1988 and has served as Vice President of Field Service Operations from
January 1988 to the present.
20
Audit Committee
We have established an audit committee, which consists of Mr.
Sennewald, Mr. Short and Mr. Nobel. The audit committee is responsible for
reviewing and monitoring our financial statements and internal accounting
procedures, recommending the selection of independent auditors by our board,
evaluating the scope of the annual audit, reviewing audit results, consulting
with management and our independent auditor prior to presentation of financial
statements to stockholders and, as appropriate, initiating inquiries into
aspects of our internal accounting controls and financial affairs. We currently
do not have an audit committee financial expert because of our relatively small
size and our limited resources to attract such an expert.
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding all
compensation earned by Paul Turner, our Senior Vice President and Chief
Technology Officer, and Hyrum Mead, our President, for services rendered to us
during fiscal 2003, 2002 and 2001. No other executive officer received total
salary and bonus compensation in excess of $100,000 for the fiscal year ended
August 31, 2003.
Summary Compensation Table
Annual Compensation Long-Term
Compensation Awards
=========== ============ ======================
Name and Principal Position Year Salary ($) Bonus ($) Securities
Underlying
Options / SARs (#)
========================================= ============ =========== ============ ======================
Paul Turner, 2003 $145,000 $400
Chairman of the Board, Senior Vice 2002 $145,000 $400 45,000(1)
President, Chief Technology Officer 2001 $145,000 $400
Hyrum A. Mead, 2003 $125,000 $400
President, Director 2002 $125,000 $30,000 45,000(1)
2001 $125,000 $400
=========================================
(1) Represents options to purchase shares of TherMatrx common stock we
owned on the date of grant. These options were granted by us in July 2002 and
were exercised in the fourth quarter of fiscal 2002 at an exercise price per
share of $0.001. We recognized a compensation expense related to these TherMatrx
options computed using a value of $4.00 per share. The $4.00 per share value is
based solely on the price per share for common stock sold by TherMatrx to
existing TherMatrx stockholders in December 2001.
The following table summarizes the exercise of stock options during
fiscal 2003 by Messrs. Turner and Mead, and the fiscal year-end value of
unexercised stock options held by each of them. None of these executive officers
exercised stock options during fiscal 2003.
21
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
Name and Number of Securities Underlying Value of Unexercised
Position Unexercised Options at FY-end (#) In-the-Money Options at FY-end
($) (1)
================================== ================================
Exercisable Unexercisable Exercisable Unexercisable
===================== =============== =============== ============= ===============
Hyrum A. Mead, 200,000 120,000 $33,600 $16,800
President
Paul F. Turner,
Sr. VP and Chief
Technology Officer 180,953 0 $124,858 0
(1) Value based on the difference between the fair market value of one
share of our common stock at August 31, 2003 $0.79, and the exercise price of
the options ranging from $0.10 to $0.81 per share. Options are in-the-money if
the market price of the shares exceeds the option exercise price.
Compensation of Directors
We provide annual compensation in the amount of $12,000 to each
non-employee director. Of this amount, $4,000 is to be paid in cash and the
balance is to be paid in the form of restricted shares of our common stock under
our 1998 Director Stock Option Plan. In addition to the annual compensation to
directors, each non-employee director will receive an annual option to purchase
25,000 restricted shares of our common stock at a purchase price of 85% of the
fair market value at the date the option is granted. The options vest ratably
over 5 years and expire in 10 years.
Paul F. Turner and Hyrum A. Mead are the only members of the Board of
Directors who are employed by us. Messrs. Turner and Mead do not receive any
separate compensation for services performed as directors.
Employment Contracts
We entered into an employment agreement with Mr. Mead dated August 10,
1999. This agreement provides that Mr. Mead shall receive an annual base salary
of $125,000, which shall be reviewed annually by the Board of Directors. The
agreement provides that if Mr. Mead is involuntarily terminated, Mr. Mead will
receive severance compensation for a period of six months, including an
extension of all benefits and perquisites. The severance amount shall include
six month's of salary at the highest rate paid to Mr. Mead prior to termination
and an additional amount equal to all bonuses received by Mr. Mead during the
12-month period preceding termination (excluding any signing bonus received
during such period). The agreement also requires us to vest any options granted
to Mr. Mead for the purchase of our common stock, allowing a 90-day period for
Mr. Mead to exercise those options. Mr. Mead's agreement includes a
non-competition covenant prohibiting him from competing with us for one year
following his termination.
We entered into an employment agreement with Mr. Turner dated November
2, 1988. The agreement provides that Mr. Turner's salary will be based upon a
reasonable mutual agreement. The agreement provides that if Mr. Turner's
employment is involuntarily terminated, he will receive severance pay for a
one-year period, which pay includes an extension of all of his rights,
privileges and benefits as an employee (including medical insurance). The one
year severance pay shall be equal to Mr. Turner's regular salary for the
22
12-month period immediately prior to the termination. The agreement also
requires us to pay Mr. Turner for any accrued unused vacation at the time of
termination. We are also obligated to pay Mr. Turner $1,000 (or the equivalent
value in stock options) for each newly issued patent obtained by us as a result
of Mr. Turner's efforts (Mr. Turner receives only $500 if multiple inventors are
involved). Mr. Turner's agreement includes a non-competition covenant
prohibiting him from competing with us for one year following his termination.
We may continue the non-competition period for up to four additional years by
notifying Mr. Turner in writing and by continuing the severance payments for the
additional years during which the non-competition period is extended.
SELLING STOCKHOLDERS
The following table sets forth the number of shares of our common stock
beneficially owned by the selling stockholders as of January 23, 2004, based on
the selling stockholders' representations regarding their ownership. The
percentages shown in the table are based on 19,915,232 shares of common stock
outstanding on that date. We cannot estimate the number of shares that will be
held by the selling stockholders after completion of this offering because the
selling stockholders may sell all or some of the shares and because there
currently are no agreements, arrangements or understandings with respect to the
sale of any of the shares. The term "selling stockholder" or "selling
stockholders" includes the stockholders listed below and their transferees,
assignees, pledgees, donees or other successors. Each selling stockholder
reserves the right to accept or reject, in whole or in part, any proposed sale
of shares. Each selling stockholder also may offer and sell less than the number
of shares indicated. No selling stockholder is making any representation that
any shares covered by this prospectus will or will not be offered for sale.
Except as indicated in this section, we are not aware of any material
relationship between us and a selling stockholder within the past three years
other than as a result of a selling stockholder's beneficial ownership of our
common stock.
Unless otherwise indicated in the table below, the shares being offered
in this prospectus were issued to seven accredited investors pursuant to that
certain Securities Purchase Agreement dated as of November 28, 2003, and as
amended on December 10, 2003, (the "Purchase Agreement") between us and these
investors. In accordance with the terms and conditions of the Purchase
Agreement, we issued an aggregate of 2,059,600 shares of common stock. We also
issued a three-year, immediately exercisable warrant to purchase up to 102,980
shares of common stock at an exercise price of $1.80 per share (the "Warrant")
to a broker-dealer in connection with the Purchase Agreement. The shares to be
issued upon exercise of the Warrant are also being offered in this prospectus.
Percentage of
Number of Shares Shares of
Number of Shares Shares of common of Common Stock Common Stock
of Common Stock Stock Being Beneficially Beneficially
Beneficially Owned Offered in the Owned After the Owned After
Selling Stockholder Before the Offering Offering Offering the Offering
-------------------------------------------------------------------------------------------------------------------
JMG Capital Partners, L.P (1) 455,000 455,000 -- *
JMG Triton Offshore Fund, Ltd (2) 455,000 455,000 -- *
J. Steven Emerson IRA R/O II (3) 1,127,787 910,000 217,787 1.09%
Emerson Partners, Ltd. (4) 135,000 135,000 -- *
High Tide, LLC (5) 45,500 45,500 -- *
Kenneth R. Malkes 13,600 13,600 -- *
The Runnels Family Trust (6) 105,500 105,500 -- *
T.R. Winston & Company, LLC (7) 42,980 42,980 -- *
--------------------------
23
* Represents beneficial ownership of less than 1.0% of the outstanding
shares of common stock.
(1) JMG Capital Partners, L.P. ("JMG Partners") is a California limited
partnership. Its general partner is JMG Capital Management, LLC (the
"Manager"), a Delaware limited liability company and an investment
adviser registered with the Securities and Exchange Commission. The
Manager has voting and dispositive power over JMG Partners'
investments, including these shares. The equity interests of the
Manager are owned by JMG Capital Management, Inc., ("JMG Capital") a
Delaware corporation, and Asset Alliance Holding Corp., a Delaware
corporation. Jonathan M. Glaser is the Executive Officer and Director
of JMG Capital and has sole investment discretion over JMG Partners'
portfolio holdings.
(2) JMG Triton Offshore Fund, Ltd. (the "Fund") is an international
business company under the laws of the British Virgin Islands. The
Funds' investment manager is Pacific Assets Management LLC, a Delaware
limited liability company (the "Manager"). The Manager is an investment
adviser registered with the Securities and Exchange Commission and has
voting and dispositive power over the Fund's investments, including
these shares. The equity interests of the Manager are owned by Pacific
Capital Management, Inc., a Delaware company ("Pacific") and Asset
Alliance Holding Corp., a Delaware company. The equity interests of
Pacific are owned by Messrs. Roger Richter, Jonathan M. Glaser and
Daniel A. David and Messrs. Glaser and Richter have sole investment
discretion over the Fund's portfolio holdings.
(3) J. Stevens Emerson, the sole beneficiary of J. Steven Emerson IRA R/O
II, has voting and investment control over these shares.
(4) J. Stevens Emerson, a manager of Emerson Partners, Ltd, has voting and
investment control over these shares.
(5) G. Tyler Runnels, manager of High Tide, LLC, has voting and investment
control over these shares.
(6) The shares being offered in this prospectus include 60,000 shares
issuable upon exercise of warrants. These warrants were issued to The
Runnels Family Trust in connection with placement services relating to
the Purchase Agreement, and we agreed to register for resale the shares
issuable upon exercise of the warrants. G. Tyler Runnels, trustee, of
the Runnels Family Trust, have voting and investment control over these
shares.
(7) The shares being offered in this prospectus include 42,980 shares
issuable upon exercise of warrants. These warrants were issued to T.R.
Winston & Company, LLC ("TR Winston") in connection with placement
services relating to the Purchase Agreement, and we agreed to register
for resale the shares issuable upon exercise of the warrants. G. Tyler
Runnels, Chairman, and John W. Galuchie, Jr., President of T.R.
Winston, have voting and investment control over these shares. TR
Winston is a registered broker-dealer and has represented to us that
the warrants held by it were issued in the ordinary course of business,
and that at the time of issuance it did not have any agreements or
understandings, directly or indirectly, with any person to distribute
the warrants or the underlying shares.
We have agreed to prepare and file any amendments and supplements to
the registration statement relating to these shares as may be necessary to keep
the registration statement effective until such time as all of the shares
covered by this prospectus have been sold or until all of such shares may be
sold without registration or restriction pursuant to Rule 144(k) under the
Securities Act.
This prospectus also covers any additional shares of our common stock
which become issuable in connection with the shares being registered by reason
of any stock dividend, stock split, recapitalization or other similar
transaction effected without the receipt of consideration which results in an
increase in the number of our outstanding shares of common stock.
PLAN OF DISTRIBUTION
We have registered the 2,162,580 shares of our common stock offered in
this prospectus on behalf of the selling stockholders. We will pay all expenses
of this registration, other than fees and expenses, if any, of counsel or other
advisors to the selling stockholders. The selling stockholders are responsible
for paying any commissions, discounts, or other brokerage fees incurred in
connection with their sale of any of the shares.
24
The shares of common stock may be sold in one or more transactions at
fixed prices, at prevailing market prices at the time of sale, at prices related
to the prevailing market prices, at varying prices determined at the time of
sale, or at negotiated prices. These sales may be effected at various times in
one or more of the following transactions, or in other kinds of transactions:
o in the over-the-counter market;
o in private transactions and transactions otherwise than on
exchanges or systems or in the over-the-counter market;
o in connection with short sales of the shares;
o by pledge to secure debt and other obligations;
o through the writing of options, whether the options are listed on
an options exchange or otherwise;
o in connection with the writing of non-traded and exchange-traded
call options, in hedge transactions and in settlement of other
transactions in standardized or over-the-counter options; or
o through a combination of any of the above transactions.
The selling stockholder and its successors, including its transferees,
pledgees or donees or their successors, may sell the common stock directly to
purchasers or through underwriters, broker-dealers or agents, who may receive
compensation in the form of discounts, concessions or commissions from the
selling stockholder or the purchasers. These discounts, concessions or
commissions as to any particular underwriter, broker-dealer or agent may be in
excess of those customary in the types of transactions involved.
We have agreed to indemnify the selling stockholders, and each
director, officer or controlling person of each selling stockholder within the
meaning of Section 15 of the Securities Act of 1933 against all losses, claims,
damages, liabilities and expenses, (or action in respect thereof) including any
of the foregoing incurred in settlement of any litigation, commenced or
threatened, arising out of or based on (i) any untrue statement or alleged
untrue statement of a material fact contained in, or information incorporated by
reference into, any registration statement or prospectus (or any amendment or
supplement thereto) or any preliminary prospectus prepared in connection with
the registration contemplated by the Purchase Agreement, (ii) any omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, (iii) any failure by
us to fulfill and perform any agreement, covenant or undertaking pursuant to the
Purchase Agreement, or (iv) any failure or breach of our representations and
warranties as set forth in the Purchase Agreement.
The selling stockholders also may resell all or a portion of the shares
in open market transactions in reliance on Rule 144 under the Securities Act of
1933, if they meet the criteria and conform to the requirements of that rule.
25
The selling stockholders and any broker-dealers or agents that
participate with the selling stockholders in the sale of shares may be
"underwriters" within the meaning of the Securities Act of 1933. Any commissions
received by broker-dealers or agents on the sales and any profit on the resale
of shares purchased by broker-dealers or agents may be deemed to be underwriting
commissions or discounts under the Securities Act of 1933.
Under the rules of the SEC, any person engaged in the distribution of
our common stock may not simultaneously buy, bid for or attempt to induce any
other person to buy or bid for our common stock in the open market for a period
of two business days prior to the beginning of the distribution. The rules and
regulations under the Securities Exchange Act of 1934 may also limit the timing
of purchases and sales of shares of our common stock by the selling
stockholders. We have notified the selling stockholders they should not begin
any distribution of common stock unless they have stopped purchasing and bidding
for common stock in the open market as provided in applicable securities
regulations, including Regulation M promulgated under the Securities Exchange
Act of 1934.
We have informed the selling stockholders that the anti-manipulation
provisions of Regulation M may apply to the sales of their shares. We have
advised the selling stockholders of the requirement for delivery of this
prospectus in connection with any sale of the common stock.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our
financial statements included elsewhere in this prospectus and the "Risks
Factors" set forth above. This prospectus contains forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995
related to our business. These forward-looking statements include statements
regarding our anticipated financial performance, business prospects, receipt of
FDA approvals, technological developments, new products, research and
development efforts, and similar matters including our expectation that related
party revenue will continue to be a significant portion of our total revenue and
that sales of BSD-500 and BSD-2000 systems will be a greater percentage of total
revenue in fiscal 2004 and our belief that our current working capital and cash
from operations will be sufficient to fund our anticipated operations for fiscal
2004. In addition terms such as "expect," "may," "should," "will," "anticipate,"
"believe," "intend," "estimate," "plan," "continue," "should," "potential,"
"will," "project," "likely" or similar expressions or the negative of such
expressions identify forward-looking statements. These forward-looking
statements involve risks, uncertainties and other factors that could cause our
actual results and achievements to be materially different than those expressed
or implied by our forward-looking statements. These risks, uncertainties and
other factors include those identified in the section entitled "Risk Factors"
above.
General
We develop, manufacture and market microwave systems used in the
treatment of cancer. Our microwave systems are used in cancer treating therapies
that elevate the temperature of tumors or other targeted tissue to conditions
classified as either hyperthermia or thermal therapy (also called
thermotherapy), through precisely delivered microwave energy. We also own
approximately 30% of TherMatrx, Inc., a company engaged in the development and
marketing of a medical device designed to be used in the treatment of benign
prostatic hyperplasia. We supply thermotherapy systems, component parts and
contract manufacturing services to TherMatrx.
Since our inception, we have been engaged in the development and
improvement of technology that can better accomplish cancer cure through
hyperthermia therapy. From our predecessor hyperthermia systems, our current
BSD-500 and BSD-2000 hyperthermia systems have emerged. We have also developed
enhancements to our BSD-2000 system including the BSD-2000/3D that is designed
26
to allow three dimensional steering of deep focused energy and heat to targeted
tumors and tissue and the BSD-2000/3D/MR that includes an interface for magnetic
resonance imaging. Our hyperthermia systems are sold with supporting software
and may also be sold with support services. Since inception, we have generated
substantial operating losses and at August 31, 2003, had an accumulated deficit
of $20,486,107. We recorded net loss for fiscal 2003 of $570,285.
We derived $1,907,585, or 74.14% of our revenue in fiscal 2003 from
sales to related parties. Approximately $1,391,443 of such related party revenue
was from manufacturing, assembling and testing thermotherapy systems for
TherMatrx and selling probes, applicators and temperature sensors and other
components and contract services to TherMatrx. We also realized $63,500 of
royalty revenue from TherMatrx, which is included in other revenue. The
remaining related party revenue of approximately $516,142 was for one BSD-2000
system and component parts sold to Medizin-Technik GmbH. Dr. Gerhard Sennewald,
one of our directors, is a stockholder, executive officer and a director of
Medizin-Technik GmbH.
In fiscal 2003, we derived $326,597, or 12.69% of our revenue from
sales to unrelated parties. These revenues consisted of two BSD 500 systems for
$203,386, billable labor of $20,863, service contracts of $65,731, and sales of
consumable devices used with our hyperthermia systems of $36,617. We also
recognize revenue of $275,000 of royalties in arrears that were collected from a
legal settlement. Our ability to increase revenue depends primarily on our
ability to continue to provide hyperthermia or thermotherapy systems and
components to TherMatrx and Medizin-Technik and increase sales of our
hyperthermia systems domestically and internationally. We expect related party
revenues to continue to be a significant portion of total revenue as we continue
to sell hyperthermia systems in Europe through our distributor, Medizin-Technik.
We anticipate revenue from TherMatrx to be less in our second quarter of 2004,
and possibly the third quarter, than it was in the second and third quarter of
2003 because of TherMatrx's existing excess inventory. Consequently, we
currently expect revenue from TherMatrx to be less in fiscal 2004 than it was in
fiscal 2003. In fiscal 2004, we currently anticipate sales of our BSD-500 and
BSD-2000 systems to be a greater percentage of total revenue. We recorded a net
loss of $550,165 on revenue of $589,855 in the fourth quarter of fiscal 2003,
primarily due to a write-off of a significant receivable of approximately
$300,000.
Cost of sales for the year ended August 31, 2003, included raw material
and labor costs. For the year ended August 31, 2003, we increased our reserve
for potential inventory impairment by $90,000, resulting in a total inventory
reserve of $140,000 at year-end. Because of the level of usage of certain
inventory items, we estimated that such items on hand potentially exceeded the
estimated near-term usage. Consequently, we determined to increase our inventory
reserve. Research and development expenses include expenditures for new product
development and development of enhancements to existing products.
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 is recognized when a valid purchase order
has been received, services have been performed or product has been delivered,
the selling price is fixed or determinable, and collectibility is reasonably
assured. Sales include revenue from systems with software products, software
license rights and service contracts. Software Revenue Recognition, generally
requires revenue earned on software arrangements involving multiple elements
such as software products, enhancements, post-contract customer support,
installation and training to be allocated to each element based on the relative
fair values of the elements. The revenue allocated to software products is
27
generally recognized upon delivery of the products. The revenue allocated to
post-contract customer support is generally recognized over the support period.
Revenue for products sold is recorded when products are delivered. Revenue from
long-term service contracts is recognized on a straight-line basis over the term
of the contract, which approximates recognizing it as it is earned. Deferred
revenue and customer deposits payable includes amounts from service contracts as
well as revenue from sales of products, which have not been shipped. We estimate
collectibility of receivables based on numerous factors, including the credit
worthiness of the customer, prior payment history, and review of public
information.
Inventory Reserves. As of August 31, 2003, we had recorded a reserve
for potential inventory impairment of $140,000. Due to the level of usage of
certain inventory items, we estimated that such items on hand potentially
exceeded the estimated near-term usage. As a result, we determined to increase
the inventory reserve by $90,000 in the fourth quarter. This estimate is
determined based on our forecasted sales and related inventory usage to fill
such sales orders as well as evaluation of technological enhancements that may
render inventory items obsolete in the near-term. We periodically review our
inventory levels and usage, paying particular attention to slower-moving items.
If projected sales for fiscal 2004 do not materialize or if our hyperthermia
systems do not receive increased market acceptance, we may be required to
increase the reserve for inventory 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 sale. 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 provide our customers with payment
terms that vary from contract to contract. We perform ongoing credit evaluations
of our customers and maintain allowances for possible losses which, when
realized, have been within the range of management's expectations with exception
of the bad debt expense of approximately $300,000 recorded fiscal 2003 as
discussed below. Our allowance for doubtful accounts at August 31, 2003 was
approximately $67,000, or approximately 14.23% of the total outstanding
receivables. Bad debt expense for the fiscal year ended August 31, 2003 was
approximately $300,000. This resulted from a sale of BSD-2000 that was recorded
in FYE 2002 to customer that was determined to be uncollectible in the fourth
quarter of 2003. Allowance estimates are recorded on a customer-by-customer
basis and are determined based on the age of the receivable, compliance with
payment terms, and prior history with existing clients. To date, actual results
have not differed materially from management's estimates, with the exception of
the above-mentioned bad debt. The non-payment of a receivable related to the
sale of a BSD-500 or BSD-2000 could have a material adverse impact on our
results of operations.
Results of Operations
Three months Ended November 30, 2003 Compared to Three Months Ended November 30,
2002
Sales decreased from $800,285 in the three months ended November 30,
2002, to $681,134 in the three months ended November 30, 2003, a decrease of
$119,151 or 14.89%, primarily due to a decrease in sales to the Company's
unconsolidated subsidiary. The decrease was due to a significant drop in sales
to TherMatrx, due to TherMatrx's existing excess inventory. We derived $20,592,
or 3.02% of total revenue in the period ended November 30, 2003 from
manufacturing, assembling and testing thermotherapy systems for TherMatrx and
selling probes, applicators and temperature sensors and other components and
contract services to TherMatrx. The remaining related party revenue of $466,633,
or 68.5% was for one BSD-2000 system and component parts sold to Medizin-Technik
28
GmbH. Dr. Gerhard Sennewald, one of our directors, is a stockholder, executive
officer and a director of Medizin-Technik GmbH. The remaining revenue was
$143,300 for the sale of a BSD-500, $26,722 for service contracts, $6,050 for
billable labor and $17,837 for miscellaneous items.
Gross profit for the period ending November 30, 2003 was $351,004 or
51.53% as compared to $451,127 or 56.37% of total product sales for the period
ending November 30, 2002. This decrease was primarily due to a change in product
mix.
Selling, general and administrative expenses decreased to $212,575 in
the three months ended November 30, 2003, from $248,991 in the three months
ended November 30, 2002 a decrease of $36,416 or 14.63%. This decrease was
primarily due to lower legal and consulting costs. Total costs and expenses
decreased by $48,545, a decrease of 6.44%, primarily due to decreased cost of
goods sold as a result of decreased sales and the aforementioned decrease in
selling, general and administrative expense offset by increases in research and
development.
Research and development expenses were $162,558 for the three months
ended November 30, 2003, as compared to $155,659 in the three months ended
November 30, 2002. Research and development expenses in the period ending
November 30, 2003 related primarily to development work on our BSD-2000/3D/MR
hyperthermia system and enhancements to our BSD-500 systems.
The net loss for the three months ending November 30, 2003, was $24,136
as compared with net income of $47,606 for the three months ending November 30,
2002 was primarily due to lower sales volume.
Fiscal Year Ended August 31, 2003 Compared to Fiscal Year Ended August 31, 2002
Revenue. Revenue for fiscal 2003 was $2,572,682 compared to $2,672,472
for fiscal 2002, a decrease of $99,790, or approximately 3.73%. This decrease
was mainly due to a decrease in sales to TherMatrx. Product sales decreased to
$2,234,182 in 2003 from $2,672,472 in 2002 a decrease of $438,290 or 16.4%.
Related Party Revenue. We derived $1,907,585, or 74.14% of our revenue
in fiscal 2003 from sales to related parties as compared to $1,854,714, or 69.4%
in fiscal 2002. Approximately $1,391,443 of such related party revenue in fiscal
2003 was from the sales of thermotherapy systems, component products and
contract services to TherMatrx. There was also a payment for royalty revenue of
$63,500 paid to us by Thermatrx that is included in other revenue. During fiscal
2002, sales to TherMatrx were approximately $1,781,000. The remaining related
party revenue of approximately $516,142 in fiscal 2003 was for one BSD-2000
system and various component parts sold to Medizin-Technik. Dr. Gerhard
Sennewald, one of our directors and stockholders, is a stockholder, executive
officer and a director of Medizin-Technik. During fiscal 2002, we had sales of
approximately $74,000 to Medizin-Technik. The significant increase in sales to
Medizin-Technik in fiscal 2003 was due to the normal rise and fall cycle
associated with the sale of large-ticket item capital equipment.
Non-related Party Revenue. In fiscal 2003, we derived approximately
$601,597, or 23.38% of our total revenue as compared to approximately $817,758,
or 30.59% in fiscal 2002 through non-related party sales. Our non-related party
revenue consisted of sales of two BSD-500 systems in fiscal 2003 for
approximately $203,386, consumable devices of $36,617, billable labor of
$20,863, service contracts of $65,731 and royalty revenue of $275,000.
29
Cost of Sales. Cost of sales for fiscal 2003 was $1,227,377 compared to
$1,114,846 for fiscal 2002, an increase of $112,531, or approximately 10.09%.
This increase resulted primarily from charges to cost of sales for obsolete
inventory of $90,000 Cost of sales for fiscal 2003 to unrelated parties
decreased to $94,619 from $302,431 primarily because of the decrease in sales to
unrelated customers. Cost of sales to related parties in fiscal 2003 increased
to $1,132,758 from $812,415 in fiscal 2002 primarily because of the change in
product mix and an increase in related party sales. During fiscal 2003,
approximately 74% of the related party cost of sales were to TherMatrx and 26%
were to Medizin-Technik. The products sold to TherMatrx generally require less
cost per unit to manufacture than the BSD-2000 and BSD-500 systems.
Gross Profit. Gross profit for fiscal 2003 was $1,070,305 or 47.9% of
total product sales and related service, excluding royalty revenue in arrears,
compared to $1,557,626, or 58.28% of total product sales in fiscal 2002. The
decrease in gross profit as a percentage of total product sales was primarily
because of decreases in sales of higher margin hyperthermia system products in
fiscal 2003.
Research and Development Expenses. Research and development expenses
for fiscal 2003 were $676,867 compared to $603,137 for fiscal 2002, an increase
of $73,730, or 12.22%. Research and development expenses in fiscal 2003 related
primarily to development of commercial version of BSD-2000/3D/MR hyperthermia
system and to our BSD-500 systems.
Inventory Impairment Expense. We recorded an inventory impairment
charge in fiscal 2003 of $90,000 increasing our total inventory reserve at
August 31, 2003 to $140,000.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for fiscal 2003 were $1,241,561 compared to $1,667,042
in fiscal 2002, a decrease of $425,481, or approximately 25.52%. This decrease
was primarily due to less compensation expense of $717,000 related to the
issuance of options to purchase TherMatrx stock in fiscal 2002. This was offset
by higher bad debt expense of $300,394 and increased legal fees and lower
administrative and regulatory costs and special promotion costs.
Other Income. Other income for fiscal 2003 was $2,838 compared to
$722,198 in fiscal 2002, a decrease of $719,360. This decrease resulted almost
entirely from a gain recognized in 2002 on transfer of equity interest in
affiliate to related parties as noted above.
Net Loss. In fiscal 2003 we had a net loss of $570,285 as compared to
net income in fiscal of $9,645. The net loss was primarily caused by an increase
in bad debt expense of $300,394, an increase in inventory reserve of $90,000 and
lower overall sales for fiscal 2003.
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 operating success of TherMatrx and its continued demand for
thermotherapy systems and component parts supplied by us, market acceptance of
our BSD hyperthermia systems, changes in the medical capital equipment market,
changes in order mix and product order configurations, competition, regulatory
developments and other matters. Operating expenses may fluctuate as a result of
the timing of sales and marketing activities, research and development and
clinical trial expenses, and general and administrative expenses associated with
our potential growth. For these and other reasons, including those set forth in
"Risks of our Business" in Part I, our results of operations for a particular
period may not be indicative of operating results for any other period.
30
Liquidity and Capital Resources
Since inception, we have generated an accumulated deficit of
$20,510,243 at November 30, 2003. We have historically financed our operations
through cash from operations, licensing of technological assets and issuance of
common stock.
We used $227,298 in cash from operating activities in fiscal 2003
compared to cash generated of $19,800 in fiscal 2002. This was a result of a
significant uncollectible receivable of $300,000 that contributed to a net loss
of $570,285 for fiscal 2003 compared to net income of $9,645 in 2002, and a
reduction of accounts receivable of $9,614 as compared to $55,173 in fiscal 2002
offset by an increase in accounts payable of $217,447 compared to a reduction in
accounts payable of $51,121 in fiscal 2002. Accrued expenses decreased by
$133,066 primarily as a result of a decrease in customer deposits as orders were
shipped. Our investing activities resulted in net cash used of $60,599 relating
to the purchase of certain property and equipment. Cash provided by financing
activities totaled $2,000 reflecting proceeds from the issuance of common stock
in connection with the exercise of outstanding stock options.
We used $86,827 in cash from operating activities during the period
ended November 30, 2003 compared to cash generated of $99,428 in the period
ending November 30, 2002. Cash flow from operating activities decreased in the
November 30, 2003 period primarily because of lower sales volume compared to the
prior year period.
On November 28, 2003, we completed the sale of an aggregate of
1,820,000 shares of our common stock to investors for cash consideration of
$1.10 per share, or a total of $2,002,000. The net proceeds from the
transaction, after paying a commission to our placement agent, T.R. Winston &
Company, LLC, and legal other expenses related to the transaction, were
approximately $1,836,000.
At November 30, 2003, our working capital was $2,281,196 and our cash
and cash equivalents totaled $2,051,376. We have no bank debt and no credit
facility. Our contractual obligations and commercial commitments requiring
capital resources include building rent of $82,000 per year for five years
adjusted annually for increases in the cost of living based on the Consumer
Price Index for Urban Consumers.
On December 10, 2003 there was an additional 239,600 shares issued to
investors at $1.10 per share or a total of $263,560.
Our ability to fund our cash needs and grow our business depends on our
ability to generate cash flow from operations and capital from financing
activities. Our operating cash flow has fluctuated significantly in the past and
may continue to do so in the future. We believe that our current working capital
and anticipated cash flow from future operations will be sufficient to fund our
anticipated operations for fiscal 2004. We have based this belief, however, on
assumptions that may prove to be wrong. We expect our revenue from sales of
products to TherMatrx to decline in the second quarter, and possibly the third
quarter, of 2003 compared to the second and third quarters of 2002. We also
expect to incur additional expenses related to the commercial introduction of
our BSD-500 systems, which will precede any revenue from the sale of such
systems. We believe any cash shortfall during fiscal 2004 that results from this
decrease in revenues and increase in expenses can be covered through the cash
raised in our November and December 2003 private placements. However, if our
revenues from TherMatrx decrease more or more rapidly than we currently expect
or revenues from the sale of our systems is lower than we currently expect, we
will have to cut expenses or use more of our available cash than we anticipated.
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. 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.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TherMatrx, Inc. We manufacture, assemble and test for TherMatrx, Inc.
its TMx-2000 thermotherapy system and supply TherMatrx with equipment components
used for its TMx-2000 system. We also have provided regulatory compliance and
other consulting services to TherMatrx. TherMatrx has become our largest
customer, and for the year ended August 31, 2003, TherMatrx accounted for
$1,391,443, or approximately 54.08%, of our revenue. We currently own
approximately 30% of TherMatrx, and Dr. Gerhard W. Sennewald, a director and
significant stockholder of BSD, is also a director of TherMatrx. In July 2002,
we granted options to all of our directors and employees to acquire shares of
TherMatrx common stock and each has exercised such options in fiscal 2002 as
further described elsewhere in this prospectus.
31
Medizin-Technik GmbH. Additionally, we supply equipment components to
Medizin-Technik GmbH located in Munich, Germany, which is a significant
distributor of our products in Europe. Medizin-Technik purchases equipment,
which it installs, and components to service our hyperthermia therapy systems
that it sells to its customers in Europe. Dr. Gerhard W. Sennewald, one of our
directors and significant stockholders, is the President and Chief Executive
Officer of Medizin-Technik and a controlling stockholder of Medizin-Technik.
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock trades publicly on the OTC Bulletin Board under the
symbol "BSDM." The following table sets forth the high and low bid transactions,
as provided by the OTC Bulletin Board, for the quarters in fiscal year 2002 and
2003. The amounts reflect inter-dealer prices, without retail mark-up, markdown
or commission, and may not represent actual transactions.
Bid
Quarter Ended: High Low
------------------------------- ----------------------
November 30, 2001.............. .90 .90
February 28, 2002.............. 1.16 1.10
May 31, 2002................... 1.00 .95
August 31, 2002................ .66 .66
November 30, 2002.............. .42 .42
February 29, 2003.............. 1.65 .60
May 31, 2003................... .45 .45
August 31, 2003................ .80 .78
November 30, 2003.............. 1.45 1.45
As of January 23, 2004, there were approximately 595 holders of record
of our common stock. We have not paid any cash dividends on our common stock
since our inception and we have no intention of declaring any common stock
dividends in the foreseeable future.
32
Equity Compensation Plan Information
Number of Securities to Weighted-Average Number of Securities
be Issued Upon Exercise Exercise Price of Remaining Available for
of Outstanding Options, Outstanding Options, Future Issuance Under Equity
Plan Category Warrants and Rights Warrants and Rights Compensation Plans
Equity Compensation Plans 1,275,303 $0.49 1,802,241
Approved by Security Holders
Equity Compensation Plans - - -
not Approved by Security
Holders
Total 1,275,303 $0.49 1,802,241
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of January 23, 2004, the beneficial
ownership of our outstanding common stock by:
o each person (including any group) known to us to own more than 5%
of any class of our common stock,
o each of our executive officers,
o each of our directors, and
o all executive officers and directors as a group.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission, and generally includes voting or investment
power with respect to securities. For purposes of calculating the percentages
shown in the table, each person listed is deemed to beneficially own any shares
issuable on the exercise of vested options and warrants held by that person that
are exercisable within 60 days after January 23, 2004. Except as indicated by
footnote, the persons named in the table have sole voting and investment power
with respect to all shares of common stock shown beneficially owned by them. The
inclusion of any shares as beneficially owned does not constitute an admission
of beneficial ownership of those shares. The percentage calculation of
beneficial ownership is based on 19,915,232 shares of common stock outstanding
as of January 23, 2004. Except as otherwise noted, the address of each person
listed on the following table is 2188 West 2200 South, Salt Lake City, Utah
84119.
Common Stock Beneficially Owned
Title of Class Name of Beneficial Owner Shares Percent
----------------------------------------------------------------------------------------------
Officers and Directors
----------------------
Common Stock Dr. Gerhard W. Sennewald(1) 6,771,814 33.85%
Common Stock Paul F. Turner(2) 1,995,871 9.93%
Common Stock Hyrum A. Mead(3) 340,000 1.69%
Common Stock Dr. J. Gordon Short(4) 217,635 1.08%
Common Stock Dr. Michael Nobel(5) 154,718 *
Holders of More Than 5%
-----------------------
Common Stock John E. Langdon(6) 1,295,010 6.50%
J. Steven Emerson 1,262,787 6.34%
Common Stock All Executive Officers and Directors
as a Group (5 persons)(7) 9,480,038 45.95%
---------------
* Less than 1.0%.
33
(1) Includes 90,000 shares subject to options. Does not include 500,000
shares held by Dr. Sennewald's spouse, for which he disclaims
beneficial ownership.
(2) Includes 180,953 shares subject to options.
(3) Includes 260,000 shares subject to options.
(4) Includes 110,000 shares subject to options.
(5) Includes 75,000 shares subject to options.
(6) Includes 351,862 shares owned directly by Mr. Langdon. The remaining
shares are held in trusts for which Mr. Langdon is trustee. Does not
include 50,000 shares held by Mr. Langdon's spouse, for which he
disclaims beneficial ownership. Mr. Langdon's address is: 2501 Parkview
Drive, Suite 500, Fort Worth, TX 76102.
(7) Includes 715,953 shares subject to options.
In July 2002, we issued to our employees and board members options to
purchase 179,300 shares of TherMatrx at an exercise price of $0.001 per share.
All options were immediately exercisable upon grant and were exercised in the
fourth quarter of fiscal year 2002. The exercise of these options reduced our
holdings in TherMatrx from shares (32%) to 2,520,700 shares (30%).
DESCRIPTION OF SECURITIES
General
We are authorized to issue 40,000,000 shares of common stock, $0.001
par value, and 10,000,000 shares of undesignated preferred stock, $0.001 par
value per share.
The following description of our capital stock is a summary, it is not
complete and is subject to and qualified in its entirety by our Amended and
Restated Certificate of Incorporation and Bylaws, a copy of each of which has
been incorporated as an exhibit to the registration statement of which this
prospectus forms a part, and the provisions of applicable Delaware law.
Our Amended and Restated Certificate of Incorporation and Bylaws
contain certain provisions that are intended to enhance the likelihood of
continuity and stability in the composition of the board of directors, which may
have the effect of delaying, deferring or preventing a future takeover or change
in control of BSD unless such takeover or change in control is approved by our
board of directors.
34
Common Stock
As of January 23, 2004, there were 19,915,232 shares of common stock
outstanding, which were held of record by 595 stockholders.
Holders of common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Holders of common stock do not
have cumulative voting rights, and, therefore, holders of a majority of the
shares voting for the election of directors can elect all of the directors. In
such event, the holders of the remaining shares will not be able to elect any
directors. Subject to preferences that may be applicable to any then-outstanding
preferred stock, holders of common stock are entitled to receive such dividends
as may be declared from time to time by our board of directors out of funds
legally available therefore. We have never declared or paid cash dividends on
our capital stock, expect to retain future earnings, if any, for use in the
operation and expansion of its business, and do not anticipate paying any cash
dividends in the foreseeable future.
In the event of liquidation, dissolution or winding up of BSD, holders
of common stock are entitled to share ratably in all assets legally available
for distribution after payment of all debts and other liabilities and subject to
the prior rights of the holders of any preferred stock then outstanding. Holders
of common stock have no preemptive or other subscription or conversion rights,
and there are no redemption or sinking fund provisions applicable to the common
stock.
Preferred Stock
As of January 23, 2004, there were no shares of preferred stock
outstanding. Our Amended and Restated Certificate of Incorporation authorize
10,000,000 shares of undesignated preferred stock. Our board of directors will
have the authority, without any further vote or action by our stockholders, to
issue from time to time the preferred stock in one or more series and to fix the
price, rights, preferences, privileges and restrictions thereof, including
dividend rights, dividend rates, conversion rights, voting rights, terms of
redemption, redemption prices, liquidation preferences and the number of shares
constituting a series or the designation of such series. The issuance of
preferred stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could decrease the amount of
earnings and assets available for distribution to holders of common stock or
adversely affect the rights and powers, including voting rights, of the holders
of common stock, and may have the effect of delaying, deferring or preventing a
change in control of BSD without further action by the stockholders. We have no
current plans to issue any shares of preferred stock.
Warrants and Options
As of January 23, 2004 warrants to purchase an aggregate of 102,980
shares of our common stock at a weighted average exercise price per share of
$1.80 were issued and outstanding and options to purchase an aggregate 1,112,300
shares of our common stock at a weighted average exercise price per share of
$0.49 were issued and outstanding.
Antitakeover Effects of Provisions of Our Amended and Restated Certificate of
Incorporation and Bylaws and Delaware Law
Certain provisions of our Amended and Restated Certificate of
Incorporation and Bylaws could make the following more difficult:
35
o acquisition of BSD by means of a tender offer;
o acquisition of BSD by means of a proxy contest or otherwise; and
o the removal of our incumbent officers and directors.
These provisions, summarized below, are expected to discourage coercive
takeover practices and inadequate takeover bids. These provisions are also
designed to encourage persons seeking to acquire control of BSD to first
negotiate with our board of directors. We believe that the benefits of increased
protection resulting from our potential ability to negotiate with the proponent
of an unfriendly or unsolicited proposal to acquire or restructure BSD outweigh
the disadvantages of discouraging such proposals because we believe that the
negotiation of such proposals could result in an improvement of their terms.
Stockholder Meetings. Our Amended and Restated Certificate of
Incorporation provide that only the board of directors, the Chairman of the
board, the Chief Executive Officer or the President of BSD may call special
meetings of stockholders. The provision may not be amended without the
affirmative vote of holders of at least 66 2/3% of the outstanding voting stock
of BSD.
Elimination of Stockholder Action By Written Consent. Our charter
documents eliminate the right of stockholders to act by written consent without
a meeting.
Elimination of Cumulative Voting. Our charter documents do not provide
for cumulative voting in the election of directors.
Undesignated Preferred Stock. The ability to authorize undesignated
preferred stock makes it possible for the Board of Directors to issue preferred
stock with voting or other rights or preferences that could impede the success
of any attempt to change control of BSD. These and other provisions may have the
effect of deferring hostile takeovers or delaying changes in control or
management of BSD.
The provisions of Delaware law and our Amended and Restated Certificate
of Incorporation and Bylaw could have the effect of discouraging others from
attempting unsolicited takeovers and, as a consequence, they may also inhibit
temporary fluctuations in the market price of our common stock that often result
from actual or rumored unsolicited takeover attempts. Such provisions may also
have the effect of preventing changes in our management. It is possible that
these provisions could make it more difficult to accomplish transactions, which
stockholders may otherwise deem to be in their best interests.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Section 145 of the Delaware General Corporation Law permits a
corporation to include in its charter documents, and in agreements between the
corporation and its directors and officers, provisions expanding the scope of
indemnification beyond that specifically provided by the current law.
Article 8 of our Amended and Restated Certificate of Incorporation
provides for the indemnification of directors to the fullest extent permissible
under Delaware law.
Section 8 of our Bylaws provides for the indemnification of officers,
directors and third parties acting on behalf of BSD if such person acted in good
faith and in a manner reasonably believed to be in and not opposed to the best
interest of BSD, and, with respect to any criminal action or proceeding, the
indemnified party had no reason to believe his or her conduct was unlawful.
36
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to our directors, officers and controlling persons
pursuant to the foregoing provisions, or otherwise, we have been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
LEGAL MATTERS
The validity under the Delaware General Corporation Law of the common
stock to be sold by the selling stockholders has been passed on for us by Dorsey
& Whitney LLP, Salt Lake City, Utah.
EXPERTS
Tanner + Co., independent certified public accountants, have audited
our financial statements and schedule included in this prospectus for the year
ended August 31, 2003, as set forth in their reports which are incorporated by
reference in this prospectus and elsewhere in the registration statement. Our
financial statements and schedule are incorporated by reference in reliance on
Tanner + Co.'s reports, given on their authority as experts in accounting and
auditing.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and
other information with the Securities and Exchange Commission. You may read and
copy any document we file with the SEC at the SEC's Public Reference Room at 450
Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330 for further information on the Public Reference Room. Our SEC
filings are also available to the public at the SEC's web site at
http://www.sec.gov.
In addition, we maintain an Internet website at www.bsdmc.com. We do
not intend that our website be a part of this prospectus.
We have filed a registration statement on Form SB-2 with the SEC for
the common stock offered by the selling stockholders under this prospectus. This
prospectus does not include all of the information contained in the registration
statement. You should refer to the registration statement and its exhibits for
additional information that is not contained in this prospectus. Whenever we
make reference in this prospectus to any of our contracts, agreements or other
documents, you should refer to the exhibits attached to this registration
statement for copies of the actual contract, agreement or document.
FINANCIAL STATEMENTS
37
BSD Medical Corporation
Financial Statements
August 31, 2003 and 2002
BSD MEDICAL CORPORATION
Index to Financial Statements
--------------------------------------------------------------------------------
Page
----
Independent Auditor's Report F-1
Balance Sheet F-2
Statement of Operations F-3
Statement of Stockholders' Equity F-4
Statement of Cash Flows F-5
Notes to Financial Statements F-6
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of BSD Medical Corporation
We have audited the balance sheet of BSD Medical Corporation (the Company) as of
August 31, 2003, and the related statements of operations, stockholders' equity,
and cash flows for the years ended August 31, 2003 and 2002. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of BSD Medical Corporation as of
August 31, 2003, and the results of its operations and cash flows for the years
ended August 31, 2003 and 2002 in conformity with accounting principles
generally accepted in the United States of America.
Salt Lake City, Utah
September 29, 2003, except for note 15, which is
Dated January 16, 2004
F-1
BSD MEDICAL CORPORATION
Balance Sheet
-----------------------------------------------------------------------------------------------------------
November 30,
2003 August 31,
(unaudited) 2003
----------------------------------
Assets
------
Current assets:
Cash and cash equivalents $ 2,051,376 $ 136,003
Receivables, net 88,451 60,844
Related party receivables 256,048 342,878
Inventories 709,727 802,473
Other current assets 37,089 43,238
----------------------------------
Total current assets 3,142,691 1,385,436
Property and equipment, net 130,089 141,294
Patent, net of amortization of $5,512 and $5,043, respectively 26,416 26,885
----------------------------------
$ 3,299,196 $ 1,553,615
----------------------------------
-----------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 220,124 $ 280,068
Accrued expenses 602,803 614,470
Current portion of deferred revenue 38,568 43,220
----------------------------------
Total current liabilities 861,495 937,758
Deferred revenue 30,675 40,900
----------------------------------
Total liabilities 892,170 978,658
----------------------------------
Commitments and contingencies - -
Stockholders' equity:
Preferred stock, $.001 par value; 10,000,000 authorized,
no shares issued and outstanding - -
Common stock, $.001 par value; authorized 40,000,000
shares; issued and outstanding 19,675,632 and 17,839,633
shares, respectively 19,676 17,840
Additional paid-in capital 22,925,635 21,070,874
Deferred compensation (27,808) (27,416)
Accumulated deficit (20,510,243) (20,486,107)
Treasury stock, at cost (234) (234)
----------------------------------
Total stockholders' equity 2,407,026 574,957
----------------------------------
$ 3,299,196 $ 1,553,615
----------------------------------
-----------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements. F-2
BSD MEDICAL CORPORATION
Statement of Operations
-----------------------------------------------------------------------------------------------------------
Three Months Ended
November 30, Years Ended August 31,
-----------------------------------------------------------
2003 2002
(unaudited) (unaudited) 2003 2002
-----------------------------------------------------------
Revenues:
Sales $ 193,909 $ 44,719 $ 326,597 $ 817,758
Sales to related parties 487,225 755,566 1,907,585 1,854,714
Revenue from royalties in arrears - - 275,000 -
Other revenue - related party - - 63,500 -
-----------------------------------------------------------
681,134 800,285 2,572,682 2,672,472
-----------------------------------------------------------
Costs and expenses:
Cost of sales 123,450 6,171 94,619 302,431
Cost of sales to related parties 206,680 342,987 1,132,758 812,415
Research and development 162,558 155,659 676,867 603,137
Selling, general, and administrative 212,575 248,991 1,241,561 1,667,042
-----------------------------------------------------------
705,263 753,808 3,145,805 3,385,025
-----------------------------------------------------------
Operating (loss) income (24,129) 46,477 (573,123) (712,553)
-----------------------------------------------------------
Other income (expense):
Gain on transfer of equity interest in
affiliate - - -
to related parties 717,000
Interest income 101 1,129 2,838 5,198
Interest expense (108) - - -
-----------------------------------------------------------
(7) 1,129 2,838 722,198
-----------------------------------------------------------
Net (loss) income before
income taxes (24,136) 47,606 (570,285) 9,645
Income tax benefit (provision) - - - -
-----------------------------------------------------------
Net (loss) income $ (24,136) $ 47,606 $ (570,285) $ 9,645
-----------------------------------------------------------
Income (loss) per common share -
basic and diluted $ - $ - $ (0.03) $ -
-----------------------------------------------------------
Weighted average shares - basic 17,896,000 17,775,000 17,805,000 17,699,000
-----------------------------------------------------------
Weighted average shares - diluted 17,896,000 18,037,000 17,805,000 17,932,000
-----------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements. F-3
BSD MEDICAL CORPORATION
Statement of Stockholders' Equity
Years Ended August 31, 2003 and 2002
and Three Months Ended November 30, 2003 (unaudited)
------------------------------------------------------------------------------------------------------------------------------------
Common Stock Additional Deferred Treasury Stock
------------------- Paid-in Compen- Accumulated -------------------------
Shares Amount Capital sation Deficit Shares Amount Total
--------------------------------------------------------------------------------------------------------
Balance, September 1, 2001 17,602,619 $ 17,603 $ 20,969,196 $ (25,097) $ (19,925,467) 24,331 $ (234) $ 1,036,001
Common stock issued for:
Cash 109,633 110 34,492 - - - - 34,602
Services 27,264 27 23,973 - - - - 24,000
Options 16,812 17 (17) - - - - -
Amortization of deferred
compensation - - - 8,636 - - - 8,636
Deferred compensation - - 9,813 (9,813) - - - -
Net income - - - - 9,645 - - 9,645
---------------------------------------------------------------------------------------------------------
Balance August 31, 2002 17,756,328 17,757 21,037,457 (26,274) (19,915,822) 24,331 (234) 1,112,884
Common stock issued for:
Cash 20,000 20 1,980 - - - - 2,000
Services 38,106 38 23,962 - - - - 24,000
Warrants 25,199 25 (25) - - - - -
Amortization of deferred
compensation - - - 6,358 - - - 6,358
Deferred compensation - - 7,500 (7,500) - - - -
Net loss - - - - (570,285) - - (570,285)
---------------------------------------------------------------------------------------------------------
Balance August 31, 2003 17,839,633 17,840 21,070,874 (27,416) (20,486,107) 24,331 (234) 574,957
Common stock issued for:
Cash, net of offering
costs of $165,653
(unaudited) 1,820,000 1,820 1,834,527 - - - - 1,836,347
Services (unaudited) 15,999 16 11,984 - - - - 12,000
Deferred compensation
(unaudited) - - 8,250 (8,250) - - - -
Amortization of deferred
compensation (unaudited) - - - 7,858 - - - 7,858
Net loss (unaudited) - - - - (24,136) - - (24,136)
---------------------------------------------------------------------------------------------------------
Balance November 30, 2003
(unaudited) 19,675,632 $ 19,676 $ 22,925,635$ (27,808) $ (20,510,243) 24,331 $ (234) $ 2,407,026
---------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements F-4
BSD MEDICAL CORPORATION
Statement of Cash Flows
----------------------------------------------------------------------------------------------------------
Three Months Ended
November 30, Years Ended August 31,
-------------------------------------------------------
2003 2002
(unaudited) (unaudited) 2003 2002
-------------------------------------------------------
Cash flows from operating activities:
Net (loss) income $ (24,136) $ 47,606 $ (570,285) $ 9,645
Adjustments to reconcile net (loss) income
to net cash (used in) provided by operating
activities operating expense
Provision for doubtful accounts - - 284,393 42,403
Provision for inventory write-off - - 90,000 30,000
Depreciation and amortization 11,675 12,020 48,678 48,965
Deferred gain on sale of building - (15,275) (15,275) (61,416)
Amortization of deferred compensation 7,858 6,358 6,358 8,636
Stock compensation expense 12,000 12,001 24,000 24,000
Compensation expense resulting from
options granted to purchase TherMatrx
shares - - - 717,000
Gain on issuance of options of TherMatrx
shares as settlement of compensation - - - (717,000)
Decrease (increase) in:
Restricted certificate of deposit - - - 15,313
Receivables 59,223 7,232 9,614 55,173
Inventories 92,746 110,805 (85,743) (109,095)
Other current assets 6,148 (19,148) (24,901) 16,767
Increase (decrease) in:
Accounts payable (59,943) 7,609 217,447 (51,121)
Accrued expenses (177,321) (31,956) (133,066) 40,043
Deferred revenue (14,877) (37,824) (78,518) (49,513)
-------------------------------------------------------
Net cash (used in) provided by
operating activities (86,627) 99,428 (227,298) 19,800
-------------------------------------------------------
Cash flows from investing activities:
Purchase of property and equipment - (4,167) (60,599) (22,532)
Purchase of patent license - - - (18,000)
-------------------------------------------------------
Net cash used in
investing activities - (4,167) (60,599) (40,532)
-------------------------------------------------------
Cash flows from financing activities-
proceeds from issuance of common stock 2,002,000 - 2,000 34,602
-------------------------------------------------------
Increase (decrease) in cash and cash equivalents 1,915,373 95,261 (285,897) 13,870
Cash and cash equivalents, beginning of period 136,003 421,900 421,900 408,030
-------------------------------------------------------
Cash and cash equivalents, end of period $ 2,051,376 $ 517,161 $ 136,003 $ 421,900
-------------------------------------------------------
----------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements F-5
BSD MEDICAL CORPORATION
Notes to Financial Statements
August 31, 2003 and 2002
--------------------------------------------------------------------------------
1. Organization Organization
of Significant BSD Medical Corporation (the Company) was incorporated
Accounting in the State of Delaware on July 3, 1986. The Company
Policies develops, produces, markets, and services systems used
for the treatment of cancer and other diseases. These
systems are sold worldwide. In addition, the Company
currently has an approximate 30% interest in TherMatrx,
Inc. (TherMatrx) a corporate joint venture that is
engaged in the manufacture and sale of medical
equipment.
Unaudited Information
The Condensed Balance Sheet as of November 30, 2003, the
Condensed Statements of Operations and the Condensed
Statements of Cash Flow for the three months ended
November 30, 2003 and November 30, 2002, and the
condensed statement of stockholders' equity for the
three months ended November 30, 2003, have been prepared
by the Company without audit. In the opinion of
management, all adjustments to the books and accounts
(which include only normal recurring adjustments)
necessary to present fairly the financial position,
results of operations, and changes in financial position
of the Company as of November 30, 2003 and for the three
months ended November 30, 2003 and 2002 have been made.
Certain information and footnote disclosures normally
included in financial statements prepared in accordance
with generally accepted accounting principles have been
condensed or omitted for the period ended November 30,
2003 and 2002. The results of operations for the period
ended November 30, 2003, are not necessarily indicative
of the results to be expected for the full year.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and
investments with original maturities to the Company of
three months or less.
Inventories
Parts and supplies inventories are stated at the lower
of cost or market. Cost is determined using the average
cost method. Work-in-process and finished goods are
stated at the lower of the accumulated manufacturing
costs or market.
--------------------------------------------------------------------------------
F-6
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
1. Organization Property and Equipment
of Significant Property and equipment are stated at cost less
Accounting accumulated depreciation. Depreciation and amortization
Policies are determined using the straight-line method over the
Continued estimated useful lives of the assets. Expenditures for
maintenance and repairs are expensed when incurred and
betterments are capitalized. Gains and losses on sales
of property and equipment are reflected in operations.
Investment in Joint Venture
The Company has an approximate 30% ownership in
TherMatrx, a corporate joint venture that is engaged in
the manufacture and sale of medical devices. The
investment is accounted for on the equity method of
accounting. Because the Company's percent share of
accumulated losses in TherMatrx has exceeded its
original investment no asset is recorded on the balance
sheet. The Company has included in accrued liabilities
$136,467 of potential obligations to TherMatrx, which it
incurred in a prior year. No further obligations have
been recognized as the Company has not guaranteed or
otherwise committed to provide further financial
funding.
Patents
Patents are carried at cost and are being amortized over
17 years.
Income Taxes
The Company accounts 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 tax 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.
Income (Loss) Per Common Share
The computation of basic income (loss) per common share
is based on the weighted average number of shares
outstanding during each year.
--------------------------------------------------------------------------------
F-7
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
1. Organization Income (Loss) Per Common Share - Continued
of Significant The computation of diluted earnings per common share is
Accounting based on the weighted average number of shares
Policies outstanding during the year, plus the common stock
Continued equivalents that 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 year. Common stock equivalents are not
included in the diluted loss per share calculation when
their effect is anti-dilutive. Options to purchase
1,275,303 shares and 1,258,901 shares of common stock at
prices ranging from $.10 to $1.76 per share were
outstanding at August 31, 2003 and 2002, respectively.
Options outstanding during the fiscal year ended August
31, 2003 were not included in the calculation of diluted
earnings per share because their effect was
anti-dilutive.
The shares used in the computation of the Company's
basic and diluted income (loss) per share are reconciled
as follows:
November 30, August 31,
2003 2002
(unaudited) (unaudited) 2003 2002
----------------------------------------------------
Weighted average number
of shares outstanding -
basic 17,896,000 17,775,000 17,805,000 17,699,000
Dilutive effect of stock
options - 262,000 - 233,000
----------------------------------------------------
Weighted average number
of shares outstanding,
assuming dilution 17,896,000 18,037,000 17,805,000 17,932,000
----------------------------------------------------
--------------------------------------------------------------------------------
F-8
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
1. Organization Stock-Based Compensation
of The Company accounts for stock options granted to
Significant employees under the recognition and measurement
Accounting principles of APB Opinion No. 25, Accounting for Stock
Policies Issued to Employees, and related Interpretations, and
Continued has adopted the disclosure-only provisions of Statement
of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation". Accordingly,
no compensation cost has been recognized in the
financial statements, as all options granted under those
plans had an exercise price equal to or greater than the
market value of the underlying common stock on the date
of grant. Had the Company's options been determined
based on the fair value method, the results of
operations would have been reduced to the pro forma
amounts indicated below:
Three Months Ended
November 30, Years Ended August 31,
----------------------------------------------
2003 2002
(unaudited) (unaudited) 2003 2002
----------------------------------------------
Net income (loss) - as reported $ (24,136) $ 47,606 $(570,285) $ 9,645
Deduct total stock based
employee compensation expense
determined under fair value
based method for all awards,
net of related tax effects (25,000) (31,000) (123,770) (126,225)
-----------------------------------------------
Net income (loss)- pro forma $ (49,136) $ 16,606 (694,055) (116,580)
-----------------------------------------------
Basic and diluted loss per
share - as reported $ - $ - $ (.03) $ -
-----------------------------------------------
Basic and diluted loss per
share - pro forma $ - $ - $ (.04) $ -
-----------------------------------------------
The fair value of each option grant is estimated on the
date of grant using the Black-Scholes option pricing
model with the following assumptions:
November 30, August 31,
-------------------------------------------------
2003 2002
(unaudited) (unaudited) 2003 2002
-------------------------------------------------
Expected dividend yield $ - $ - $ - $ -
Expected stock price 114% 122% 122%
volatility 143%
Risk-free interest rate 4.2% 4.2% 4.3% 4.3%
Expected life of options 5 years 5 years 5 years 5 years
--------------------------------------------------------------------------------
F-9
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
1. Organization Stock-Based Compensation - Continued
of The weighted average fair value of options granted
Significant during the years ended August 31, 2003 and 2002 were
Accounting $.57 and $.73, respectively. The unaudited weighted
Policies average fair value of options granted during the three
Continued months ended November 30, 2003 and 2002, were $.64 and
$.60, respectively.
Revenue Recognition
Revenue is recognized when a valid purchase order has
been received, services have been performed or product
has been delivered, the selling price is fixed or
determinable, and collectibility is reasonably assured.
Sales include revenue from systems with software
products, software license rights and service contracts.
Software revenue recognition, generally requires revenue
earned on software arrangements involving multiple
elements such as software products, enhancements,
post-contract customer support, installation and
training to be allocated to each element based on the
relative fair values of the elements. The revenue
allocated to software products is generally recognized
upon delivery of the products. The revenue allocated to
post-contract customer support is generally recognized
over the support period. Sales for products are recorded
when products are delivered. Revenue from long-term
service contracts is recognized on a straight-line basis
over the term of the contract, which approximates
recognizing it as it is earned. Deferred revenue and
customer deposits payable include amounts from service
contracts as well as revenue from sales of products,
which have not been shipped.
Research and Development Costs
Research and development costs are expensed as incurred.
--------------------------------------------------------------------------------
F-10
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
1. Organization Concentration of Credit Risk
of Financial instruments that potentially subject the
Significant Company to concentration of credit risk consists
Accounting primarily of trade receivables. In the normal course of
Policies business, the Company provides credit terms to its
Continued customers. Accordingly, the Company performs ongoing
credit evaluations of its customers and maintains
allowances for possible losses. During the year ended
August 31, 2003, the Company wrote off a receivable of
approximately $346,000. This receivable was recorded as
a sale in fiscal year 2002 and resulted in a significant
write-off in the fourth quarter of 2003.
The Company has cash in bank and short-term investments
that, at times, may exceed federally insured limits. The
Company has not experienced any losses in such accounts.
The Company believes it is not exposed to any
significant credit risk on cash and short-term
investments.
Use of Estimates in the Preparation of Financial
Statements
The preparation of financial statements in conformity
with accounting principles generally accepted in the
United States of America requires management to make
estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of
revenues and expenses during the reporting period.
Actual results could differ from those estimates.
2. Detail of Details of certain balance sheet accounts as of August
Certain 31, 2003, are as follows:
Balance
Sheet Receivables:
Accounts Trade receivables $ 471,093
Less allowance for doubtful
accounts (67,371)
----------------
$ 403,722
----------------
Inventories:
Parts and supplies $ 385,825
Work-in-process 556,648
Reserve for obsolete inventory (140,000)
----------------
$ 802,473
----------------
--------------------------------------------------------------------------------
F-11
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
2. Detail of Accrued expenses:
Certain Customer deposits $ 272,132
Balance Accrued loss in equity affiliate 136,467
Sheet Accrued vacation 96,254
Accounts Accrued payroll and taxes 67,232
Continued Other accrued expenses 42,385
------------
$ 614,470
------------
3. Property Property and equipment as of August 31, 2003 consists of
and the following:
Equipment
Equipment $ 680,630
Furniture and fixtures 297,741
------------
978,371
Less accumulated depreciation (837,077)
------------
$ 141,294
------------
4. Deferred During the year ended August 31, 1998, the Company
Gain entered into a sale-leaseback transaction on its
and building. The sale-leaseback resulted in a gain of
Operating $325,513 of which $307,000 was deferred and is being
Lease credited to income as rent expense adjustments over the
term of the lease. The lease required monthly payments
of $6,533 through November 2002. During the year ended
August 31, 2003, the Company renewed its lease for five
years, which includes payments of approximately $82,000
per year, adjusted annually for increases in the cost of
living based on the Consumer Price Index for Urban
Consumers.
--------------------------------------------------------------------------------
F-12
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
4. Deferred Future minimum payments at August 31, 2003, are as
Gain follows:
and
Operating Years Ending August 31, Amount
Lease ----------------------- -----------------
Continued
2004 $ 82,320
2005 82,320
2006 82,320
2007 82,320
2008 20,580
----------------
$ 349,860
----------------
Annual rent expense on this operating lease for the
years ended August 31, 2003 and 2002 amounted to
approximately $67,000 and $17,000, net of sale-leaseback
gain.
5. Deferred The Company has entered into certain service contracts
Revenue for which it has received payment in advance. The
Company is recognizing these service revenues over the
life of the service agreements as follows:
Years Ending August 31, Amount
----------------------- ----------------
2004 $ 43,220
2005 40,900
----------------
84,120
Less current portion (43,220)
----------------
Long-term deferred revenue $ 40,900
----------------
--------------------------------------------------------------------------------
F-13
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
6. Income The income tax benefit (expense) differs from the amount
Taxes computed at federal statutory rates as follows:
Years Ended August 31,
--------------------------------
2003 2002
--------------------------------
Income tax benefit (expense) at
statutory rate $ 198,000 $ (3,000)
Expiration of net operating loss
carryforwards (19,000) -
Change in valuation allowance (179,000) 3,000
--------------------------------
$ - $ -
--------------------------------
Deferred tax assets (liabilities) are comprised of the
following:
Net operating loss carryforwards $ 1,843,000
General business and AMT credit carryforwards 170,000
Accrued expenses and deposits 128,000
Deferred revenue 29,000
Inventory reserve 48,000
Allowance for bad debts and reserves 17,000
Depreciation (21,000)
Deferred compensation expense (9,000)
----------------
2,205,000
Valuation allowance (2,205,000)
----------------
$ -
----------------
--------------------------------------------------------------------------------
F-14
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
6. Income At August 31, 2003, the Company has net operating losses
Taxes (NOL) as follows:
Continued
Expiration Date NOL
--------------- ------------------
2005 $ 1,270,000
2007 190,000
2008 99,000
2009 671,000
2010 170,000
2012 838,000
2016 153,000
2018 1,052,000
2019 731,000
------------------
$ 5,174,000
------------------
At August 31, 2003, the Company has Research and
Experimentation Tax Credits (RETC) and Alternative
Minimum Tax Credits (AMTC) as follows:
Expiration Date RETC AMTC
--------------- -------------------------------
2004 $ 41,000 $ -
2005 - -
No expiration date 72,000 57,000
-------------------------------
$ 113,000 $ 57,000
--------------------------------
The Company has experienced a greater than 50 percent
change of ownership. Consequently, use of the Company's
carryovers against future taxable income in any one year
may be limited and those carryovers may expire
unutilized due to limitations imposed by the change of
ownership rules.
--------------------------------------------------------------------------------
F-15
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
7. Stock Stock Options
Options and The Company's 1987 Employee Stock Option Plan authorizes
Warrants the granting of incentive options to certain key
employees of the Company and nonqualified stock options
to certain key employees, non-employee directors, or
individuals who provide services to the Company. The
Plan, as amended, provides for the granting of options
for an aggregate of 950,000 shares. The options vest
according to a set schedule over a five-year period and
expire upon the employee's termination or after ten
years from the date of grant.
The Company's 1998 Employee Stock Option Plan authorizes
the granting of incentive stock options to certain key
employees and non-employees who provide services to the
Company. The Plan provides for the granting of options
for an aggregate of 2,000,000 shares. The options vest
subject to management's discretion.
The Company's 1998 Director Stock Plan authorizes an
annual compensation of $12,000 to each non-employee
director. The annual compensation may be satisfied by
issuing common stock, with the number of shares issued
calculated by dividing the unpaid compensation by a
daily average of the preceding twenty day closing price
of the Company's common stock. The Plan also grants each
non-employee outside director 25,000 options each year
at an exercise price of 85% of the fair market value of
the common stock at the date the option is granted. The
Plan allows for an aggregate of 1,000,000 shares to be
granted. The options vest according to a set schedule
over a five-year period and expire upon the director's
termination, or after ten years from the date of grant.
For certain options issued under this plan, the Company
has recorded as deferred compensation the excess of the
market value of common stock at the date of grant over
the exercise price.
--------------------------------------------------------------------------------
F-16
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
7. Stock A schedule of the options and warrants are as follows:
Options and
Warrants
Continued Price Per
Options Warrants Share
-----------------------------------------
Outstanding at September 1, 2001 1,306,434 87,133 $ .10 to 3.00
Granted 75,000 - .73
Exercised (114,312) (12,133) .10 to .37
Forfeitures (8,221) (75,000) .10 to 3.00
-----------------------------------------
Outstanding at August 31, 2002 1,258,901 - .10 to 1.76
Granted 75,000 - .56
Exercised (58,598) - .10 to .65
Forfeitures - -
-----------------------------------------
Outstanding at August 31, 2003 1,275,303 - $ .10 to 1.76
-----------------------------------------
The following table summarizes information about stock
options and warrants outstanding at August 31, 2003:
Options and Warrants Options and Warrants
Outstanding Exercisable
-------------------------------------------------------------------
Weighted
Average
Remaining Weighted Weighted
Range of Contractual Average Average
Exercise Number Life Exercise Number Exercise
Prices Outstanding (Years) Price Exercisable Price
-------------------------------------------------------------------------------
$ .10-.25 430,703 2.41 $ .13 415,703 $ .12
.37-1.11 794,600 7.65 .61 427,780 .58
1.76 50,000 7.82 1.76 50,000 1.76
-------------------------------------------------------------------------------
$ .10-1.76 1,275,303 5.23 $ .49 893,483 $ .43
-------------------------------------------------------------------------------
8. Foreign During the years ended August 31, 2003 and 2002 the
Customer Company had sales of $1,391,443 and $1,844,500
and Major (including $63,500 in royalty revenues), respectively,
Customer to TherMatrx, an unconsolidated affiliate of which it
owns approximately 30%. During the years ended August
31, 2003 and 2002 the Company had sales to a European
entity controlled by a significant stockholder and
member of the Board of Directors of the Company of
approximately $518,000 and $74,000, respectively. The
Company also had a sale to an unrelated entity of
approximately $344,000 or approximately 12.9% of total
sales for the year ended August 31, 2002.
--------------------------------------------------------------------------------
F-17
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
9. Related Party At August 31, 2003, accrued expenses include
Transactions approximately $272,132, due to an entity controlled by a
Not otherwise significant stockholder and member of the Board of
disclosed Directors and an unconsolidated affiliate. These amounts
represent deposits to purchase product from the Company
and will be recognized as revenue when all performance
and delivery obligations have been met.
At August 31, 2003, accounts receivable includes
approximately $38,225, due from an entity controlled by
a significant stockholder and member of the Board of
Directors. Accounts receivable also include $304,653 due
from TherMatrx at August 31, 2003.
Unaudited Related Party Transactions
During the periods ended November 30, 2003 and 2002 the
Company had sales to an unconsolidated affiliate and an
entity controlled by a significant stockholder of
$487,225 and $755,566, respectively. These related party
transactions represent 71.53% and 94.41% of total sales.
At November 30, 2003, accrued expenses include $91,168
consisting of deposits on orders placed by an
unconsolidated affiliate and an entity controlled by a
significant stockholder.
At November 30, 2003, accounts receivable include
$256,048 due from an unconsolidated affiliate and an
entity controlled by a significant stockholder.
10. Supplemental Actual amounts paid for interest and income taxes are as
Cash Flow follows:
Information
Years Ended
August 31,
----------------------------------
2003 2002
----------------------------------
Interest expense $ - $ -
----------------------------------
Income taxes $ - $ -
----------------------------------
During the year ended August 31, 2002, the Company
exchanged a restricted CD to a bank for accounts
receivable of $73,604. The receivable exchanged was
allowed for by $57,403 that was offset by $15,000 of
accrued commissions payable related to the receivable.
--------------------------------------------------------------------------------
F-18
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
10. Supplemental Unaudited Supplemental Cash Flow Information for the
Cash Flow periods ended November 30, 2003 and 2002:
Information
Continued o The Company paid $108 for interest and no cash for
taxes during the period ended November 30, 2003 and
no cash for interest and taxes for the period ended
November 30, 2002.
o The Company issued 75,000 options for the periods
ended November 30, 2003 and 2002, which resulted in
an increase to Deferred Compensation of $8,250 and
$7,500, respectively.
o During the period ended November 30, 2003 the
Company recorded $165,653 of accrued offering costs
payable for sale of its common stock during the
period.
11. Significant The Company has an approximate 30% interest in an
Unconsolidated unconsolidated affiliate (TherMatrx) at August 31, 2003.
Affiliate During the year ended August 31, 2002 the Company
compensated certain employees and directors by issuing
options to purchase 179,300 shares of TherMatrx, or
approximately 2% of the Company's interest in TherMatrx
at $.001 per share. This resulted in compensation
expense of $717,000, which is included in general and
administrative expenses in the statement of operations
for the year ended August 31, 2002. Because the
TherMatrx shares used to settle the compensation
obligation had a book value of $0, such issuance of
TherMatrx shares upon exercise of the options resulted
in a gain of $717,000, which is reflected as gain on
transfer of equity interest in affiliate in the
statement of operations. All of the options had been
exercised as of August 31, 2002.
--------------------------------------------------------------------------------
F-19
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
11. Significant Summarized financial information for the significant
Unconsolidated unconsolidated affiliate of the Company, at September
Affiliate 30, 2003 and 2002 (the affiliate's fiscal year runs from
Continued October 1, through September 30) are as follows:
2003 2002
-------------------------------------
Result for year:
Gross revenue $ 13,298,422 $ 7,714,313
Gross profit $ 9,589,803 $ 4,484,253
Net income (loss) $ 1,520,190 $ (1,875,003)
Year-end financial position
Current assets $ 6,313,746 $ 4,337,756
Non-current assets $ 2,335,232 $ 2,549,626
Current liabilities $ 1,913,453 $ 1,672,047
Non-current liabilities $ 474,748 $ 474,748
12. Commitments The Company has an employment agreement with the
and President of the Company. The agreement provides that
Contingencies the President's salary will be based upon a reasonable
mutual agreement. Additionally, in the case of
non-voluntary termination, the acting president will
receive severance pay for a six-month period, which
includes an extension of all employee rights,
privileges, and benefits, including medical insurance.
The six-month severance pay would be the salary at the
highest rate paid to the president prior to such a
non-voluntary termination. The agreement also requires
the Company to pay the acting president for any accrued
unused vacation and bonuses.
The Company has an exclusive worldwide license for a
unique temperature probe. The license has no
determinable life. The Company pays royalties based upon
its sales of this probe. Royalties accrued as of August
31, 2003 and 2002, were $1,000. Royalty expense amounted
to approximately $5,000 and $11,000 for the years ended
August 31, 2003 and 2002, respectively.
--------------------------------------------------------------------------------
F-20
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
13. Fair Value of None of the Company's financial instruments are held for
Financial trading purposes. The Company estimates that the fair
Instruments value of all financial instruments at August 31, 2003
and 2002 does not differ materially from the aggregate
carrying values of its financial instruments recorded in
the accompanying balance sheet. The estimated fair value
amounts have been determined by the Company using
available market information and appropriate valuation
methodologies. Considerable judgment is necessarily
required in interpreting market data to develop the
estimates of fair value, and, accordingly, the estimates
are not necessarily indicative of the amounts that the
Company could realize in a current market exchange.
14. Recent In April 2002, the FASB issued SFAS No. 145, Rescission
Accounting of SFAS Nos. 4, 44, and 64, Amendment of SFAS 13, and
Pronounce- Technical Corrections as of April 2002 (SFAS 145). This
ments standard rescinds SFAS No. 4, Reporting Gains and Losses
from extinguishment of Debt, and an amendment of that
Statement, SFAS No. 64, Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements and excludes
extraordinary item treatment for gains and losses
associated with the extinguishment of debt that do not
meet the APB Opinion No. 30, Reporting the Results of
Operations -- Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions (APB 30)
criteria. Any gain or loss on extinguishment of debt
that was classified as an extraordinary item in prior
periods presented that does not meet the criteria in APB
30 for classification as an extraordinary item shall be
reclassified. SFAS 145 also amends SFAS 13, Accounting
for Leases as well as other existing authoritative
pronouncements to make various technical corrections,
clarify meanings, or describe their applicability under
changed conditions. Certain provisions of SFAS are
effective for transactions occurring after May 15, 2002
while others are effective for fiscal years beginning
after May 15, 2002. The adoption of SFAS No. 145 by the
Company did not have a material impact on the Company's
financial position or operations.
--------------------------------------------------------------------------------
F-21
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
14. Recent In June 2002, the FASB issued SFAS No. 146, Accounting
Accounting for Costs Associated with Exit or Disposal Activities
Pronounce- (SFAS 146). This standard addresses financial accounting
ments and reporting for costs associated with exit or disposal
Continued activities and replaces Emerging Issues Task Force Issue
No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)
(EITF 94-3). SFAS 146 requires that a liability for
costs associated with an exit or disposal activity be
recognized when the liability is incurred. Under EITF
94-3, a liability for exit costs, as defined in EITF No.
94-3 were recognized at the date of an entity's
commitment to an exit plan. The provisions of SFAS 146
are effective for exit or disposal activities that are
initiated by the Company after December 31, 2002. The
adoption of SFAS No. 146 by the Company did not have a
material impact on the Company's financial position or
operations.
In December 2002, the FASB issued SFAS No. 148
"Accounting for Stock-Based Compensation--Transition and
Disclosure--an amendment of FASB Statement No. 123,"
which is effective for all fiscal years ending after
December 15, 2002. SFAS No. 148 provides alternative
methods of transition for a voluntary change to the fair
value based method of accounting for stock-based
employee compensation under SFAS No. 123 from the
intrinsic value based method of accounting prescribed by
Accounting Principles Board Opinion No. 25. SFAS 148
also changes the disclosure requirements of SFAS 123,
requiring a more prominent disclosure of the pro-forma
effect of the fair value based method of accounting for
stock-based compensation. The adoption of SFAS No. 148
by the Company did not have a material impact on the
Company's financial position or operations.
--------------------------------------------------------------------------------
F-22
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
14. Recent In January 2003, the FASB issued Interpretation No. 46,
Accounting "Consolidation of Variable Interest Ethics" (FIN No.
Pronounce- 46), which addresses consolidation by business
ments enterprises of variable interest entities. FIN No. 46
Continued clarifies the application of Accounting Research
Bulletin No. 51, "Consolidated Financial Statements", to
certain entities in which equity investors do not have
the characteristics of a controlling financial interest
or do not have sufficient equity at risk for the entity
to finance its activities without additional
subordinated financial support from other parties. FIN
No. 46 applies immediately to variable interest entities
created after January 31, 2003, and to variable interest
entities in which an enterprise obtains an interest
after that date. It applies in the first fiscal year or
interim period beginning after June 15, 2003, to
variable interest entities in which an enterprise holds
a variable interest that it acquired before February 1,
2003. The Company does not expect to identify any
variable interest entities that must be consolidated. In
the event a variable interest entity is identified, the
Company does not expect the requirements of FIN No. 46
to have a material impact on its financial condition or
results of operations.
In November 2002, the FASB issued Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of
Indebtedness of Others" (FIN No. 45). FIN No. 45
requires certain guarantees to be recorded at fair
value, which is different from current practice to
record a liability only when a loss is probable and
reasonably estimable, as those terms are defined in FASB
Statement No. 5, "Accounting for Contingencies". FIN No.
45 also requires the Company to make significant new
disclosures about guarantees. The disclosure
requirements of FIN No. 45 are effective for the Company
in the first quarter of fiscal year 2003. FIN No. 45's
initial recognition and initial measurement provisions
are applicable on a prospective basis to guarantees
issued or modified after December 31, 2002. The adoption
of FIN No. 45 did not have a material impact on the
Company's financial position, results of operations or
cash flows.
--------------------------------------------------------------------------------
F-23
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
14. Recent In April 2003, the FASB issued SFAS No. 149, "Amendment
Accounting of Statement 133 on Derivative Instruments and Hedging
Pronounce- Activities." SFAS No. 149 amends and clarifies financial
ments accounting and reporting for derivative instruments,
Continued including certain derivative instruments embedded in
other contracts (collectively referred to as
derivatives) and for hedging activities under SFAS No.
133, "Accounting for Derivative Instruments and Hedging
Activities". This Statement is effective for contracts
entered into or modified after June 30, 2003, with
certain exceptions, and for hedging relationships
designated after June 30, 2003, with certain exceptions,
and for hedging relationships designated after June 30,
2003. Management is currently evaluating the effect that
the adoption of SFAS No. 149 may have, but believes it
will not have a material effect on its results of
operations and financial position.
In May 2003, the FASB issued SFAS No. 150, "Accounting
for Certain Financial Instruments with Characteristics
of both Liabilities and Equity." This new statement
changes the accounting for certain financial instruments
that, under previous guidance, issuers could account for
as equity or classifications between liabilities and
equity in a section that has been known as "mezzanine
capital." It requires that those certain instruments be
classified as liabilities in balance sheets. Most of the
guidance in SFAS 150 is effective for all financial
instruments entered into or modified after May 31, 2003.
Management anticipates that the adoption of SFAS No. 150
may have a material impact on the Company's consolidated
financial statements if in the future the Company issues
mandatorily redeemable preferred stock. Such mandatorily
redeemable preferred stock, previously included as
"mezzanine capital", would be included as a liability in
accordance with SFAS 150.
--------------------------------------------------------------------------------
F-24
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
15. Subsequent On November 28, 2003, the Company completed the sale of
Event an aggregate of 1,820,000 shares of common stock to
three institutional investors. The shares of common
stock were sold for cash consideration of $1.10 per
share, or a total of $2,002,000, pursuant to the terms
of the Securities Purchase Agreement entered into by and
among the investors and the Company as of November 28,
2003. These shares were issued in a private placement
transaction pursuant to Section 4(2) and Regulation D
under the Securities Act of 1933, as amended. As
provided in the Securities Purchase Agreement, the
Company also agreed to cause a shelf registration
statement covering the resale of these shares to be
filed no later than 60 days after the closing of the
private placement. The Company estimates that the net
proceeds from the transaction, after paying a commission
to the placement agent, T.R. Winston & Company, LLC, and
legal other expenses related to the transaction, will be
approximately $1,840,000. The Company has also agreed to
issue to the placement agent a three-year warrant to
purchase up to 91,000 shares at an exercise price per
share of $1.80 as provided in the Securities Purchase
Agreement.
On December 10, 2003 the Company sold 239,600 shares of
common stock at $1.10 per share or a total of $263,560.
The Company issued to the placement agent a three-year
warrant to purchase up to 11,980 shares at an exercise
price of $1.80.
--------------------------------------------------------------------------------
F-25
================================================================================
BSD MEDICAL CORPORATION
2,162,580
SHARES OF COMMON STOCK
------------
PROSPECTUS
------------
January 27, 2004
================================================================================
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law permits a
corporation to include in its charter documents, and in agreements between the
corporation and its directors and officers, provisions expanding the scope of
indemnification beyond that specifically provided by the current law.
Article 8 of our Amended and Restated Certificate of Incorporation
provides for the indemnification of directors to the fullest extent permissible
under Delaware law.
Section 8 of our Bylaws provides for the indemnification of officers,
directors and third parties acting on behalf of BSD if such person acted in good
faith and in a manner reasonably believed to be in and not opposed to the best
interest of BSD, and, with respect to any criminal action or proceeding, the
indemnified party had no reason to believe his or her conduct was unlawful.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to our directors, officers and controlling persons
pursuant to the foregoing provisions, or otherwise, we have been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
ITEM 25. Other Expenses of Issuance and Distribution.
The following table sets forth the various costs and expenses to be
paid by us with respect to the sale and distribution of the securities being
registered. All of the amounts shown are estimates except for the SEC
registration fee.
SEC Registration Fee.................................... $342.50
Legal Fees and Expenses................................. $50,000.00
Accounting Fees and Expenses............................ $5,000.00
Printing and Other Expenses............................. $2,500.00
----------
Total.............................................. $57,842.50
----------
We will bear all costs, expenses and fees in connection with the
registration of the shares. The selling stockholders will bear all commissions
and discounts, if any, attributable to the sales of the shares.
ITEM 26. Recent Sales of Unregistered Securities.
The following is information as to all securities we have sold within
the past three years that were not registered under the Securities Act of 1933,
as amended:
On November 28, 2003, we issued a total of 1,820,000 shares of our
common stock, for gross proceeds of $2,002,000, to four accredited investors in
a transaction exempt from registration pursuant to Section 4(2) of the
Securities Act and Rule 506 thereunder.
II-1
On December 10, 2003, we issued a total of 239,600 shares of our common
stock, for gross proceeds of $263,560, to three accredited investors in a
transaction exempt from registration pursuant to Section 4(2) of the Securities
Act and Rule 506 thereunder.
On December 10, 2003, we issued warrants to purchase 102,980 shares of
our common stock to a broker dealer in connection with the sale of common stock
to investors in a transaction exempt from registration pursuant to Section 4(2)
of the Securities Act and Rule 506 thereunder.
ITEM 27. Exhibits
Exhibit
Number Description
------- -----------
3.1 Amended and Restated Certificate of Incorporation. Incorporated by
reference to Exhibit 3.1 of the BSD Medical Corporation Form 10-K,
filed December 1, 2003.
3.2 By-Laws. Incorporated by reference to Exhibit 3.2 of the BSD Medical
Corporation Registration Statement on Form S-1, filed October 16, 1986.
4.1 Specimen Common Stock Certificate. Incorporated by reference to Exhibit
4 of the BSD Medical Corporation Registration Statement on Form S-1,
filed October 16, 1986.
4.2 Securities Purchase Agreement dated December 10, 2003 among BSD Medical
Corporation and the purchasers identified therein. Incorporated by
reference to Exhibit 4.2 of the BSD Medical Corporation Form 10-K,
filed December 1, 2003.
4.2 Amendment No. 1 to Securities Purchase Agreement dated December 10,
2003 among BSD Medical Corporation and the purchasers identified
therein. Incorporated by reference to Exhibit 99.1 of the BSD Medical
Corporation Form 8-K, filed December 22, 2003.
4.3 Warrant to Purchase 42,980 Shares of Common Stock dated December 10,
2003 issued by BSD Medical Corporation to T.R. Winston & Company, LLC.
Incorporated by reference to Exhibit 99.2 of the BSD Medical
Corporation Form 8-K, filed December 22, 2003.
4.4 Warrant to Purchase 60,000 Shares of Common Stock dated December 10,
2003 issued by BSD Medical Corporation to The Runnel Family Trust Dated
1/11/2000. Incorporated by reference to Exhibit 99.3 of the BSD Medical
Corporation Form 8-K, filed December 22, 2003.
5.1 Opinion of Dorsey & Whitney LLP
10.1 Transfer of Trade Secrets Agreement dated December 7, 1979, among BSD
Medical Corporation, Vitek, Incorporated and Ronald R. Bowman.
Incorporated by reference to Exhibit 10.6 of the BSD Medical
Corporation Registration Statement on Form S-1, filed October 16, 1986.
10.2 Second Addendum to Exclusive Transfer of Trade Secrets Agreement dated
April 2, 1987. Incorporated by reference to Exhibit 10 of the BSD
Medical Corporation Form 10-K, filed April 8, 1988.
II-2
10.3 BSD Medical Corporation 1998 Director Stock Plan. Incorporated by
reference to Exhibit A of the BSD Medical Corporation Schedule 14A,
filed July 27, 1998.
10.4 BSD Medical Corporation 1998 Stock Incentive Plan. Incorporated by
reference to Exhibit B of the BSD Medical Corporation Schedule 14B,
filed July 27, 1998.
10.5 Lease Agreement dated December 5, 1997, between BSD Medical Corporation
and Alcoh Development, Inc., Alan S. Cohen, Orlene H. Cohen, and
Reelman Investments, L.C.
10.6 Lease Extension Agreement and Contract to Purchase dated November 1,
2002 between BSD Medical Corporation and Alcoh Development, Inc., Alan
S. Cohen, Orlene H. Cohen, and Reelman Investments, L.C.
10.7 Employment Agreement dated August 10, 1999 between BSD Medical
Corporation and Hyrum A. Mead.
10.8 Employment Agreement dated November 2, 1988 between BSD Medical
Corporation and Paul F. Turner.
10.9 Agreement dated May 27, 1994 between BSD Medical Corporation and
Medizin Technik GmbH.
10.10 Agency Agreement dated May 20, 2002 between BSD Medical Corporation and
Nucletron B.V.
21 Subsidiary List. Incorporated by reference to Exhibit 21 of the BSD
Medical Corporation Form 10-K, filed December 1, 2003.
23.1 Consent of Independent Public Accounts, Tanner + Co.
23.2 Consent of Dorsey & Whitney LLP (included in Exhibit 5.1).
24.1 Power of Attorney (included in signature page).
ITEM 28. Undertakings.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of this registration statement (or the most
recent post-effective amendment hereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in this registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering price may be reflected in the form of prospectus filed
with the SEC under Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement; and
III-3
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in this registration statement
or any material change to such information in this registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered herein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered that remain unsold at the termination of
the offering.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of BSD
Medical Corporation pursuant to the foregoing provisions, or otherwise, BSD
Medical Corporation has been advised that in the opinion of the SEC such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by BSD Medical Corporation of
expenses incurred or paid by a director, officer or controlling person of BSD
Medical Corporation in the successful defense of any action, suit, or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, BSD Medical Corporation will,
unless in the opinion of its counsel the question has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
III-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and has duly caused this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in Salt Lake City, Utah, on the January 27, 2004.
BSD MEDICAL CORPORATION
By: /s/ HYRUM A. MEAD
---------------------
Hyrum A. Mead
President
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned officers and
directors of BSD Medical Corporation, a Delaware corporation, do hereby
constitute and appoint Paul F. Turner and Hyrum A. Mead and each of them, their
lawful attorneys-in-fact and agents with full power and authority to do any and
all acts and things and to execute any and all instruments which said attorneys
and agents, and any one of them, determine may be necessary or advisable or
required to enable said corporation to comply with the Securities Act and any
rules or regulations or requirements of the Securities and Exchange Commission
in connection with this Registration Statement. Without limiting the generality
of the foregoing power and authority, the powers granted include the power and
authority to sign the names of the undersigned officers and directors in the
capacities indicated below to this Registration Statement, to any and all
amendments, both pre-effective and post-effective, and supplements to this
Registration Statement, and to any and all instruments or documents filed as
part of or in conjunction with this Registration Statement or amendments or
supplements thereof, and each of the undersigned hereby ratifies and confirms
all that said attorneys and agents, or any one of them, shall do or cause to be
done by virtue hereof. This Power of Attorney may be signed in several
counterparts.
III-5
IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney as of the date indicated. Pursuant to the requirements of the
Securities Act, this Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated.
Signature Title Date
---------------------------------------------------------------------------------------------
/s/ PAUL F. TURNER Chairman of the Board, Senior Vice January 27, 2004
------------------------- President and Chief Technology Officer
Paul F. Turner
/s/ HYRUM A MEAD President (principal executive January 27, 2004
------------------------- officer) and Director
Hyrum A. Mead
/s/ DENNIS BRADLEY Controller (principal financial and January 27, 2004
------------------------- accounting officer)
Dennis Bradley
/s/ GERHARD W. SENNEWALD Director January 27, 2004
-------------------------
Gerhard W. Sennewald
/s/ MICHAEL NOBEL Director January 27, 2004
-------------------------
Michael Nobel
/s/ J. GORDON SHORT Director January 27, 2004
-------------------------
J. Gordon Short
III-6