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 May 31, 2004
Commission file number 0-10783
BSD MEDICAL CORPORATION
DELAWARE 75-1590407
----------------------- ----------------------------------
(State of Incorporation) (IRS Employer Identification Number)
2188 West 2200 South
Salt Lake City, Utah 84119
----------------------------------------------- -------------
(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 Outstanding as of May 31, 2004
--------------------------------------- ------------------------------
Common stock, $.001 Par Value 19,924,570
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
1
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
BSD MEDICAL CORPORATION
Condensed Balance Sheet
(Unaudited)
Assets May 31
------ 2004
-------------------
Current assets:
Cash and cash equivalents $ 1,469,711
Receivables, net 3,591
Related party receivables 224,600
Inventories 777,596
Prepaid Expenses 10,543
Deposits 47,377
-------------------
Total current assets 2,533,418
-------------------
Property and equipment, net 120,144
Patents, net 25,476
-------------------
$ 2,679,038
-------------------
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 119,095
Accrued expenses 390,146
Current portion of deferred revenue 46,612
-------------------
Total current liabilities 555,853
-------------------
Long term liabilities
Deferred revenue 11,212
-------------------
Total liabilities $ 567,065
-------------------
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, issued 19,937,982 and
outstanding 19,913,651 shares 19,938
Additional paid-in capital 23,197,508
Deferred compensation (27,808)
Accumulated deficit (21,077,431)
Common stock in treasury 24,331 shares, at cost (234)
-------------------
Net stockholders' equity 2,111,973
-------------------
$ 2,679,038
===================
2
BSD MEDICAL CORPORATION
Condensed Statements of Operations
(Unaudited)
Periods ended May 31, 2004 and May 31, 2003
Three Months Nine Months
Ended: Ended:
------------------------------- ------------------------------
May 31, May 31, May 31, May 31,
2004 2003 2004 2003
--------------- -------------- --------------- -------------
Sales $ 147,899 $ 42,554 $ 560,156 $ 297,508
Royalty revenue in arrears - 275,000 - 275,000
Related party revenue 285,823 369,128 981,241 1,410,319
--------------- -------------- --------------- -------------
Total revenues 433,722 686,682 1,541,397 1,982,827
--------------- -------------- --------------- -------------
Costs and expenses:
Cost of product sales 117,855 8,234 448,068 70,944
Related party cost of product sales 126,389 193,146 395,039 650,107
Research and development 160,715 160,241 490,006 500,706
Selling, general, and administrative 342,793 245,495 803,947 743,614
--------------- -------------- --------------- -------------
Total costs and expenses 747,752 607,116 2,137,060 1,965,371
--------------- -------------- --------------- -------------
Operating income (loss) (314,030) 79,566 (595,663) 17,456
Other income (expense):
Interest income 2,215 479 4,816 2,664
Interest (expense) (124) - (477) -
--------------- -------------- --------------- -------------
2,091 479 4,339 2,664
--------------- -------------- --------------- -------------
Net income (loss) $ (311,939) $ 80,045 $ (591,324) $ 20,120
=============== ============== =============== =============
Net (loss) income per common and common equivalent
share, basic and diluted $ (.02) $ .00 $ (.03) $ .00
=============== ============== =============== =============
Weighted average number of shares outstanding:
Basic 19,912,000 17,827,000 19,246,000 17,793,000
=============== ============== =============== =============
Diluted 19,912,000 17,827,000 19,246,000 17,793,000
=============== ============== =============== =============
See accompanying notes to financial statements.
3
BSD MEDICAL CORPORATION
Condensed Statements of Cash Flows (Unaudited)
Nine Months ended May 31, 2004 and May 31, 2003
May 31, May 31,
2004 2003
-------------- --------------
Cash flows from operating activities:
Net income (loss) $ (591,324) $ 20,120
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Provision for allowance for doubtful accounts 14,569 -
Depreciation and amortization 33,597 36,454
Deferred compensation 7,858 6,358
Stock compensation expense 12,000 24,000
Deferred gain on sale of asset - (15,275)
(Increase) decrease in:
Receivables 160,962 57,661
Inventories 24,877 (120,391)
Prepaid expenses and deposits (14,682) (10,595)
Increase (decrease) in:
Accounts payable (160,973) 96,966
Accrued expenses (224,324) (216,300)
Deferred revenue (26,296) (65,271)
-------------- --------------
Net cash flows used in
Operating activities (763,736) (186,273)
-------------- --------------
Cash flows from investing activities:
Purchase of property and equipment (11,038) (59,765)
-------------- --------------
Net cash used in investing activities (11,038) (59,765)
-------------- --------------
Cash flows provided by financing activities-
Proceeds from issuance of common stock 2,108,482 2,000
-------------- --------------
Increase (Decrease) in cash and cash equivalents 1,333,708 (244,038)
Cash and cash equivalents, beginning of period 136,003 421,900
-------------- --------------
Cash and cash equivalents, end of period $ 1,469,711 $ 177,862
============== ==============
o The Company paid $477 for interest and no cash for taxes during the
period ended May 31, 2004 and no cash for interest and taxes during the
period ended May 31, 2003.
o The Company issued 75,000 options to purchase common stock for the
periods ended May 31, 2004 and 2003, which resulted in an increase to
Deferred Compensation of $8,250 and $7,500 respectively.
o During the nine months ended May 31, 2003 the Company issued 25,199
shares of common stock in exchange for 36,199 warrants to purchase the
Company's Common Stock
o During the nine months ended May 31, 2003 the Company issued 20,000
shares of the Company's Common Stock to one of its directors for the
exercise of options at $.10 per share
4
Note 1. Basis of Presentation
The Condensed Balance Sheet as of May 31, 2004, the Condensed
Statements of Operations for the three and nine months ended May 31, 2004 and
May 31, 2003 and the Condensed Statements of Cash Flow for the nine months ended
May 31, 2004 and May 31, 2003, have been prepared by the Company without an
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 May 31, 2004 have been made.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted. The
results of operations for the three and nine month periods ended May 31, 2004
are not necessarily indicative of the results to be expected for the full year.
Note 2. Net Income (Loss) Per Common Share
Net income (loss) per common share for the quarters ended May 31, 2004,
and May 31, 2003, is 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 nine months ended May 31, 2004 and 2003 the Company had
sales to an unconsolidated affiliate of $99,503 and $915,913 and to an entity
controlled by a significant stockholder of $881,738 and $494,406, respectively.
At May 31, 2004, accounts receivable include $224,600 due from an
unconsolidated affiliate and an entity controlled by a significant stockholder.
5
BSD MEDICAL CORPORATION
Notes to Condensed Financial Statements
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 nine months ended May 31, 2004 and May 31, 2003:
Nine Months Ended Three Months Ended
May 31 May 31
2004 2003 2004 2003
------------------------------------------------------------
Net (loss) income - as reported $ (591,324) $ 20,120 $ (311,939) $ 80,045
Deduct total stock based employee
ompensation 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 $ (616,324) $ (42,993) $ (336,939) $ 47,932
------------------------------------------------------------
Basic and Diluted income (loss)
per share - as reported $ (.03) $ .00 $ (.02) $ .00
------------------------------------------------------------
Basic and Diluted income (loss)
per share - pro-forma $ (.03) $ (.01) $ (.02) $ .00
------------------------------------------------------------
6
BSD MEDICAL CORPORATION
Notes to Condensed Financial Statements
The fair value of each option granted for the nine months ended May 31,
2004 and May 31, 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 83% 137%
Risk-free interest rate 5.5% 4.2%
Expected life of options 3 years 5 years
The weighted average fair values of options granted during the nine
months ended May 31, 2004 and May 31, 2003 were $1.01 and $.64, respectively.
Note 5. Subsequent Events
On July 15, 2004, American Medical Systems Holdings, Inc., or AMS,
acquired TherMatrx, Inc. for $40 million in cash plus future payments contingent
upon the combined entity's future sales of TherMatrx's DOT systems. The sale
includes all of our TherMatrx shares. We expect to receive an initial cash
payment, after the withholding of escrow funds and the payment of other initial
obligations, of approximately $9 million in connection with the closing. Our
approximate 30% ownership of TherMatrx was reduced to approximately 25% because
of the exercise of outstanding options to acquire common stock of TherMatrx at
the closing. We may also receive future contingent payments. Contingent payments
to TherMatrx shareholders will be four times quarterly sales of TherMatrx's DOT
systems during the six quarters beginning July 5, 2004 and ending December 31,
2005. We will receive quarterly contingent payments when the accumulated value
of four times quarterly sales has exceeded the initial $40 million payment to
TherMatrx shareholders. The contingent payments are also subject to certain
set-off rights in favor of AMS. The aggregate maximum amount of the initial
payment and any contingent payments is $250 million. While the contingent
payments are not guaranteed and are subject to the future sales of TherMatrx
products, we have offered the following projections. If the sale of TherMatrx
products were to remain flat at the recent sales rates, the total payment for
our TherMatrx shares would be about $30 million, including the initial payment
of approximately $9 million. Since the sale of TherMatrx products has been
increasing in the current year over previous years, we have projected a
continued growth trend during the earn-out period. If that growth trend were
realized, the projected total payment for our TherMatrx shares would be about
$40 million, including the initial payment of approximately $9 million. However,
any future payments are not guaranteed and are subject to uncertainties, and we
may not receive any contingent payments in addition to the initial $9 million,
which is the only amount guaranteed.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other parts of this prospectus contain forward-looking
statements that involve risks and uncertainties. Forward-looking statements can
also be identified by words such as "anticipates," "expects," "believes,"
"plans," "predicts," and similar terms. Forward-looking statements are not
guarantees of future performance and our actual results may differ significantly
from the results discussed in the forward-looking statements. Factors that might
cause such differences include, but are not limited to, those discussed in the
subsections entitled "Forward-Looking Statements and Factors That May Affect
Future Results and Financial Condition" below and the subsection entitled "Risk
Factors" above. The following discussion should be read in conjunction with our
consolidated financial statements and notes thereto included in our Form 10-KSB
for our fiscal year ended August 31, 2003. We assume no obligation to revise or
update any forward-looking statements for any reason, except as required by law.
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.
Since our inception, we have been engaged in the development and
improvement of technology that can better accomplish cancer treatment 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
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
May 31,2004, had an accumulated deficit of $21,077,431. We recorded net loss for
the nine months ended May 31, 2004 of $591,324.
We recognize revenue from the sale of cancer treatment systems, the
sale of parts and accessories related to the cancer treatment systems, the sale
of software license rights, providing manufacturing services, training, and
service support contracts. Product sales were $433,722 and $1,541,397 for the
three and nine months ended May 31, 2004, respectively. Service revenue was
$19,052 and $74,684 for the three and nine months ended May 31, 2004,
respectively.
Total costs and expenses for the quarter ended May 31, 2004 increased
by $140,676, an increase of 23%, primarily due to an increase in selling,
general and administrative and higher cost of goods sold. Total costs and
expenses for the nine months ended May 31, 2004 increased by $171,689, an
increase of 9% primarily due to an increase in cost of goods sold, an increase
in selling, general and administrative expense partially offset by a small
decrease in research and development expense and the inventory adjustment of
$48,000 to reflect the lower of cost or market.
8
We derived $285,823, or 66% and $982,241 or 64% of our revenue in the
three and nine months ended May 31, 2004 from sales to related parties.
Approximately $99,503 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. The remaining related party revenue of approximately $881,738 was
for two 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 the nine-month period ended May 31, 2004, we derived $560,156, or
36% of our revenue from unrelated parties. These revenues consisted of the sales
of $471,725 for three BSD 500 systems, $51,631 for service contracts and sales
of miscellaneous consumable devices used with our hyperthermia systems of
$36,801.
As described more fully elsewhere in this report, on July 15, 2004, AMS
acquired TherMatrx, including all of our TherMatrx shares. Having sold our
TherMatrx shares, any future product sales to TherMatrx are uncertain and could
decrease to zero in future fiscal periods. While TherMatrx may purchase products
from us in the future, we have not included any TherMatrx sales in our business
planning. It has never been our intent to focus our business on contract
manufacturing. We historically provided manufacturing services to TherMatrx to
help it develop its business.
We project that in fiscal year 2004 the significant decline of
TherMatrx sales will create a significant decline in our total revenue as
compared to fiscal 2003, and that we will incur a greater loss in fiscal 2004
than in 2003.
We intend to use the cash generated from the sale of our TherMatrx
shares to aggressively pursue our business plan and diversify our revenue base
away from related party revenue. Our plan includes increasing support for sales
and marketing of our FDA approved products and the pursuit of pre-marketing
approval for the BSD-2000 in an effort to complete our objective of providing
treatment for solid tumors located throughout the body. Our plan also
anticipates the development of new products that provide heat therapies relating
to cancer and other health concerns. We intend to pursue compatible technologies
other than those developed within our company to further strengthen our product
9
offering and the markets that we can address. In the future, we expect to spend
substantially more on sales and marketing, including the development of new
channels of distribution, sales partnerships, regulatory efforts to increase our
offering of FDA approved products, and on new technology, developed both outside
our company and internally. These actions are intended to boost our sales to
levels anticipated in our forward business plan. Because our plan requires an
investment in our business as described above, we anticipate that we will incur
substantial losses until our sales rise significantly above past levels.
Results of Operations
---------------------
Nine months ended May 31, 2004 compared to nine months ended May 31, 2003
Revenue. Sales decreased from $1,982,827 in the nine months ended May
31, 2003 to $1,541,397 in the nine months ended May 31, 2004, a decrease of
$441,430 or 22%, primarily due to decreased sales to the Company's
unconsolidated subsidiary, TherMatrx. We derived $99,503 or 6% of our total
sales in the period ended May 31, 2004 as compared to $915,913 or 46% of total
sales in the period ending May 31, 2003 from manufacturing, assembling and
testing thermotherapy systems, selling probes, applicators and temperature
sensors and other components and contract services to TherMatrx. Having sold our
TherMatrx shares, any future product sales to TherMatrx are uncertain and could
decrease to zero in the fourth quarter and future fiscal periods. While
TherMatrx may purchase products from us in the future, we have not included in
the fourth quarter any TherMatrx sales in our business planning. We historically
provided manufacturing services to TherMatrx to help it develop its business.
Related party revenue. Related party revenue of approximately $881,738,
or 57 % of total sales was for 2 BSD-2000 systems 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. Product
sales to unrelated parties were $560,156 as compared to $297,508 in the period
ending May 31, 2003, an increase of $262,648 or 88%. These sales include
$471,725 for 3 BSD-500 systems, $51,631 for service contracts, and $36,801 for
miscellaneous items.
We project that in fiscal year 2004 the significant decline of
TherMatrx sales will create a significant decline in our total revenue as
compared to fiscal 2003, and that we will incur a greater loss in fiscal 2004
than in 2003.
We intend to use the cash generated from the sale of our TherMatrx
shares to aggressively pursue our business plan and diversify our revenue base
away from related party revenue. Our plan includes increasing support for sales
and marketing of our FDA approved products and the pursuit of pre-marketing
approval for the BSD-2000 in an effort to complete our objective of providing
treatment for solid tumors located throughout the body. Our plan also
anticipates the development of new products that provide heat therapies relating
to cancer and other health concerns. We intend to pursue compatible technologies
other than those developed within our company to further strengthen our product
offering and the markets that we can address. In the future, we expect to spend
substantially more on sales and marketing, including the development of new
channels of distribution, sales partnerships, regulatory efforts to increase our
offering of FDA approved products, and on new technology, developed both outside
our company and internally. These actions are intended to boost our sales to
levels anticipated in our forward business plan. Because our plan requires an
investment in our business as described above, we anticipate that we will incur
substantial losses until our sales rise significantly above past levels.
10
Gross Profit. Gross profit for the nine months ending May 31, 2004 was
$698,290, or 45%, as compared to $1,261,776, or 64%, of total product sales for
the nine-month period ending May 31, 2003. The decline in gross profit margin
was primarily due to the cost of excess production employees resulting from the
decrease in sales and due to a sales incentive we agreed to in connection with
the sale of the BSD-2000 to Medizin-Technik. We agreed to provide an extra
applicator at no additional charge as a sales incentive in connection with the
sale of the BSD-2000. The cost of the additional applicator lowered the gross
margin recognized on the sale. Also, we made 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. In addition, we 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 May 31,
2003.
Selling,General and Administrative Expenses. Selling, general and
administrative expenses were $803,947 for the nine months ended May 31, 2004, as
compared to $743,614 in the nine months ended May 31, 2003, an increase of
$60,333 or 8%, primarily due to increases in sales and marketing of $55,753,
increase in warranty costs $17,200 of approximately that was associated with a
European sale, charges to bad debt expense of $14,577 and small increases in
employee benefits and insurance offset by decreases in legal and consulting
expense of approximately $69,478. This increase in selling, general and
administrative expenses also includes penalties of $22,656 for delays in getting
a registration statement on Form SB-2 declared effective by the SEC. In the nine
months ended May 31, 2003, we paid significant legal fees associated with fiscal
2002 compliance with the Sarbanes-Oxley Act. Such costs were not repeated in the
nine months ended May 31, 2004. Total costs and expenses increased by $171,689,
an increase of 9%, primarily due an increase in cost of goods sold, the
aforementioned increase in selling, general and administrative expense partially
offset by small decrease in research and development and the inventory
adjustment of $48,000 to reflect the lower of cost or market.
Research and Development Expenses. Research and development expenses
were $490,006 for the nine months ended May 31, 2004, as compared to $500,706 in
the nine months ended May 31, 2003. Research and development expenses in the
period ending May 31, 2004 related primarily to development work on our
BSD-2000/3D/MR hyperthermia system and enhancements to our BSD-500 systems.
Net Loss. Net loss for the period ending May 31, 2004 was $591,324
compared to a profit of $20,120 for the May 31, 2003 period. The increase in net
loss was primarily due to decreased sales volume and higher cost of goods sold.
Three months ended May 31, 2004 compared to three months ended May 31, 2003
Revenue. Sales decreased to $433,722 in the three months ended May 31,
2004, as compared to $686,682 in the three months ended May 31, 2003, a decrease
of $252,960 or 37%, primarily due to decreased sales to TherMatrx, the Company's
unconsolidated subsidiary. During the three-month period ending May 31, 2004, we
derived $10,882 or 2.5% of total sales from TherMatrx as compared to $362,067,
or 53% of our sales in the period ended May 31, 2003. The sales to TherMatrx
include manufacturing, assembling and testing thermotherapy systems, probes,
applicators, temperature sensors and other components. Having sold our TherMatrx
11
shares, any future product sales to TherMatrx are uncertain and could decrease
to zero in the fourth quarter and future fiscal periods. While TherMatrx may
purchase products from us in the future, we have not included any TherMatrx
sales in our business planning. We historically provided manufacturing services
to TherMatrx to help it develop its business .The remaining related party
revenue of approximately $274,941 or 63% of total sales was for a BSD -2000 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. Non-related party revenue for the period ending May 31, 2004 was $147,899,
an increase of $105,345 as compared to the period ending May 31, 2003. This
non-related party revenue for the period ended May 31, 2004 includes $8,402 for
service contracts, $130,425 for the sale of one BSD -500 system and $9,072 for
miscellaneous items.
Gross Profit. Gross profit for the period ending May 31, 2004 was
$189,478 or 44% as compared to $485,302 or 71% of total product sales for the
period ending May 31, 2003. The decrease in gross profit as a percentage of
total product sales was primarily 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 for the period ending May
31, 2003 accompanied by production efficiencies obtained from a higher volume of
hyperthermia system sales.
Selling, General and Administrative Expense. Selling, general and
administrative expense was $342,793 in the three months ended May 31, 2004, as
compared to $245,495 in the three months ended May 31, 2003, an increase of
$97,298 or 40%, primarily due to increases in legal and accounting services of
$33,369, penalties of $22,656 for delays in getting a registration statement on
Form SB-2 declared effective by the SEC, increases in marketing expenses of
$54,480 and small increases in employee benefits and insurance partially offset
by lower consulting expense.
Research and Development Expense. Research and development expense were
$160,715 for the three months ended May 31, 2004, as compared to $160,241 in the
three months ended May 31, 2003. Research and development expenses in the period
ending May 31, 2004 related primarily to development work on our BSD-2000o3D/MR
hyperthermia system and enhancements to our BSD-500 systems.
Net Loss. Net loss for the three months ending May 31, 2004, was
$311,939 as compared with a net profit of $80,045 for the three months ending
May 31, 2003.
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.
12
Revenue Recognition. Revenue from the sale of cancer treatment systems
is recognized when a purchase order has been received, the system has been
shipped, the selling price is fixed or determinable, and collection is
reasonably assured. Most system sales are F.O.B. shipping point, therefore
shipment is deemed to have occurred when the product is delivered to the
transportation carrier. Most system sales do not include installation. If
installation is included as part of the contract, revenue is not recognized
until installation has occurred, or until any remaining installation obligation
is deemed to be perfunctory. Some sales of cancer treatment systems may include
training as part of the sale. In such cases, the portion of the revenue related
to the training, calculated based on the amount charged for training on a
stand-alone basis, is deferred and recognized when the training has been
provided. The sales of our cancer treatment systems do not require specific
customer acceptance provisions and do not include the right of return except in
cases where the product does not function as guaranteed by BSD. We provide a
reserve allowance for estimated returns. To date, returns have not been
significant.
Revenue from manufacturing services is recorded when an agreement with
the customer exists for such services, the services have been provided, and
collection is reasonably assured. Revenue from training services is recorded
when an agreement with the customer exists for such training, the training
services have been provided, and collection is reasonably assured. Revenue from
service support contracts is recognized on a straight-line basis over the term
of the contract, which approximates recognizing it as it is earned.
Our revenue recognition policy is the same for sales to both related
parties and non-related parties. We provide the same products and services under
the same terms for non-related parties as with related parties. Sales to
distributors are recognized in the same manner as sales to end-user customers.
Deferred revenue and customer deposits include amounts from service contracts as
well as cash received for the sales of products, which have not been shipped.
Inventory Reserves. As of May 31, 2004, we had recorded a reserve for
potential inventory impairment of $140,000. 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. We have projected a decrease in future orders
placed with us for TherMatrx systems, but do not project a requirement for any
inventory impairment based on this decline. In the past we have purchased
inventory only after receiving orders for TherMatrx systems, and only in
quantities sufficient to fulfill those orders. We have no inventory for
TherMatrx systems that is currently at risk, whether or not future orders are
placed with us for TherMatrx systems.
13
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 in fiscal 2003 as
discussed below. Our allowance for doubtful accounts at August 31, 2003 was
approximately $67,000, or approximately 14% 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. 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. As of May 31, 2004, our allowance for
doubtful accounts was approximately $82,000 or approximately 26% of total
outstanding receivables.
Fluctuation in Operating Results. Our results of operations have
fluctuated in the past and may fluctuate in the future from year to year as well
as from quarter to quarter. Revenue may fluctuate as a result of factors
relating to the demand for thermotherapy systems and components parts supplied
by us to TherMatrx, 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 described elsewhere, our results of operations for a
particular period may not be indicative of operating results for any other
period.
Liquidity and Capital Resources
-------------------------------
Since inception, we have generated an accumulated deficit of
$21,077,431. We have historically financed our operations through cash from
operations, licensing of technological assets and issuance of common stock. We
used $763,736 in cash from operating activities during the nine-month period
ended May 31, 2004 compared to cash used of $186,273 in the nine-month period
ended May 31, 2003. Our investing activities for the period ended May 31, 2004
resulted in net cash used of $11,038 relating to the purchase of certain
property and equipment.
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At May 31, 2004, our working capital was $1,977,565, and our cash and
cash equivalents totaled $1,469,711. 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 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 gross proceeds of $2,002,000. On December 10, 2003, we
issued an additional 239,600 shares to investors at a price per share of $1.10
for gross proceeds of $263,560. 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. The net
proceeds from the transactions, after paying a commission to our placement
agent, T.R. Winston & Company, LLC, and legal and other expenses related to the
transaction, were approximately $2,079,000.
Our ability to fund our cash needs and grow our business depends on
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
substantially in the fourth quarter of fiscal 2004 compared to the fourth
quarter of fiscal 2003. 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. Due to additional participation at trade
shows, expenditures on publicity, additional travel, higher sales commissions
and other related expenses, we project that our sales and marketing expenses
will be approximately $250,000 higher in 2004 than in the prior year to support
the commercial introduction of the BSD-500 systems. In addition, we anticipate
that we will incur expenses of approximately $100,000 related to governmental
and regulatory, including FDA, approvals during fiscal 2004 in excess of fiscal
2003. We are making these investments in sales and marketing and on government
and regulatory activities to increase our revenue from sales of our BSD-500
system and, upon receipt of FDA approval, from the sale of our BSD-2000 system
in the United States. These increased marketing and regulatory expenses are an
investment in generating offsetting revenue against the decline in TherMatrx
sales that we have projected, and to provide future revenue growth over the long
term. We have not projected any sales to TherMatrx in our business planning
beyond fiscal 2004.
We are currently subject to the penalty provisions of the terms of the
common stock issued in November and December 2003 and as such are required to
pay these investors $1,500 per day until the registration statement is declared
effective. We cannot assure when this registration statement will be declared
effective and our obligation to pay this penalty will cease. Our cash available
for operations will decrease by the amount paid as penalties to these investors.
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 and from the initial
closing payment of approximately $9 million from the sale of our TherMatrx
shares. However, if our revenues from TherMatrx decrease more rapidly than we
currently expect or revenues from the sale of our systems is lower than we
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currently expect or we are required to pay substantial amounts as penalties to
certain investors, we will have to cut expenses or use more of our available
cash than we anticipated. We believe we can cover any such cash shortfall with
cost cutting or available cash. If we cannot cover any such cash shortfall with
cost cutting or available cash, we would need to obtain additional financing. We
cannot be certain that any financing will be available when needed or will be
available on terms acceptable to us. 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.
On July 15, 2004, American Medical Systems Holdings, Inc., or AMS,
acquired TherMatrx, Inc. for $40 million in cash plus future payments contingent
upon the combined entity's future sales of TherMatrx's DOT systems. The sale
includes all of our TherMatrx shares. We expect to receive an initial cash
payment, after the withholding of escrow funds and the payment of other initial
obligations, of approximately $9 million in connection with the closing. Our
approximate 30% ownership of TherMatrx was reduced to approximately 25% because
of the exercise of outstanding options to acquire common stock of TherMatrx at
the closing. We may also receive future contingent payments. Contingent payments
to TherMatrx shareholders will be four times quarterly sales of TherMatrx's DOT
systems during the six quarters beginning July 5, 2004 and ending December 31,
2005. We will receive quarterly contingent payments when the accumulated value
of four times quarterly sales has exceeded the initial $40 million payment to
TherMatrx shareholders. The contingent payments are also subject to certain
set-off rights in favor of AMS. The aggregate maximum amount of the initial
payment and any contingent payments is $250 million. While the contingent
payments are not guaranteed and are subject to the future sales of TherMatrx
products, we have offered the following projections. If the sale of TherMatrx
products were to remain flat at the recent sales rates, the total payment for
our TherMatrx shares would be about $30 million, including the initial payment
of approximately $9 million. Since the sale of TherMatrx products has been
increasing in the current year over previous years, we have projected a
continued growth trend during the earn-out period. If that growth trend were
realized, the projected total payment for our TherMatrx shares would be about
$40 million, including the initial payment of approximately $9 million. However,
any future payments are not guaranteed and are subject to uncertainties, and we
may not receive any contingent payments in addition to the initial $9 million,
which is the only amount guaranteed. We expect to use the payments from the sale
of our TherMatrx shares, including any contingent payments, for general
corporate purposes including the sales and marketing effort for our FDA approved
cancer therapy products, supporting the FDA application for our cancer therapy
products under investigational status, and the development of future products
used in medical therapy.
FORWARD-LOOKING STATEMENTS
With the exception of historical facts, the statements contained in the
section entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations" are forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995, which reflect our current
expectations and beliefs regarding our future results of operations, performance
and achievements. These statements are subject to risks
16
and uncertainties and are based upon assumptions and beliefs that may or may not
materialize. These forward-looking statements include, but are not limited to,
statements concerning:
o our anticipated financial performance and business plan;
o our expectations regarding the co1mmercial introduction of the
BSD-500 system;
o our expectations and efforts regarding receipt of FDA approvals
relating to the BSD-2000 system;
o our technological developments to the BSD-500 and BSD-2000
systems;
o our development or acquisition of new technologies;
o our expectation that sales to TherMatrx will decline and the rate
at which sales to TherMatrx decline;
o the amount of expenses we will incur for the commercial
introduction of the BSD-500 system;
o the amount of expenses we will incur for governmental and
regulatory, including FDA, approvals;
o our expectation that related party revenue will continue to be a
significant portion of our total revenue;
o our belief that sales of BSD-500 and BSD-2000 systems will
increase through our future sales and marketing efforts;
o our belief that our current working capital and cash from
operations will be sufficient to fund our anticipated operations
for fiscal 2004;
o our assumption that we will receive contingent payments from AMS
in connection with the TherMatrx acquisition; and
o our anticipated use of proceeds from the AMS transaction.
We wish to caution readers that the forward-looking statements and our
operating results are subject to various risks and uncertainties that could
cause our actual results and outcomes to differ materially from those discussed
or anticipated, including the factors set forth in the section entitled "Risk
Factors" included elsewhere in this prospectus. We also wish to advise readers
not to place any undue reliance on the forward-looking statements contained in
this prospectus, which reflect our beliefs and expectations only as of the date
of this prospectus. We assume no obligation to update or revise these
forward-looking statements to reflect new events or circumstances or any changes
in our beliefs or expectations, other than as required by law.
17
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 evaluated
the effectiveness of the design and operation 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 May 31, 2004. Based on this evaluation, our
principal executive officer and our principal financial officer concluded that,
as of the end of the period covered by this report, our disclosure controls and
procedures were effective and adequately designed to ensure that the information
required to be disclosed by us in the reports we file or submit under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in applicable rules and forms.
(b) Changes in internal controls over financial reporting.
During the quarter ended May 31, 2004, there has been no change in our internal
control over financial reporting that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
PART 2. OTHER INFORMATION
ITEM 1. LEGAL PROCEDINGS. NONE
ITEM 2. CHANGE IN SECURITIES. NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. NONE
ITEM 4. SUBMISSION OF MATTERS TO A RATE OF SECURITY HOLDER. NONE
ITEM 5. OTHER INFORMATION. NONE
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are 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 April 20, 2004 with a press release
attached to announce that BSD Medical would present major technology advances at
a World Hyperthermia Conference.
The Company filed an 8-K on April 22, 2004 with a press release
attached to announce that BSD Medical's Chairman had been nominated for
"Entrepreneur of the Year".
The Company filed an 8-K on May 11, 2004 with a press release attached
to announce that BSD Medical had received FDA approval to investigate a new
cancer treatment applicator.
The Company filed an 8-K on May 25, 2004 with a press release attached
to announce that BSD Medical's Hyperthermia Systems is a patient friendly
treatment for rectal cancer.
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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: July 15, 2004 /s/ Hyrum A. Mead
----------------------------- -----------------
President
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