U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended February 29, 2004
Commission file number 0-10783
BSD MEDICAL CORPORATION
DELAWARE 75-1590407
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(State of Incorporation) (IRS Employer Identification Number)
2188 West 2200 South
Salt Lake City, Utah 84119
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (801) 972-5555
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class February 29, 2004
------------------------------------- -----------------
Common stock, $.001 Par Value 19,915,232
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
BSD MEDICAL CORPORATION
Condensed Balance Sheet
(Unaudited)
Assets February 29,
------ 2004
-------------------
Current assets:
Cash and cash equivalents $ 1,827,289
Receivables, net of $81,941 allowance
for doubtful accounts 202,697
Related party receivables 127,321
Inventories 711,889
Other current assets 25,919
-------------------
Total current assets 2,895,115
-------------------
Property and equipment, net 119,642
Patents, net 25,946
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$ 3,040,703
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Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 74,516
Accrued expenses 496,118
Current portion of deferred revenue 34,285
-------------------
Total current liabilities 604,919
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Long term liabilities
Deferred revenue 20,450
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Total liabilities 625,369
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Stockholders' equity:
Preferred stock, .001 par value; 10,000,000
authorized, no shares issued and outstanding
Common stock, $.001 par value; authorized
40,000,000 shares; issued and outstanding
19,915,232, shares 19,916
Additional paid-in capital 23,188,956
Deferred compensation (27,808)
Accumulated deficit (20,765,496)
Common stock in treasury 13,412 shares, at cost (234)
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Net stockholders' equity 2,415,334
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$ 3,040,703
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1
BSD MEDICAL CORPORATION
Condensed Statements of Operations
(Unaudited)
Periods ended February 29, 2004 and February 28, 2003
Three Months Six Months
Ended: Ended:
--------------------------------- ---------------------------------
February 29 February 28 February 29 February 28
2004 2003 2004 2003
--------------- ---------------- --------------- ----------------
Sales $ 218,350 212,121 $ 412,258 $ 254,954
Related party sales 208,192 283,740 695,418 1,041,191
--------------- ---------------- --------------- ----------------
Total revenues 426,542 495,861 1,107,676 1,296,145
--------------- ---------------- --------------- ----------------
Costs and expenses:
Cost of product sales 206,765 56,540 315,186 62,710
Cost of related party sales 61,969 113,974 283,676 456,961
Research and development 166,733 184,806 329,290 340,465
Selling, general, and administrative 248,581 249,128 461,161 498,119
--------------- ---------------- --------------- ----------------
Total costs and expenses 684,048 604,448 1,389,313 1,358,255
--------------- ---------------- --------------- ----------------
Operating loss (257,506) (108,587) (281,637) (62,110)
Other income
Interest income 2,500 1,055 2,601 2,185
Interest expense (245) - (353)
--------------- ---------------- --------------- ----------------
Total other income 2,255 1,055 2,248 2,185
--------------- ---------------- --------------- ----------------
Loss before income taxes (255,251) (107,532) (279,389) (59,925)
Income tax benefit - - - -
--------------- ---------------- --------------- ----------------
Net loss $ (255,251) (107,532) $ (279,389) $ (59,925)
=============== ================ =============== ================
Net loss per common and common equivalent share,
basic and diluted $ (.01) (.01) $ (.01) -
--------------- ---------------- --------------- ----------------
Weighted average number of shares outstanding,
basic and diluted 18,898,000 17,777,000 19,891,000 17,776,000
See accompanying notes to financial statements.
2
BSD MEDICAL CORPORATION
Condensed Statements of Cash Flows (Unaudited)
Six months ended February 29, 2004 and February 28, 2003
Increase (Decrease) in Cash and Cash Equivalents Feb. 29, Feb. 28,
------------------------------------------------ 2004 2003
-------------------------------
Cash flows from operating activities:
Net loss $ (279,389) $ (59,925)
Adjustments to reconcile net loss to net cash
Used in operating activities:
Depreciation and amortization 22,591 24,013
Bad debt expense 61,805
Deferred gain on sale of building - (15,275)
Stock compensation expense 12,000 11,199
Deferred compensation 7,858 6,358
(Increase) decrease in:
Receivables 11,899 107,049
Inventories 90,584 (58,003)
Prepaid expenses and deposits 17,319 (8,549)
Increase (decrease) in:
Accounts payable (205,552) 135,591
Accrued expenses (118,352) (96,933)
Deferred revenue (29,385) (48,763)
-------------------------------
Net cash provided (used) by operating activities (408,622) (2,438)
-------------------------------
Cash flows from investing activities:
Purchase of property and equipment - (6,744)
-------------------------------
Net cash used in investing activities - (6,744)
-------------------------------
Cash flows provided by financing activities:
Proceeds from issuance of common stock 2,099,908 -
-------------------------------
Net cash provided by financing activities 2,099,908 -
-------------------------------
Increase (decrease) in cash and cash equivalents 1,691,286 (9,182)
Cash and cash equivalents, beginning of period 136,003 421,900
-------------------------------
Cash and cash equivalents, end of period $ 1,827,289 $ 412,718
===============================
Supplemental Disclosure of Cash Flow Information
o The Company paid no cash for taxes and $353 for interest in the
period ended February 29, 2004. During the period ended February
28, 2003 the Company paid no cash for taxes and interest.
o The Company issued 75,000 options to purchase common stock for the
periods ended February 28, 2004 and 2003, which resulted in an
increase to Deferred Compensation of $8,250 and $7,500
respectively.
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BSD MEDICAL CORPORATION
Notes to Condensed Financial Statements
Note 1. Basis of Presentation
The Condensed Balance Sheet as of February 29, 2004, the Condensed
Statements of Operations for the three and six months ended February 29, 2004
and February 28, 2003, and the Condensed Statements of Cash Flow for the six
months ended February 29, 2004, and February 28, 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 February 29, 2004 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. The results of operations for the
period ended February 29, 2004, are not necessarily indicative of the results to
be expected for the full year.
Note 2. Net Loss Per Common Share
Net loss per common share for the quarters ended February 29, 2004 and
February 28, 2003, are based on the weighted average number of shares
outstanding during the respective periods. Diluted earnings per share are based
upon the weighted average share per common stock equivalent. When common stock
equivalents are anti dilutive they are not included.
Note 3. Related Party Transactions
During the six months periods ended February 29, 2004 and February 28,
2003 the Company had sales to an unconsolidated affiliate and an entity
controlled by a significant stockholder of $695,418 and $1,041,191,
respectively. These related party transactions represent 62.78 % and 80.32 % of
total sales.
At February 29, 2004, accrued expenses includes approximately $126,428
consisting of deposits on orders placed by an unconsolidated affiliate and an
entity controlled by a significant stockholder.
At February 29, 2004, accounts receivable includes approximately
$127,321 due from an unconsolidated affiliate and an entity controlled by a
significant stockholder.
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Note 4. Stock-Based Compensation
The Company accounts for stock options granted to employees under the
recognition and measurement principles of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related Interpretations, and has adopted the
disclosure-only provisions of Statement of Financial Accounting Standards (SFAS)
No. 123, "Accounting for Stock-Based Compensation." Accordingly, only the
intrinsic value has been recognized in the financial statements as expense. 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 for the six months ended February 29, 2004 and February 28, 2003:
Six Months Ended Three Months Ended
February 29 February 28
2004 2003 2004 2003
-------------------------------------------------
Net (loss) income - as reported $ (279,389) $ (59,925) $ (255,251) $ (107,532)
Deduct total stock based employee
compensation expense determined under fair
value based method for all awards,
net of related taxes (25,000) (63,113) (25,000) (32,113)
-------------------------------------------------
Net loss - pro forma $ (304,389) $ (123,038) $ (280,251) $ (139,645)
-------------------------------------------------
Basic and Diluted income (loss) per share - as reported
$ (.01) $ (.00) $ (.01) $ (.01)
-------------------------------------------------
Basic and Diluted income (loss ) per share - pro-forma
$ (.02) $ (.01) $ (.02) $ (.01)
-------------------------------------------------
The fair value of each option granted for the six months ended February
29, 2004 and February 28, 2003 is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions:
----------------------------------
2004 2003
----------------------------------
Expected dividend yield $ - $ -
Expected stock price volatility 114% 137%
Risk-free interest rate 4.2% 4.2%
Expected life of options 5 years 5 years
The weighted average fair value of options granted during the six
months ended February 29, 2004 and February 28, 2003 were $.64 and $.60,
respectively.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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.
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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.
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 February 29, 2004, we had recorded a reserve
for potential inventory impairment of $140,000. 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. Our allowance
for doubtful accounts at February 29, 2004 was approximately $82,000, or
approximately 19.9% of the total outstanding receivables. 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, however 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.
Liquidity and Capital Resources
-------------------------------
Since inception, we have generated an accumulated deficit of
$20,765,496. We have historically financed our operations through cash from
operations, licensing of technological assets and issuance of common stock. As
of February 29, 2004, our working capital was $2,290,196 and our cash and cash
equivalents totaled $1,827,289. 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.
6
We used $408,622 in cash from operating activities during the period
ended February 29, 2004 primarily as a result of our net loss of $279,389 and a
decrease in accounts payable and accrued expenses of $323,904, offset by a
decrease in inventory of $90,584, a decrease in prepaids and accounts receivable
of $29,218, and $22,591 in depreciation and amortization.
On November 28, 2003, we completed the sale of an aggregate of
1,820,000 shares of our 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 our 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, we 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. We estimate that our
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, will be approximately $1,836,000. We also have agreed to issue to
our 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 there was an additional 239,600 shares issued to
the above investment group at $1.10 per share or a total of $263,560. We also
agreed to issue to our placement agent a three-year warrant to purchase up to
11,980 shares at an exercise price of $1.80.
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. While 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, there can be no assurance that
we will not require additional financing in the future or that any additional
financing will be available to us on satisfactory terms, or at all.
Fluctuations in Operating Results
---------------------------------
The Company's sales and operating results historically have varied (and
will be likely to continue to vary) on a quarter-to-quarter and a year to year
basis due to cyclical needs for research equipment as the sales are as yet
principally limited to research centers involved in clinical trials with the
BSD-2000, the relatively large per unit sales prices of the Company's products;
the typical fluctuations in the mix of orders for different systems and system
configurations; and other factors. For these and other reasons, the results of
operations for a particular fiscal period may not be indicative of results for
any other period.
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Results of Operations:
----------------------
Six Months ended February 29, 2004
Sales decreased from $1,296,145 in the six months ended February 28,
2003 to $1,107,676 in the six months ended February 29, 2004, a decrease of
$188,469 or 14.54%, primarily due to decreased sales to the Company's
unconsolidated subsidiary, TherMatrx. We derived $88,620, or 8% of our total
sales in the period ended February 29, 2004 as compared to $553,943 or 42.73% of
total sales in the period ending February 28, 2003, from manufacturing,
assembling and testing thermotherapy systems, selling probes, applicators and
temperature sensors and other components and contract services to TherMatrx. The
remaining related party revenue of approximately $606,798, or 54.78 % of total
sales was for a 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. The remaining revenue of
$412,258 was for non-related party sales, which included sales of 2 BSD-500
systems for $341,300, $43,230 for service contracts, and $27,728 for
miscellaneous items.
Gross profit for the six months ended February 29, 2004 was $508,812 or
45.93% as compared to $776,474 or 59.9% of total sales for the period ending
February 28, 2003. The decrease in gross profit as a percentage of total product
sales was primarily due to an adjustment to inventory to reflect the lower of
cost or market which resulted in an increase in cost of sales of approximately
$48,000 and because the Company had excess capacity of production employees due
to the decrease in sales. In addition, the Company had sales of higher margin
hyperthermia system products - accompanied by production efficiencies obtained
from a higher volume of hyperthermia system sales in the period ending February
28, 2003.
Selling, General and Administrative expenses were $461,161 for the six
months ended February 29, 2004, as compared to $498,119 in the six months ended
February 28, 2003, a decrease of $36,958 or 7.41%, primarily due to decreases in
legal and consulting expense increase of approximately $88,000, offset by an
increase in warranty costs of approximately $17,200 that was associated with a
European sale, charges to bad debt expense of $14,577 and small increases in
employee benefits and insurance. In the six months ended February 28, 2003, the
Company paid significant legal fees associated with the filing of its fiscal
2003 Form 10KSB and compliance with the Sarbanes Oxley Act. Such costs were not
repeated in the six months ended February 29, 2004. Total costs and expenses
increased by $31,058, an increase of 2.28%, primarily due an increase in cost of
goods sold as a result of the aforementioned adjustment to inventory offset by
decreases in selling, general and administrative and research and development.
Research and Development expenses were $329,290 for the six months
ended February 28, 2004, as compared to $340,465 in the six months ended
February 28, 2003. Research and Development expenses in the period ending
February 28, 2004 related primarily to development work on our BSD-2000o3D/MR
hyperthermia system and enhancements to our BSD-500 systems.
Net Loss for the period ending February 28, 2004 was $279,389 compared
to $59,925 for the February 28, 2003 period. The increase in net loss was
primarily due to decreased sales volume and higher cost of goods sold.
8
Three Months ended February 29, 2004
Sales decreased to$426,542 in the three months ended February 28, 2004,
as compared to $495,861 in the three months ended February 28, 2003, a decrease
of $69,319 or 13.98%, primarily due to decreased sales to Thermatrx, the
Company's unconsolidated subsidiary. During the three-month period ending
February 29, 2004, we derived $68,028 or 15.94% of total sales from Thermatrx as
compared to $204,113, or 41.16% of our sales in the period ended February 28,
2003. The sales to Thermatrx include manufacturing, assembling and testing
thermotherapy systems, probes, applicators, temperature sensors and other
components. The remaining related party revenue of approximately $140,180, or
32.86% of total sales was for 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. The remaining revenue was $16,508 for
service contracts, $198,000 for the sale of 1 BSD -500 system and $3,842 for
miscellaneous items.
Gross profit for the period ending February 29, 2004 was $157,808 or
36.99% as compared to $325,347 or 65.61% of total product sales for the period
ending February 28, 2003. The decrease in gross profit as a percentage of total
product sales was primarily due to an adjustment to inventory to reflect the
lower of cost or market which resulted to an increase in cost of sales of
approximately $48,000 and because the Company had excess capcity of production
employees due to the decrease in sales. In addition, the Company had sales of
higher margin hyperthermia system products for the period ending February 28,
2003 accompanied by production efficiencies obtained from a higher volume of
hyperthermia system sales.
Selling, General and Administrative expenses was $248,581 in the three
months ended February 29, 2004, as compared to $249,128 in the three months
ended February 28, 2003 an decrease of $547 or .22%, primarily due to decreases
in legal and consulting expense offset by increases in bad debt expense of
$14,570, warranty costs of $17,221 and small increases in employee benefits and
insurance. Total costs and expenses increased by $79,600, an increase of 13.17%,
primarily due to an increase in cost of goods sold partially offset by the
aforementioned increase in selling, general and administrative and research and
development partially offset by a slight decrease in research and development.
Research and Development expenses were $166,733 for the three months
ended February 29, 2004, as compared to $184,806 in the three months ended
February 28, 2003. Research and Development expenses in the period ending
February 28, 2003 related primarily to development work on our BSD-2000o3D/MR
hyperthermia system and enhancements to our BSD-500 systems.
The Net Loss for the three months ending February 29, 2004, was
$255,251 as compared with a Net Loss of $107,532 for the three months ending
February 28, 2003.
FORWARD OUTLOOK AND RISKS. From time to time, the Company may publish
forward-looking statements relating to such matters as anticipated financial
performance, business prospects, technological development, new products,
research and development activities and similar matters. The Private Securities
Litigation Reform Act of 1995 provides a safe harbor for forward-looking
statements. In order to comply with the terms of the safe harbor, the Company
notes that a variety of factors could cause the Company's actual results and
experience to differ materially from the anticipated results or other
expectations expressed in any of the Company's forward-looking statements.
9
This form 10-QSB contains and incorporates by reference certain
"forward-looking statements" within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act with respect to results of operations
and businesses of the Company. All statements, other than statements of
historical facts, included in this Form 10-QSB, including those regarding market
trends, the Company's financial position, business strategy, projected costs and
plans, and objectives of management for future operations, are forward-looking
statements. These forward-looking statements are based on the Company's current
expectations. Although the Company believes that the expectations reflected in
such forward-looking statements are reasonable, there can be no assurance that
such expectations will prove to be correct.
CHANGING REGULATORY ENVIRONMENT. The Company's business is subject to
extensive federal, state and local regulation. Political, economic and
regulatory influences are subjecting the health care industry in the United
States to fundamental change. See "Government Regulation" in the Company's
fiscal 1998 10-KSB.
Item 3. Controls and Procedures
a) Evaluation of disclosure controls and procedures.
Under the supervision and with the participation of our Management,
including our principal executive officer and principal financial officer, we
conducted an evaluation of the effectiveness of the design and operations of our
disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as of February 29, 2004. Based on
this evaluation, our chief executive officer and chief financial officer
concluded that our disclosure controls and procedures were effective to ensure
that the information required to be included in our Securities and Exchange
Commission ("SEC") reports is properly recorded, processed, summarized and
reported within the time periods specified in SEC rules and forms relating to
BSD Medical, Inc.
(b) Changes in internal controls over financial reporting.
In addition, there were no significant changes in our internal controls
that could significantly affect these controls subsequent to the date of the
evaluation referenced in paragraph (a) above. We have not identified any
significant deficiency or material weaknesses in our internal controls, and
therefore there were no corrective actions taken..
PART 2. OTHER INFORMATION
ITEM 1. LEGAL PROCEDINGS.
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Item 6. Exhibits and reports on Form 8-K
(a) Exhibits
The following exhibit is filed as part of this report:
SEC
Exhibit Reference
Number Number Title of Document Location
-------------------------------------------------------------------------------------------------------------------
31.01 31 Certification of Chief Executive Officer Pursuant to Rule This filing
13a-14
31.02 31 Certification of Chief Financial Officer Pursuant to Rule This filing
13a-14
32.01 32 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted This filing
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Chief Executive Officer)
32.02 32 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted This filing
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Chief Financial Officer)
b) Reports on Form 8-K
The Company filed an 8-K on December 10, 2003 to report the completed
sale of 239,600 of its commons stock to three institutional investors pursuant
to the Securities Purchase Agreement dated November 28, 2003 which was filed
with BSD's annual report filed on December 1, 2003.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
BSD Medical Corporation, the registrant, has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
BSD MEDICAL CORPORATION
Date: April 14, 2004 /s/ Hyrum A. Mead
----------------- -----------------
President
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