U.S. SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended February 28, 2005
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 February 28, 2005
------------------------------------- -----------------------------------
Common stock, $.001 Par Value 20,135,333
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
BSD MEDICAL CORPORATION
Condensed Balance Sheet
(Unaudited)
Assets February 28,
------ 2005
------------------------
Current assets:
Cash and cash equivalents $ 9,251,358
Receivables, net 229,294
Related party receivables 561,746
Inventories 894,642
Deferred tax asset 829,000
Other current assets 177,358
------------------------
Total current assets 11,943,398
------------------------
Property and equipment, net 165,213
Patents, net 24,068
------------------------
$ 12,132,679
------------------------
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 262,588
Accrued expenses 209,683
Current portion of deferred revenue 29,557
-------------------------
Total current liabilities 501,829
-------------------------
Long term liabilities
Deferred tax liability 51,000
-------------------------
Total liabilities 552,829
-------------------------
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
20,148,745 and outstanding 20,135,333, shares
20,136
Additional paid-in capital 23,300,280
Deferred compensation (34,050)
Accumulated deficit (11,706,281)
Common stock in treasury 13,412 shares, at cost (234)
-------------------------
Net stockholders' equity 11,579,850
-------------------------
$ 12,132,679
=========================
See accompanying notes to financial statements
1
BSD MEDICAL CORPORATION
Condensed Statements of Operations
(Unaudited)
Periods ended February 28, 2005 and February 29, 2004
Three Months Six Months
Ended: Ended:
--------------------------------- ---------------------------------
February 28 February 29 February 28 February 29
2005 2004 2005 2004
--------------- ---------------- --------------- ----------------
Sales $ 226,507 218,350 $ 477,286 $ 412,258
Related party sales 488,906 208,192 496,060 695,418
--------------- ---------------- --------------- ----------------
Total revenues 715,413 426,542 973,346 1,107,676
--------------- ---------------- --------------- ----------------
Costs and expenses:
Cost of product sales 184,629 206,765 450,693 315,186
Cost of related party sales 190,330 61,969 194,637 283,676
Research and development 191,283 166,733 374,880 329,290
Selling, general, and administrative 459,280 248,581 838,698 461,161
--------------- ---------------- --------------- ----------------
Total costs and expenses 1,025,522 684,048 1,858,908 1,389,313
--------------- ---------------- --------------- ----------------
Operating loss (310,109) (257,506) (885,562) (281,637)
Other income
Interest income 86,905 2,500 157,498 2,601
Interest expense - (245) - (353)
Other income 1,094,406 - 1,094,929 -
--------------- ---------------- --------------- ----------------
Total other income 1,181,311 2,255 1,252,426 2,248
--------------- ---------------- --------------- ----------------
Income (loss) before income taxes 871,202 (255,251) 366,865 (279,389)
Income tax benefit - - - -
--------------- ---------------- --------------- ----------------
Net income (loss) $ 871,202 (255,251) $ 366,865 $ (279,389)
=============== ================ =============== ================
Net loss per common and common equivalent share,
basic and diluted $ .04 (.01) $ .02 (.01)
--------------- ---------------- --------------- ----------------
Weighted average number of shares outstanding,
Basic 20,060,000 18,898,000 20,060,000 19,891,000
--------------- ---------------- --------------- ----------------
Diluted 21,495,000 18,898,000 21,254,000 19,891,000
See accompanying notes to financial statements
2
BSD MEDICAL CORPORATION
Condensed Statements of Cash Flows (Unaudited)
Six Months Ended February 28, 2005 and February 29, 2004
Feb. 28, Feb. 29,
2005 2004
-------------------------------
Cash flows from operating activities:
Net Income (loss) $ 366,865 $ (279,389)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization 24,150 22,591
Bad debt expense - 61,805
Stock compensation expense 30,000 12,000
Deferred compensation 9,508 7,858
(Increase) decrease in:
Receivables (531,736) 11,899
Inventories (154,226) 90,584
Prepaid expenses and deposits (126,293) 17,319
Increase (decrease) in:
Accounts payable 163,457 (205,552)
Accrued expenses (214,232) (118,352)
Deferred revenue (17,666) (29,385)
-------------------------------
Net cash used in operating activities (450,172) (408,622)
-------------------------------
Cash flows from investing activities:
Purchase of property and equipment (49,324) -
-------------------------------
Net cash used in investing activities (49,324) -
-------------------------------
Cash flows from financing activities:
Proceeds from issuance of common stock options 53,700 2,099,908
-------------------------------
Net cash provided by financing activities 53,700 2,099,908
-------------------------------
Increase in cash and cash equivalents 445,796 1,691,286
Cash and cash equivalents, beginning of period 9,697,154 136,003
-------------------------------
Cash and cash equivalents, end of period $ 9,251,358 $ 1,827,289
===============================
Supplemental Disclosure of Cash Flow Information
o The Company paid no cash for interest and taxes for the period
ended February 28, 2005 and $353 for interest and no cash for
taxes during the period ended February 28, 2004.
o The Company issued 75,000 options for the periods ended February
28 , 2005 and February 29, 2004, which resulted in an increase to
Deferred Compensation of $15,750 and $8,250, respectively.
See accompanying notes to financial statements
3
BSD MEDICAL CORPORATION
Notes to Condensed Financial Statements
Note 1. Basis of Presentation
The Condensed Balance Sheet as of February 28, 2005, the Condensed
Statements of Operations for the three and six months ended February 28, 2005
and February 29, 2004, and the Condensed Statements of Cash Flows for the six
months ended February 28, 2005, and February 29, 2004 have been prepared by the
Company without audit. In the opinion of management, all adjustments to the
books and accounts (which include only normal recurring adjustments) necessary
to present fairly the financial position, results of operations, and changes in
financial position of the Company as of February 28, 2005 have been made.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with U.S. generally accepted
accounting principles have been condensed or omitted. The results of operations
for the period ended February 28, 2005, 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 periods ended February 28,
2005 and February 29, 2004 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 six months ended February 28, 2005 and February 29, 2004,
the Company had sales to an unconsolidated affiliate and an entity controlled by
a significant stockholder and member of the Board of Directors of $496,060 and
$608,798, respectively. These related party transactions represents 50.96% and
54.96 % of total sales. Related party revenue from TherMatrx was $0 in the
period ended February 28, 2005 compared to $86,620 in period ended February 29,
2004.
At February 28, 2005, receivables include $561,746 due from an entity
controlled by a significant stockholder and member of the Board of Directors.
Note 4. Stock-Based Compensation
The Company accounts for stock options granted to employees under the
recognition and measurement principles of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related Interpretations, and has adopted the
disclosure-only provisions of Statement of Financial Accounting Standards (SFAS)
No. 123, "Accounting for Stock-Based Compensation." Accordingly, only the
intrinsic value has been recognized in the financial statements as expense. Had
the Company's options been determined based on the fair value method, the
results of operations would have been reduced to the pro forma amounts indicated
below for the six months ended February 28:
4
Six Months Ended Three Months Ended
February 28/29 February 28/29
2005 2004 2005 2004
-------------------------------------------------
Net income (loss) - as reported $ 366,865 $ (279,389) $ 871,202 $ (255,251)
Add: Stock based employee compensation expense included
in reported net income (loss), net of related tax effects
9,508 7,858) - -
Deduct: Total stock based employee compensation expense
determined under fair value based method for all awards,
net of related taxes (103,089) (25000) - (25,000)
-------------------------------------------------
Net income (loss) - pro forma $ 273,284 $ (296,531) $ 871,202 $ (280,251)
-------------------------------------------------
Basic and Diluted income (loss) per share - as reported
$ .02 $ (.01) $ .04 $ (.01)
-------------------------------------------------
Basic and Diluted income (loss) per share - pro-forma
$ .01 $ (.02) $ .04 $ (.02)
-------------------------------------------------
The fair value of each option granted for the six months ended February
28, 2005 and February 29, 2004 is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions:
----------------------------------
2005 2004
----------------------------------
Expected dividend yield $ - $ -
Expected stock price volatility 84% 114%
Risk-free interest rate 3.32% 4.2%
Expected life of options 10 years 5 years
The weighted average fair value of options granted during the three
months ended February 28, 2005 and 2004 was $1.20 and $.64, respectively.
Note 5. Gain on Sale of Investment in TherMatrx
On July 15, 2004, the Company's investment in 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 nearly $9 million, with
additional payments contingent on the quarterly sales of TherMatrx through the
fourth calendar quarter of 2005. During the quarter ended February 28, 2005, the
Company received additional payments from the sale of TherMatrx that totaled
$1,094,406. This amount was recorded as a gain and is reflected in "Other
income" in the statement of operations. The Company is scheduled to receive its
next payment in May, 2005; however, the amount of such payment cannot be
determined at this time.
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. All information presented
herein is based on the six months ended February 28, 2005. We assume no
obligation to revise or update any forward-looking statements for any reason,
except as required by law.
5
General
-------
We develop, manufacture, market and service systems that deliver
focused electromagnetic energy for use in a variety of medical therapies and
applications. Our objective is to commercialize our developed products and
further expand the application of our technology into new markets. We pioneered
the use of microwave thermal therapy for the treatment of the symptoms
associated with enlarged prostate, and are responsible for much of the
technology that has created a substantial medical industry using that therapy.
Our longest-term development has been the application of focused electromagnetic
energy for the treatment of cancer.
One of our significant contributions to the advancement of medical
therapy has been our pioneering efforts in developing a new treatment for
conditions associated with enlargement of the prostate that afflicts most men as
they age. As the prostate enlarges it constricts urine flow. The condition is
known medically as benign prostatic hyperplasia or BPH. We developed a
technology that allows men to be treated for BPH through an outpatient procedure
as an alternative to surgery or a lengthy regimen of medication.
We determined early in our planning that we would treat our BPH
development as a spin-off business with the intent of providing an asset that
could help fund our other business plans. As a result, we introduced the
opportunity to investment groups and subsequently on October 31, 1997 entered
into an agreement with investors Oracle Strategic Partners, L.P. and Charles
Manker. Together we established a new company, TherMatrx, which was
independently managed.
On July 15, 2004, TherMatrx was sold to American Medical Systems, Inc.
(AMS). Our portion of the initial payment from this sale was nearly $9 million,
with additional payments contingent on the quarterly sales of TherMatrx through
the fourth calendar quarter of 2005. We received additional payment totaling
$1,094,406 during the quarter ended February 28, 2005. We have estimated that
our portion of the total payout from this sale will be approximately $40
million. If TherMatrx sales exceed our projections, the maximum payout that we
could receive from the sale is $62.5 million. If TherMatrx sales fall under our
projections, there is no guarantee of any further payment beyond those payments
already received.
Since the inception of our company we have engineered systems designed
to increase the effectiveness of cancer treatment through the use of focused
electromagnetic energy. From this development our current BSD-500 and BSD-2000
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. These
systems are sold with supporting software and may also be sold with support
services.
Our accumulated deficit since inception decreased from $20,750,923 as
of February 29, 2004 to $11,706,281 as of February 28, 2005 due to net income
recorded during our fiscal year ended August 31, 2004 and during the six months
ending February 28, 2005, as a result of our sale of our interest in TherMatrx.
We recorded a net profit for the first six months of fiscal 2005 of $366,865.
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 $861,417 and $1,052,042 for the
six months ending February 28, 2005 and 2004, respectively. Service revenue was
$111,929 and $55,633 for the six months ending February 28, 2005 and 2004,
respectively.
We derived $496,060, or 50.96%, of our revenue for the six months
ending February 28, 2005, from sales to a related party, Medizin-Technik GmbH.
Dr. Gerhard Sennewald, one of our directors, is a stockholder, executive officer
and a director of Medizin-Technik GmbH. We also had sales to unrelated parties.
6
In the six months ending February 28, 2005, we derived $477,286, or
49.04%, of our revenue from sales to unrelated parties. These revenues consisted
of product sales of approximately $365,357, consulting services of approximately
$84,107, service contracts of approximately $26,239, and other miscellaneous
revenue of approximately $1,583.
Cost of sales for the six months ending February 28, 2005, included raw
material and labor costs. 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 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 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 February 28, 2005, we had recorded a reserve
for potential inventory impairment of $80,000. We periodically review our
inventory levels and usage, paying particular attention to slower-moving items.
We have projected no orders to be placed with us for TherMatrx systems, and do
not project a requirement for any inventory impairment based on this decline.
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.
7
Allowance for Doubtful Accounts. We provide our customers with payment
terms that vary from contract to contract. Our allowance for doubtful accounts
at February 28, 2005 was $0. Bad debt expense for the period ending February 28,
2005 was approximately $9,000. 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. The non-payment of a receivable related to the sale of a BSD-500 or
BSD-2000 could have a material adverse impact on our results of operations.
Results of Operations
---------------------
Three Months Ended February 28, 2005 compared to the Three Months Ended February
29, 2004
Revenue. Revenue for the three months ended February 28, 2005 was
$715,413 compared to $426,542 for the quarter ended February 29, 2004, an
increase of $288,871, or approximately 68%. The increase in total revenue was
primarily due to an increase in sales to related parties. Sales to
Medizin-Technik totaled $488,906 in the quarter ending February 28, 2005
compared to $140,180 in the corresponding quarter of fiscal 2004. Dr. Gerhard
Sennewald, one of our directors, is a stockholder, executive officer and a
director of Medizin-Technik GmbH. Sales to Medizin-Technik may fluctuate
significantly depending on Medizin-Technik's anticipated sales and ability to
place orders in Europe. Our revenue can fluctuate significantly from period to
period because our sales, to date, have been based upon a relatively small
number of systems, the sales price o 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 as noted in the
increase in sales to Medizin-Technik from the second quarter of fiscal 2005 to
the second quarter of fiscal 2004. Product sales increased to $645,960 as
compared to $407,426 in the corresponding quarter of fiscal 2004, an increase of
$238,534, or 59%.
Related Party Revenue. We derived $488,906, or 68%, of our revenue in
the three months ending February 28, 2005 from sales to related parties as
compared to $208,192 or 49%, in the corresponding quarter of fiscal 2004. All of
the related party revenue in the 2005 period was from sales of systems and
component parts to Medizin-Technik. For the period ending February 29, 2004, the
related party revenue $140,180 for sales to Medizin-Technik and the remaining
sales of $68,028 was to TherMatrx was from services provided to TherMatrx. Since
the sale of TherMatrx in July 2004, TherMatrx is no longer considered a related
party. Sales to Medizin-Technik may fluctuate significantly from period to
period due to the high cost of a BSD-2000 or BSD-500 system. Sales increases of
one or two systems can have a material effect on our revenue.
Non-related Party Revenue. In the three months ending February 28,
2005, we derived $226,507, or 31.66% of our total revenue from sales to
non-related parties, as compared to approximately $218,350, or 51.19%, for the
corresponding period of fiscal 2004. Our fiscal 2005 non-related party revenue
consisted of product sales of approximately $158,637, consulting services of
approximately $54,751, and service contracts of approximately $13,119.
Gross Profit. Gross profit for the three months ending February 28,
2005 was $340,454 or 47.58% as compared to $154,808, or 36.29%, of total product
sales for the corresponding period in fiscal 2004. The increase in gross profit
margin was primarily due to improved utilization of labor resulting from the
increase in sales. Because we have not had employee layoffs due to the
specialized nature of our employees and because of the fixed costs associated
with production, as our sales declined in the 2004 period, it resulted in a
decline in gross profit percentage. As sales volumes increase, our employees are
more utilized, thus increasing the gross profit percentage.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $459,280 in the three months ending
February 28, 2005, from $248,581 for the corresponding period of fiscal 2004, an
increase of $210,699 or 84.76%. This increase was primarily due to an increase
8
in sales and marketing costs supporting new product sales from $34,744 for the
three months ended February 29, 2004 to $136,168 for the three months ended
February 28, 2005. Legal and accounting costs increased from $4,128 in the 2004
period to $51,531 in the 2005 period. We also incurred higher consulting costs
related to marketing and preparation of FDA submissions. Consulting costs
increased from $35,960 to $54,970 in the 2004 and 2005 periods, respectively.
Payroll costs also increased from $223,623 to $330,940, a result of wage and
salary raises, the addition of new employees and fewer BSD employees working as
consultants for TherMatrx..
Research and Development Expenses. Research and development expenses
were $191,283 for the three months ending February 28, 2005, as compared to
$166,733 for the corresponding period in fiscal 2004 an increase of $24,550, or
14.72%, primarily due to an increase in payroll and consulting costs. Research
and development expenses for the period ended February 28, 2005 related
primarily to the conversion of systems software to foreign languages for
international use and to new developments in the areas of thermal therapy and
thermal ablation.
Interest income. Interest income increased to $86,905 for the three
months ended February 28, 2005 as compared to $2,500 for the corresponding
period in fiscal 2004 due to the significantly higher levels of cash resulting
from the sale of TherMatrx.
Net income. The net income for the three months ended February 28,
2005, was $871,202 as compared with a net loss of $255,251 for the corresponding
period of fiscal 2004. The increase in the net profit was primarily due to
payments of $1,094,406 received during the period ended February 28, 2005 from
the sale of our investment in TherMatrx and the increase in interest income.
Results of Operations
---------------------
Six Months Ended February 28, 2005 compared to the Six Months Ended February 29,
2004
Revenue. Revenue for the six months ended February 28, 2005 was
$973,346 compared to $1,107,676 for the corresponding period in fiscal 2004, a
decrease of $134,330, or approximately 12%. The decrease in total revenue was
primarily due to a decrease in sales to related parties. Sales to
Medizin-Technik totaled $496,060 in the period ending February 28, 2005 compared
to $606,798 in the corresponding period of fiscal 2004. Dr. Gerhard Sennewald,
one of our directors, is a stockholder, executive officer and a director of
Medizin-Technik GmbH. Sales to Medizin-Technik may fluctuate significantly
depending on Medizin-Technik's anticipated sales and ability to place orders in
Europe. Our revenue can fluctuate significantly from period to period because we
have historically sold relatively few BSD-2000 and BSD-500 systems as these
systems are expensive. Sales of a few systems can cause a large change in the
revenue from period to period as noted in the decrease in sales to
Medizin-Technik from the six month period ended February 28, 2005 as compared to
the corresponding period of fiscal 2004. Product sales increased to $645,960 as
compared to $407,426 in the corresponding period of fiscal 2004, an increase of
$238,534, or 59%.
Related Party Revenue. We derived $496,060, or 50.96%, of our revenue
in six months ended February 28, 2005 from sales to related parties as compared
to $695,418 or 62.78%, in the corresponding period of fiscal 2004. All of the
related party revenue in the 2005 period was from sales of BSD systems and
component parts to Medizin-Technik. For the six months ended February 29, 2004,
the related party revenue was $606,798 for sales to Medizin-Technik and the
remaining sales of $88,620 was from services provided to TherMatrx. Since the
sale of TherMatrx in July 2004, TherMatrx is no longer considered a related
party. Sales to Medizin-Technik may fluctuate significantly from period to
period due to the high cost of a BSD-2000 or BSD-500 system. Sales increases of
one or two systems can have a material effect on our revenue.
9
Non-related Party Revenue. In the six months ended February 28, 2005,
we derived $477,286, or 49.03% of our total revenue from sales to non-related
parties, as compared to $412,258, or 37.21%, for the corresponding period of
fiscal 2004. Our fiscal 2005 non-related party revenue consisted of product
sales of approximately $365,357. The balance of our non-related party revenue
consisted of consulting services of approximately $84,107 and service contracts
of approximately $27,822.
Gross Profit. Gross profit for the six months ended February 28, 2005
was $328,016 or 33.69% of product sales as compared to $508,814, or 45.93% of
total product sales for the corresponding period in fiscal 2004. The decline in
gross profit margin was primarily due to the cost of excess production employees
resulting from the significant decrease in sales during our first fiscal
quarter. Because we have not had employee layoffs and because of the fixed costs
associated with production, as our sales declined, it resulted in the costs of
sales exceeding the sales during the first quarter of fiscal 2005.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $838,698 in the six months ended February
28, 2005, from $461,161 for the corresponding period of fiscal 2004, an increase
of $377,537 or 81.86%. This increase was primarily due to higher sales and
marketing costs due to greater emphasis on marketing. Our sales and marketing
costs increased from approximately $27,000 in the six months ended February 29,
2004 to approximately $125,000 in the six months ended February 28, 2005 due to
higher sales and marketing costs due to greater emphasis on marketing. Legal and
accounting costs increased from approximately $36,000 in the 2004 period to
approximately $88,000 in the 2005 period, reflecting the use of legal counsel in
preparation for the shareholders meeting and the review of the Form 10-QSB and
proxy statements, as well as fees incurred in connection with tax consulting and
planning. Shareholder relations costs increased from approximately $10,000 in
the 2004 period to approximately $42,000 in the 2005 period reflecting costs
incurred in connection with our annual shareholders meeting and the issuance of
various press releases. Consulting costs increased from approximately $1,000 to
approximately $46,000 from the 2004 period to the 2005 period, respectively.
This is due to the use of consultants in marketing efforts and in efforts to
complete the FDA approval process.
Research and Development Expenses. Research and development expenses
were $374,880 for the six months ended February 28, 2005, as compared to
$329,290 for the corresponding period in fiscal 2004 an increase of $45,590, or
13.84%, primarily due to an increase in payroll and consulting costs. Research
and development expenses for the period ended February 28, 2005 related
primarily to the conversion of systems software to foreign languages for
international use and to new developments in the areas of thermal therapy and
thermal ablation.
Interest income. Interest income increased to $157,498 for the six
months ended February 28, 2005 as compared to $2,601 for the corresponding
period in fiscal 2004 due to the significantly higher levels of cash on
resulting from the sale of TherMatrx.
Net income. The net income for the six months ended February 28, 2005,
was $366,865 as compared with a net loss of $279,389 for the corresponding
period of fiscal 2004. The increase in the net profit was primarily due to
payments of $1,094,406 received during the 2005 period from the sale of our
investment 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 the demand for thermotherapy systems and component 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.
10
Liquidity and Capital Resources
-------------------------------
Our accumulated deficit since inception decreased from $20,750,923 as
of February 29, 2004 to $11,706,281 as of February 28, 2005, due to net income
recorded during our fiscal year ended August 31, 2004 as a result of our sale of
our interest in TherMatrx and net income recorded for the first six months of
fiscal 2005. We have historically financed our operations through cash from
operations, licensing of technological assets and issuance of common stock and
through the sale of our TherMatrx shares. We have projected substantial payments
yet to be made to us as a result of the sale of our TherMatrx shares. However,
these payments are contingent on the product sales that TherMatrx achieves
through December 31, 2005. We believe these payments, if received, will
contribute significantly to our future capital resources.
We used $450,172 in cash from operating activities during the six
months ended February 28, 2005 compared to $408,622 for the corresponding period
of fiscal 2004. Cash flow from operating activities increased for the period
primarily because of lower sales volume compared to the prior year period. Our
investing activities for the first quarter of fiscal 2005 resulted in net cash
used of $49,324 relating to the purchase of certain property and equipment.
Total cash decreased from $9,697,154 at August 31, 2004 to $9,251,358 at
February 28, 2005.
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, the development of new products used in medical therapy
and the possibility of acquiring new companies or technology.
We expect to incur additional expenses related to the commercialization
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
$500,000 higher in fiscal 2005 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 $200,000 related to governmental and regulatory,
including FDA, approvals during fiscal 2005 in excess of fiscal 2004. 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 also
project that we will incur approximately $250,000 in additional new development
expenses associated with developments for the treatment of non-cancerous
diseases and medical conditions.
We believe any cash shortfall during fiscal 2005 that results from a
decrease in revenues and increase in expenses can be covered through cash
received from the sale of our TherMatrx shares. We believe we can cover any 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 or entry into
new markets.
11
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 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 ability to successfully develop our technology for new
applications and the expense of such developments;
o our development or acquisition of new technologies;
o our expectation that sales to TherMatrx may decline to zero in
future periods;
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 2005;
o our assumption that we will receive contingent payments, and the
amount of such payments, in connection with the sale of our
ownership in TherMatrx to AMS; and
o our anticipated use of proceeds from the sale of our ownership in
TherMatrx to AMS.
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, 2004 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
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 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.
12
During the six months ended February 28, 2005 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.
13
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
The Company's Annual Meeting of Shareholders was held on January 14,
2005. Of the 20,057,333 shares of common stock outstanding and entitled to vote
at the meeting, 10,197,495 shares were present, either in person or by proxy.
The following describes the matters considered by the Company's shareholders at
the Annual Meeting, as well as the results of the votes cast at the Annual
Meeting:
Proposal # 1 Election of Directors
----------------------------------
For Withheld
--- --------
Paul F. Turner 9,975,971 221,524
Hyrum A. Mead 9,975,971 221,524
Gerhard W. Sennewald 9,975,971 221,524
J. Gordon Short 10,185,595 11,900
Michael Nobel 10,185,595 11,900
Proposal # 2 Amend Company's 1998 Stock Incentive Plan to increase shares.
-------------------------------------------------------------------------
For Against Abstain
---------- ------- -------
10,159,148 29,547 8,400
Proposal # 3 Ratify Tanner & Company as independent public Accounts
-------------------------------------------------------------------
For Against Abstain
---------- ------- -------
10,185,770 6,725 5,000
Proposal #4 Transact Business as may properly come before the meeting
---------------------------------------------------------------------
For Against Abstain
--------- ------- -------
9,962,615 231,855 3,025
Item 5: Other Information
None.
14
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
Serbanes-Oxley Act of 2002
31.2 Certification Required Pursuant to Section 302 of the
Serbanes-Oxley Act of 2002
32.1 Certification Required Pursuant to Section 902 of the
Serbanes-Oxley Act of 2002
32.2 Certification Required Pursuant to Section 902 of the
Serbanes-Oxley Act of 2002
15
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
BSD Medical Corporation, the registrant, has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
BSD MEDICAL CORPORATION
Date: April 14, 2005 /s/ Hyrum A. Mead
----------------------------------------
President (principal executive officer)
Date: April 14, 2005 /s/ Dennis E. Bradley
----------------------------------------
Controller (principal financial officer)
16