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, 2006
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
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (801) 972-5555
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
As of July 10, 2006, there were 21,021,668 shares of the Registrant's common
stock, $0.001 par value per share, outstanding.
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 May 31,
------ 2006
------------------
Current assets:
Cash and cash equivalents $ 542,446
Available-for-sale securities 27,273,927
Receivables, net of allowance for
doubtful accounts of $42,500 603,309
Related party receivables 341,873
Inventories, net 1,518,210
Deferred tax asset 215,000
Other current assets 133,769
------------------
Total current assets 30,628,534
------------------
Property and equipment, net 306,923
Patents, net 21,720
------------------
$ 30,957,177
==================
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 523,951
Accrued expenses 469,431
Income taxes payable 4,266,602
Deferred revenue 17,546
------------------
Total current liabilities 5,277,530
------------------
Total liabilities 5,277,530
------------------
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 21,021,668
shares and outstanding 20,997,357 shares 21,022
Additional paid-in capital 25,504,433
Deferred compensation (321,299)
Common stock in treasury 24,311 shares, at cost (234)
Other comprehensive loss (78,366)
Retained earnings 554,091
------------------
Net stockholders' equity 25,679,647
------------------
$ 30,957,177
==================
See accompanying notes to condensed financial statements
1
BSD MEDICAL CORPORATION
Condensed Statements of Operations
(Unaudited)
Periods ended May 31, 2006 and May 31, 2005
Three Months Nine Months
Ended May 31, Ended May 31,
--------------------------------- ----------------------------------
2006 2005 2006 2005
--------------- --------------- --------------- ----------------
Sales $ 264,050 $ 321,843 $ 1,004,272 $ 799,129
Related party sales 448,721 43,370 669,041 539,431
--------------- --------------- --------------- ----------------
Total sales 712,771 365,213 1,673,313 1,338,560
--------------- --------------- --------------- ----------------
Costs and expenses:
Cost of sales 167,464 267,600 680,918 566,949
Cost of related party sales 245,250 35,860 393,026 381,841
Research and development 380,623 270,803 945,527 645,683
Selling, general, and administrative 1,329,282 504,923 3,553,103 1,343,619
--------------- --------------- --------------- ----------------
Total costs and expenses 2,122,619 1,079,186 5,572,574 2,938,092
--------------- --------------- --------------- ----------------
Operating loss (1,409,848) (713,973) (3,899,261) (1,599,532)
Other income (expense):
Interest income 411,777 43,306 960,990 200,804
Other income 5,935,315 5,460,462 17,750,601 6,555,391
--------------- --------------- --------------- ----------------
Total other income 6,347,092 5,503,768 18,711,591 6,756,195
--------------- --------------- --------------- ----------------
Income before income taxes 4,937,244 4,789,795 14,812,330 5,156,663
Provision for income taxes 1,949,621 1,841,000 5,506,785 1,841,000
--------------- --------------- --------------- ----------------
Net income $ 2,987,623 $ 2,948,795 $ 9,305,545 $ 3,315,663
=====================================================================
Net income per common and common
equivalent share,
Basic $ .14 $ .15 $ .45 $ .17
--------------- --------------- --------------- ----------------
Diluted $ .13 $ .14 $ .42 $ .16
--------------- --------------- --------------- ----------------
Weighted average number of shares outstanding,
Basic 20,926,000 20,144,000 20,683,000 20,108,000
--------------- --------------- --------------- ----------------
Diluted 22,163,000 20,612,000 22,148,000 21,376,000
--------------- --------------- --------------- ----------------
See accompanying notes to condensed financial statements
2
BSD MEDICAL CORPORATION
Condensed Statements of Cash Flows
(Unaudited)
Periods ended May 31, 2006 and May 31, 2005
Nine Months
Ended:
----------------------------------
May 31, May 31,
2006 2005
----------------- --------------
Cash flows from operating activities:
Net Income $ 9,305,545 $ 3,315,663
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization 64,195 45,106
Gain on sale of investment in TherMatrx (17,413,342) (6,552,089)
Gain on sale of property - (1,050)
Non-cash stock compensation expense 48,471 45,000
Amortization of deferred compensation expense 75,950 9,508
(Increase) decrease in:
Receivables (335,760) (258,015)
Related party receivables (105,745) (172,020)
Inventories (383,857) (336,319)
Deferred tax asset (111,000) 708,000
Other current assets (1,028) 336
Increase (decrease) in:
Accounts payable 411,138 53,199
Accrued expenses 221,055 (136,875)
Income taxes payable 4,998,125 1,008,182
Deferred revenue 10,219 (30,785)
Deferred tax liability (13,000) -
----------------- ---------------
Net cash used in operating activities (3,229,031) (2,302,159)
----------------- ---------------
Cash flows from investing activities:
Proceeds from sale of investment in TherMatrx 17,413,342 6,552,089
Purchase of available-for-sale securities (14,770,709) -
Purchase of property and equipment (194,866) (100,994)
Proceeds from sale of property and equipment - 1,050
----------------- ---------------
Net cash provided by investing activities 2,447,767 6,452,145
----------------- ---------------
Cash flows from financing activities:
Proceeds from issuance of common stock options 415,036 75,305
----------------- ---------------
Net cash provided by financing activities 415,036 75,305
----------------- ---------------
Change in cash and cash equivalents 4,225,291
(366,228)
Cash and cash equivalents, beginning of period 9,697,154
908,674
----------------- ---------------
Cash and cash equivalents, end of period $ 542,446 $ 13,922,445
================= ===============
Supplemental Disclosure of Cash Flow Information
------------------------------------------------
o The Company paid no cash for interest during the nine months ended
May 31, 2006 and 2005 and $392,311 and $124,919 for income taxes
during the nine months ended May 31, 2006 and 2005, respectively.
o The Company issued 349,368 and 75,000 stock options during the
nine month periods ended May 31, 2006 and 2005, respectively,
which resulted in an increase to deferred compensation of $363,200
and $15,750, respectively.
o The Company had an income tax benefit from the exercise of stock
options of $972,282 and $230,182 during the nine months ended May
31, 2006 and 2005, respectively, which was recorded as an increase
to additional paid-in capital and a reduction in income taxes
payable.
o The Company had an unrealized loss of $115,305 during the nine
months ended May 31, 2006 on available-for-sale securities.
3
BSD MEDICAL CORPORATION
Notes to Condensed Financial Statements
Note 1. Basis of Presentation
The accompanying unaudited condensed financial statements of BSD
Medical Corporation as of May 31, 2006 and for the three and nine months ended
May 31, 2006 and 2005, have been prepared in accordance with U.S. generally
accepted accounting principles for interim financial reporting and pursuant to
the rules and regulations of the Securities and Exchange Commission (SEC). The
financial statements do not include all of the information and footnotes
required by U.S. generally accepted accounting principles for complete financial
statements. These financial statements should be read in conjunction with the
notes hereto, and the financial statements and notes thereto included in our
annual report on Form 10-KSB for the year ended August 31, 2005.
All adjustments (consisting only of normal recurring adjustments)
necessary for the fair presentation of our financial position as of May 31, 2006
and our results of operations, financial position and changes therein for the
three and nine months ended May 31, 2006 and 2005 have been included. The
results of operations for the three and nine months ended May 31, 2006 may not
be indicative of the results for the year ending August 31, 2006.
Note 2. Recent Accounting Pronouncements
The Company accounts for stock-based compensation awards issued to
employees using the intrinsic value measurement provisions of Accounting
Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees
for Stock-Based Compensation. Accordingly, no compensation expense has been
recorded for stock options granted to employees with exercise prices greater
than or equal to the fair value of the underlying common stock at the option
grant date. On December 16, 2004, the Financial Accounting Standards Board
(FASB) issued Statements of Accounting Standards (SFAS) No. 123R (revised 2004),
Share-Based Payment, which eliminates the alternative of applying the intrinsic
value measurement provisions of APB No. 25 to stock compensation awards issued
to employees. The new standard requires enterprises to measure the cost of
employee services received in exchange for an award of equity instruments based
on the grant-date fair value of the award. That cost will be recognized over the
period during which an employee is required to provide services in exchange for
the award, known as the requisite service period (usually the vesting period).
The Company has not yet quantified the effects of the adoption of SFAS
123R, but it is expected that the new standard will result in significant
stock-based compensation expense. The pro forma effects on net loss and net loss
per common share if the Company had applied the fair value recognition
provisions of the original SFAS 123 on stock compensation awards (rather than
applying the intrinsic value measurement provisions of APB 25) are disclosed in
Note 6 below. Although the pro forma effects of applying the original SFAS 123
may be indicative of the effects of adopting SFAS 123R, the provisions of these
two statements differ in some important respects. The actual effects of adopting
SFAS 123R will be dependent on numerous factors including, but not limited to,
the valuation model chosen by the Company to value stock-based awards, the
assumed award forfeiture rate, the accounting policies adopted concerning the
method of recognizing the fair value of awards over the requisite service
period, and the transition method (as described below) chosen for adopting SFAS
123R.
4
SFAS 123R will be effective for the Company beginning September 1,
2006, and requires the use of either the Modified Prospective Application Method
or the Modified Retrospective Method. Under the Modified Prospective Method,
SFAS 123R is applied to new awards and to awards modified, repurchased, or
cancelled after the effective date. Additionally, compensation cost for the
portion of awards for which the requisite service has not been rendered (such as
unvested options) that are outstanding as of the date of adoption shall be
recognized as the remaining requisite services are rendered. The compensation
cost relating to unvested awards at the date of adoption shall be based on the
grant-date fair value of those awards as calculated for pro forma disclosures
under the original SFAS 123. Alternatively, companies may use the Modified
Retrospective Application Method. This method may be applied to all prior years
for which the original SFAS 123 was effective or only to prior interim periods
in the year of initial adoption. If the Modified Retrospective Application
Method is applied, financial statements for prior periods shall be adjusted to
give effect to the fair-value-based method of accounting for awards on a
consistent basis with the pro forma disclosures required for those periods under
the original SFAS 123.
On April 15, 2005, the SEC issued Release No. 33-8568, Amendment to
Rule 4-01(a) of Regulation S-X Regarding the Compliance Date for SFAS 123R. The
amended rule permits calendar year registrants subject to oversight by the SEC
to implement SFAS 123R at the beginning of its next fiscal year. The Company
will implement SFAS 123R at the beginning of its next fiscal year (September 1,
2006).
In March 2005, the SEC issued Staff Accounting Bulletin (SAB) No. 107
Share-Based Payment to simplify some of the implementation challenges of SFAS
123R. In particular, SAB 107 provides supplemental implementation guidance on
SFAS 123R including guidance on valuation methods, classification of
compensation expense, inventory capitalization of share-based compensation
costs, income tax effects, disclosures in Management's Discussion and Analysis
and several other issues. We will apply the principles of SAB 107 in conjunction
with the adoption of SFAS 123R.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error
Corrections, which replaces APB No. 20, Accounting Changes, and SFAS No. 3,
Reporting Accounting Changes in Interim Financial Statements. SFAS 154 applies
to all voluntary changes in accounting principle, and changes the requirements
for accounting and reporting a change in accounting principles. SFAS 154
requires retroactive application to prior periods' financial statements of a
voluntary change in accounting principle unless it is impractical to do so. APB
20 previously required that most voluntary changes in accounting principle be
recognized with a cumulative effect adjustment in net income of the period of
the change. SFAS 154 is effective for accounting changes made in annual periods
beginning after December 15, 2005. The Company will implement SFAS 154 at the
beginning of its next fiscal year (September 1, 2006) and does not expect it to
have a material effect on its financial position, results of operations or cash
flows.
5
Note 3. Net Income Per Common Share
The computation of basic earnings per common share is based on the
weighted average number of shares outstanding during the period. The computation
of diluted earnings per common share is based on the weighted average number of
shares outstanding during the period plus the weighted average common stock
equivalents which would arise from the exercise of stock options outstanding
using the treasury stock method and the average market price per share during
the period. When common stock equivalents are anti-dilutive, they are not
included.
The shares used in the computation of the Company's basic and diluted
earnings per share are reconciled as follows:
Three Months Ended Nine Months Ended
May 31, May 31,
2006 2005 2006 2005
---- ---- ---- ----
Weighted average number of
shares outstanding - basic 20,926,000 20,144,000 20,683,000 20,108,000
Dilutive effect of stock options 1,237,000 468,000 1,465,000 1,268,000
------------- ---------------- ---------------- ---------------
Weighted average number of
shares outstanding - diluted 22,163,000 20,612,000 22,148,000 21,376,000
============== =============== =============== ===============
Note 4. Inventories
Inventories consisted of the following as of May 31, 2006:
Raw materials $ 810,728
Work in process 787,482
Reserve for obsolete inventory (80,000)
---------------
$ 1,518,210
---------------
Note 5. Related Party Transactions
During the nine months ended May 31, 2006 and May 31, 2005, the Company
had sales of $669,041 and $539,431, respectively, to an entity controlled by a
significant stockholder and member of the Board of Directors. These related
party transactions represent 39.98% and 40.29% of total sales for the
corresponding period. During the three months ended May 31, 2006 and May 31,
2005 the Company had related party sales of $448,721 and $43,370, respectively,
which represent 62.95% and 11.87% of total sales for the corresponding period.
6
Note 6. Stock-Based Compensation
The Company accounts for stock options granted to employees under the
recognition and measurement principles of APB 25, Accounting for Stock Issued to
Employees, and related Interpretations, and has adopted the disclosure-only
provisions of SFAS No. 123, Accounting for Stock-Based Compensation.
Accordingly, the difference between the exercise price and the fair market value
of the stock on the grant date has been recognized in the financial statements
as expense. Had the Company's stock options been accounted for based on the fair
value method of SFAS No. 123, the results of operations would have been reduced
to the pro forma amounts indicated below for the periods indicated below:
Three Months Ended Nine Months Ended
May 31, May 31,
2006 2005 2006 2005
-------------------------------------------------
Net income as reported $ 2,987,623 $ 2,948,795 $ 9,305,545 $ 3,315,663
Add: Stock based employee compensation expense included
in reported net income net of related tax effects $ - - 75,950 9,508
Deduct: Total stock based employee compensation expense
determined under fair value based method for all awards,
net of related taxes $ (6,377) (50,926) (177,175) (347,460)
-------------------------------------------------
Net income - pro forma $ 2,981,246 $ 2,897,869 $ 9,204,320 $ 2,977,711
Basic income per share as reported $ .14 $ .15 $ .45 $ .17
-------------------------------------------------
Diluted income per share as reported $ .13 $ .14 $ .42 $ .16
Basic income per share - pro forma $ .14 $ .14 $ .44 $ .15
-------------------------------------------------
Diluted income per share - pro forma $ .13 $ .14 $ .42 $ .14
-------------------------------------------------
The fair value of each stock option granted for the nine months ended
May 31, 2006 and 2005 is estimated on the date of grant using the Black-Scholes
option pricing model using the following assumptions:
2006 2005
--------------------------------
Expected dividend yield $ - $ -
Expected stock price volatility 75% 81%
Risk-free interest rate 4.3% 3.32%
Expected life of options 4.89 years 7 years
The weighted average fair value of options granted during the nine
months ended May 31, 2006 and 2005 was $3.53 and $1.97, respectively.
Note 7. Gain on Sale of Investment in TherMatrx
On July 15, 2004, the Company's investment in an unconsolidated
subsidiary (TherMatrx) was sold to American Medical Systems, Inc. (AMS). The
Company's portion of the initial payment from this sale, received in fiscal
2004, was approximately $9 million, with additional payments contingent on the
quarterly sales of TherMatrx through the fourth calendar quarter of 2005. During
the quarter ended May 31, 2006, the Company received an additional payment from
the sale of TherMatrx of $5,863,222 to bring the total received to date as of
May 31, 2006 to $32,940,174. This amount is recorded as a gain and has been
reflected as "other income" in the Statements of Operations.
Note 8. Stockholders' Equity
During the nine months ended May 31, 2006, 656,598 shares of common
stock were issued for cash of $415,036 and services of $48,471.
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 report contain forward-looking
statements that involve risks and uncertainties. Forward-looking statements can
also be identified by words such as "anticipates," "expects," "believes,"
"plans," "predicts," and similar terms. Forward-looking statements are not
guarantees of future performance and our actual results may differ significantly
from the results discussed in the forward-looking statements. Factors that might
cause such differences include, but are not limited to those discussed in the
subsections entitled "Forward-Looking Statements" below. The following
discussion should be read in conjunction with our consolidated financial
statements and notes thereto included in this report. We assume no obligation to
revise or update any forward-looking statements for any reason, except as
required by law.
General
-------
We develop, manufacture, market and service systems that deliver
precision-focused radio frequency (RF) and microwave energy into diseased sites
of the body, heating them to specified temperatures as required by a variety of
medical therapies. Our business objectives currently are to commercialize our
products developed for the treatment of cancer and to further expand our
developments to treat other diseases and medical conditions.
While our primary developments to date have been cancer treatment
systems, we also pioneered the use of microwave thermal therapy for the
treatment of symptoms associated with enlarged prostate, and we are responsible
for much of the technology that has successfully created a substantial new
medical industry using that therapy. In accordance with our strategic plan, we
sold our interest in TherMatrx, Inc., the company established to commercialize
our technology to treat enlarged prostate symptoms, to provide funding that we
can utilize for commercializing our systems used in the treatment of cancer and
in achieving other business objectives. We have received approximately $33
million in earnout payments from the TherMatrx sale through May 31, 2006.
In spite of the advances in cancer treatment technology, over 40% of
cancer patients continue to die from the disease in the United States, and
cancer has now surpassed heart disease as the number one killer from all causes
of death in the United States. Commercialization of our systems used to treat
cancer (the BSD-2000 and BSD-500 families of products) is our most immediate
business objective. Our cancer therapy systems are used in combination with
existing cancer treatments to kill cancer with heat while boosting the
effectiveness of radiation and chemotherapy through a number of biological
mechanisms. Current and targeted cancer treatment sites for our systems include
cancers of the prostate, breast, chestwall, head, neck, bladder, cervix,
colon/rectum, esophagus, liver, pancreas, brain, bone, stomach and lung,
including soft tissue sarcoma, melanoma, carcinoma, and basal cell carcinoma.
Our BSD-2000 systems are used to non-invasively treat cancers located
deeper in the body, and are designed to be companions to the estimated 7,500
linear accelerators used to treat cancer through radiation globally and in
combination with chemotherapy treatments. Our BSD-500 systems treat cancers on
or near the body surface and those that can be approached through body orifices
such as the throat, the rectum, etc., or through interstitial treatment in
combination with interstitial radiation (brachytherapy). BSD-500 systems can be
used as companions to our BSD-2000 systems, to the estimated 2,500 brachytherapy
systems installed and with chemotherapy treatments.
We have received FDA approval to market our commercial version of the
BSD-500 and have applied for FDA approval to sell the BSD-2000 in the United
States. We have designed our cancer treatment systems such that together they
are capable of providing complementary therapy for treatment of most solid
tumors located in the body.
8
In this report it will be noted that we have substantially increased
our emphasis on marketing, market preparation and sales efforts. This
corresponds to our FDA submission for approval of the BSD-2000. Our objective is
to prepare the market for our systems. We have also increased our efforts in the
development of new products.
We now have five outside sales people in the United States and a Vice
President of Sales whose role is to prepare and develop markets for our cancer
treatment systems. We are also attending major trade shows as well as
advertising in journals and magazines. On an international basis, we are
formulating sales distribution relationships. Multiple supportive marketing
efforts are also being used behind these initiatives.
Our market research has shown that when patients are informed about our
cancer therapy there is a strong propensity for them to pursue it with their
physician. We have therefore initiated an internet website program focused on
cancer patients and caregivers. This website can be accessed at
www.treatwithheat.com. In conjunction with the patient website, a patient
advisor hotline has been created to allow patients to call and discuss the
therapy. We have also developed education materials that are sent to those that
request it. These materials better prepare patients to discuss the treatment
with their physicians.
We are completing a website directed at the physicians who currently
provide, or who are candidates to provide the therapy. The primary objective of
this website is to provide physician training.
We are conducting a public relations campaign directed at national
press coverage via television and newspapers, as well as magazines and journals.
This campaign has already reached out to more than 20 million people in all 50
states, as well as internationally.
To bring further patient attention to our cancer therapy, we have
developed a special website focused on cancer patients and their need for
emotional support from family and friends. The "Hope Garden" allows patients and
supporters to "plant flowers" with messages of hope attached and then Emailed to
the patient. The flower is then planted in the cyber-space garden where all can
view the messages of hope and inspiration. This website can be accessed at
www.flowersforhope.com.
Our common stock trades on the American Stock Exchange (AMEX) under the
symbol "BSM."
Our accumulated deficit since inception decreased from $8,751,454 as of
August 31, 2005 to a positive retained earnings of $554,091 as of May 31, 2006
due to a positive net income recorded during the nine months ended May 31, 2006.
We recorded after tax net income for the first nine months of fiscal 2006 of
$9,305,545.
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
support services. Product sales were $1,554,246 and $1,189,824 for the nine
months ended May 31, 2006 and 2005, respectively. Service revenue was $119,067
and $148,736 for the nine months ended May 31, 2006 and 2005, respectively.
During the nine month period ended May 31, 2006, we earned $1,004,272,
or 61%, of our revenue from sales to unrelated parties. These revenues consisted
of product sales of $886,954, consulting services of $89,268 and service
contracts of $28,050.
9
Cost of sales for the period ended May 31, 2006 includes raw materials
and labor costs of $751,089 and overhead costs of $322,855. 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 from the sale of cancer treatment systems
is recognized when a purchase order has been received, the system has been
shipped, the selling price is fixed or determinable, and collection is
reasonably assured. Most system sales are F.O.B. shipping point; therefore,
shipment is deemed to have occurred when the product is delivered to the
transportation carrier. Most system sales do not include installation. If
installation is included as part of the contract, revenue is not recognized
until installation has occurred, or until any remaining installation obligation
is deemed to be perfunctory. Some sales of cancer treatment systems may include
training as part of the sale. In such cases, the portion of the revenue related
to the training, calculated based on the amount charged for training on a
stand-alone basis, is deferred and recognized when the training has been
provided. The sales of our cancer treatment systems do not require specific
customer acceptance provisions and do not include the right of return, except in
cases where the product does not function as warranted by us. We provide a
reserve allowance for estimated returns. To date, returns have not been
significant.
Revenue from manufacturing services is recorded when an agreement with
the customer exists for such services, the services have been provided, and
collection is reasonably assured. Revenue from training services is recorded
when an agreement with the customer exists for such training, the training
services have been provided, and collection is reasonably assured. Revenue from
service support contracts is recognized on a straight-line basis over the term
of the contract.
Our revenue recognition policy is the same for sales to both related
parties and non-related parties. We provide the same products and services under
the same terms 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 payable 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, 2006, we have a reserve for potential
inventory impairment recorded of $80,000. We periodically review our inventory
levels and usage, paying particular attention to slower-moving items.
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. Our allowance for doubtful accounts
at May 31, 2006 was $42,500. Bad debt expense for the nine months ended May 31,
2006 was $0. We perform ongoing credit evaluations of our customers and maintain
allowances for possible losses. 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.
Results of Operations
---------------------
10
Three Months Ended May 31, 2006 Compared to the Three Months Ended May 31, 2005
Revenue. Revenue for the three months ended May 31, 2006 was $712,771
compared to $365,213 for the three months ended May 31, 2005, an increase of
$347,558, or approximately 95%. The increase in total revenue was primarily due
to an increase in sales to related parties.
We derived $448,721, or approximately 63%, of our revenue in the three
months ended May 31, 2006 from sales to related parties as compared to $43,370,
or 12%, in the three months ended May 31, 2005. All of the related party revenue
in the three months ended May 31, 2006 was from sales of systems and component
parts to Medizin-Technik GmbH. Dr. Gerhard Sennewald, one of our directors, is a
stockholder, executive officer and a director of Medizin0-Tehcnik. Sales to
Medizin-Technik may fluctuate significantly from period to period because our
sales, to date, have been based upon a relatively small number of systems, the
sales price of each being substantial enough to greatly impact revenue levels in
the periods in which they occur. Sales of a few systems can cause a large change
in the revenue from period to period.
In the three months ended May 31, 2006, we derived $264,050, or 37%, of
our revenue from sales to unrelated parties, as compared to $321,843, or 88%,
for the three months ended May 31, 2005.
Gross Profit. Gross profit for the three months ended May 31, 2006 was
$300,056, or 42% as compared to $61,753, or 17% of total product sales for the
three months ended May 31, 2005. This increase in gross profit margin was
attributed to the improved production efficiencies and higher sales.
Selling General and Administrative Expenses. Selling, general and
administrative expenses increased to $1,329,282 in the three months ended May
31, 2006, up from $504,923 for the three months ended May 31, 2005, an increase
of $824,359, or 163%. This increase was primarily due to an increase in sales
and marketing costs of $862,110 supporting sales and marketing preparation
efforts as described above.
Research and Development Expenses. Research and development expenses
were $380,623 for the three months ended May 31, 2006, as compared to $270,803
for the three months ended May 31, 2005, an increase of $109,820, or 41%,
primarily due to an increase in payroll and consulting costs associated with
increased emphasis on the development of new products.
Interest income. Interest income increased to $411,777 for the three
months ended May 31, 2006, as compared to $43,306 for the three months ended May
31, 2005, due to the significantly higher levels of cash and available-for-sale
securities resulting from the sale of our investment in TherMatrx.
Net income. Net income for the three months ended May 31, 2006 was
$2,987,623 after an income tax expense of $1,949,621, as compared to net income
of $2,948,795 for the three months ended May 31, 2005. The increase in the net
income was substantially due to a payment of $5,863,222 received during the
period ended May 31, 2006, from the sale of our investment in TherMatrx, and the
increase in interest income.
Results of Operations
---------------------
Nine Months Ended May 31, 2006 Compared to the Nine Months Ended May 31, 2005
Revenue. Revenue for the nine months ended May 31, 2006 was $1,673,313,
compared to $1,338,560 for the corresponding period in fiscal 2005, an increase
of $334,753 or approximately 25%. The increase in total revenue was primarily
due to an increase in sales to related and non-related parties.
In the nine months ended May 31, 2006, we derived $669,041, or 40% of
our revenue, as compared to $539,431, or 40% of our revenue, in the nine months
ended May 31, 2005, from sales to related parties. All of the related party
revenue in the nine months ended May 31, 2006, was from sales of BSD systems and
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component parts to Medizin-Technik. Dr. Gerhard Sennwald, one of our directors
is a stockholder, executive officer and a director of Medizin-Tehcnik. Sales to
Medizin-Technik may fluctuate significantly from period to period due to the
relatively high price of a BSD-2000 or BSD-500 system to the sales volume. Sales
increases of one or two systems can have a material effect on our revenue.
In the nine months ended May 31, 2006, we derived $1,004,272, or 60% of
our revenue to sales to non-related parties compared to $799,129, or 60% for the
corresponding period of fiscal 2005. Our fiscal 2006 non-related party revenue
consisted of product sales of approximately $ 886,954. The balance of our
non-related party revenue consisted of consulting services of approximately
$89,268 and service contracts of approximately $28,050.
Gross Profit. Gross profit for the nine months ended May 31, 2006 was
$599,369, or 36% as compared to $389,770, or 29% of sales in the corresponding
period in fiscal 2005. The increase in gross profit margin was primarily due to
the efficiencies afforded through the increase of sales.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $3,553,103 in the nine months ended May 31,
2006, from $1,343,619 for the corresponding period of fiscal 2005, an increase
of $2,209,484, or 165%. Our sales and marketing costs increased from
approximately $419,370 in the nine months ended May 31, 2005 to approximately
$2,065,728 in the nine months ended May 31, 2006 due to increased number of
sales people and to higher sales and marketing costs due to greater emphasis on
sales and marketing as described above in our management discussion in Item 2.
Legal and accounting costs increased from approximately $113,498 in the 2005
period to approximately $193,537 in the 2006 period, reflecting the use of legal
counsel in preparation for the shareholders meeting and the review of the Form
10-QSB, 10-KSB and proxy statements, as well as fees incurred in connection with
tax consulting and planning. Shareholder relations costs increased from
approximately $54,838 in the 2005 period to approximately $82,077 in the 2006
period reflecting costs incurred in connection with our annual shareholders
meeting and the issuance of various press releases. Consulting costs increased
from approximately $109,713 to approximately $171,959 from the 2005 period to
the 2006 period, respectively. This was due to the use of consultants in efforts
to file the FDA application for the BSD 2000.
Research and Development Expenses. Research and development expenses
were $945,527 for the nine months ended May 31, 2006, as compared to $645,683
for the corresponding period in fiscal 2005, an increase of $299,844, or 46%,
primarily due to an increase in payroll and consulting costs associated with
increased emphasis on the development of new products and costs associated with
filing the FDA application for the BSD 2000.
Interest income. Interest income increased to $960,990 in the nine
months ended May 31, 2006 as compared $200,804 for the nine months ended May 31,
2005, due to the higher levels of cash on hand resulting from the sale of our
shares in TherMatrx.
Net income. Net income after taxes for the nine months ended May 31,
2006, was $9,305,545 as compared with a net income of $3,315,663 for the
corresponding period of fiscal 2005. The increase in the net income was
significantly due to payments of $17,413,342 during the 2006 period from the
sale of our shares in TherMatrx and the increase in interest income.
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 market acceptance of our cancer therapy 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.
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Liquidity and Capital Resources
-------------------------------
Our accumulated deficit since inception decreased from $8,751,454 as of
August 31, 2005 to a positive retained earnings of $554,091 as of May 31, 2006
due to net income recorded during the nine months ended May 31, 2006. We
recorded after tax net income for the first nine months of fiscal 2006 of
$9,305,545
We have received additional payments and expect to receive a final
payment as a result of the sale of our TherMatrx shares. In accordance with the
purchase agreement, we expect to receive a final adjustment payment in American
Medical System's third quarter which ends approximately September 30, 2006 for
cash collected on open receivables at the end of the earnout period.
During the nine months ended May 31, 2006, we used $3,229,031 in
operating activities. The cash used in operating activities was mainly the
result of the exclusion of TherMatrx gain, an increase in income taxes payable
of $4,998,125, an increase in accounts payable of $411,138, an increase in
accrued expenses of $221,055, an increase in accounts receivable of $441,505,
and an increase in inventory of $383,857. Our investing activities for the nine
months ended May 31, 2006 generated net cash of $2,447,767, relating mainly to
the proceeds received from the sale of our investment in TherMatrx of
$17,413,342 offset by the purchase of available-for-sale securities of
$14,770,709 and the purchase of certain property and equipment of $194,866.
Total cash decreased from $908,674 at August 31, 2005 to $542,446 at May 31,
2006, primarily as a result of cash used in operations and an increase in
investments.
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, the development
of new products used in medical therapy and the possible acquisition of new
companies or technology.
We expect to incur additional expenses related to the commercial
introduction of our systems, due to additional participation at trade shows,
expenditures on publicity, additional travel, increased sales salaries and
commissions and other related expenses. In addition, we anticipate that we will
incur increased expenses related to seeking governmental and regulatory
approvals for our products, during fiscal 2006 in excess of fiscal 2005.
We believe our current cash and cash equivalents and securities that
are available for sale will be sufficient to finance our operations through
fiscal 2006.
FORWARD-LOOKING STATEMENTS
With the exception of historical facts, the statements contained in
sections 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 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 commercial introduction of our
systems;
o our expectations and efforts regarding receipt of FDA approvals
relating to the BSD-2000 system;
o our technological developments for the BSD-500 and BSD-2000
systems;
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o our ability to successfully develop our technology for new
applications and the expense of such developments;
o our development or acquisition of new technologies;
o the amount of expenses we will incur for the commercial
introduction of our systems;
o our anticipation that we will incur increased expenses related to
seeking governmental and regulatory approvals for our products
during fiscal 2006 in excess of fiscal 2005;
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 payments received in connection with the sale of
our TherMatrx shares will contribute to our future capital
resources;
o our anticipated use of proceeds from the sale of our TherMatrx
shares; and
o our belief that our current cash, investments and cash received
from the sale of our TherMatrx shares will be sufficient to
finance our operations through fiscal 2006.
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 in our Annual Report on Form 10-KSB for the year ended August
31, 2005 and our other filings with the Securities and Exchange Commission. We
also wish to advise readers not to place any undue reliance on the
forward-looking statements contained in this report, which reflect our beliefs
and expectations only as of the date of this report. We assume no obligation to
update or revise these forward-looking statements to reflect new events or
circumstances or any changes in our beliefs or expectations, other than as
required by law.
Item 3. 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 Rule 13a-15(e) or 15d-15(e) under the
Securities Exchange Act of 1934 (the "Exchange Act"). Based upon that
evaluation, the principal executive officer and principal financial officer
concluded that, as of the end of the period covered by this report, our
disclosure controls and procedures were not effective and adequately designed to
ensure that information required to be disclosed by us in the reports we file or
submit under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in applicable rules and forms. We have
identified deficiencies that existed in the design or operation of our internal
control over financial reporting. The deficiencies relate to the preparation of
our provision for income taxes and related income tax footnote disclosures, and
the lack of formal procedures to identify and apply new accounting
pronouncements and related disclosures. These deficiencies were detected in the
review process and have been appropriately recorded and disclosed in this Form
10-QSB. We are in the process of improving our internal control and related
disclosures in an effort to remediate these deficiencies through improved
supervision and training of our accounting staff. These deficiencies have been
disclosed to our audit committee and to our auditors. Additional effort is
needed to fully remedy these deficiencies and we are continuing our efforts to
improve and strengthen our control processes and procedures. Our management,
audit committee, and directors will continue to work with our auditors and other
outside advisors to ensure that our controls and procedures are adequate and
effective.
b. Changes in internal controls.
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During the fiscal quarter covered by this report, there has been no
change in our internal control over financial reporting (as defined in Rule
13a-15(f) or 15d-15(f) under the Exchange Act) that has materially affected, or
is reasonably likely to materially affect, our internal control over financial
reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None.
Item 6. Exhibits
The following exhibits are filed as part of this report:
Exhibit No. Description of Exhibit
----------- ----------------------
31.1 Certification Required Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification Required Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification Required Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification Required Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
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SIGNATURES
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 17, 2006 /s/ Hyrum A. Mead
--------------------------------------
President (principal executive officer)
Date: July 17, 2006 /s/ Dennis E. Bradley
---------------------------------------
Controller (principal financial officer)
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