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, 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 February 28, 2006, there were 20,740,296 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 February 28,
2006
------------------
Current assets:
Cash and cash equivalents $ 671,489
Available-for-sale securities 22,558,649
Receivables, net of allowance for
doubtful accounts of $42,500 306,424
Related party receivables 176,926
Inventories, net 1,355,654
Deferred tax asset 298,000
Other current assets 76,532
------------------
Total current assets 25,443,674
Property and equipment, net 293,729
Patents, net 22,190
------------------
$ 25,759,593
==================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 234,566
Accrued expenses 530,836
Income taxes payable 2,924,697
Deferred revenue 7,107
------------------
Total current liabilities 3,697,206
Deferred tax liability 8,000
------------------
Total liabilities 3,705,206
------------------
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 20,740,296 shares and
outstanding 20,715,965 shares 20,741
Additional paid-in capital 24,779,702
Deferred compensation (340,950)
Common stock in treasury 24,331 shares, at cost (234)
Other comprehensive income 28,661
Accumulated deficit (2,433,533)
------------------
Net stockholders' equity 22,054,387
------------------
$ 25,759,593
==================
See accompanying notes to financial statements.
1
BSD MEDICAL CORPORATION
Condensed Statements of Operations
(Unaudited)
Periods ended February 28, 2006 and February 28, 2005
Three Months Six Months
Ended: Ended:
--------------------------------- ---------------------------------
February 28, February 28, February 28, February 28,
2006 2005 2006 2005
--------------- ---------------- --------------- ----------------
Sales $ 242,790 $ 226,507 $ 752,090 $ 477,286
Related party sales 196,586 488,906 208,453 496,060
--------------- ---------------- --------------- ----------------
Total sales 439,376 715,413 960,543 973,346
--------------- ---------------- --------------- ----------------
Costs and expenses:
Cost of sales 242,333 184,629 594,576 450,693
Cost of related party sales 61,398 190,330 66,654 194,637
Research and development 334,739 191,283 564,904 374,880
Selling, general, and administrative 1,169,707 459,280 2,223,822 838,698
--------------- ---------------- --------------- ----------------
Total costs and expenses 1,808,177 1,025,522 3,349,956 1,858,908
--------------- ---------------- --------------- ----------------
Operating loss (1,368,801) (310,109) (2,489,413) (885,562)
Other income
Interest income 304,590 86,905 549,213 157,498
Other income 5,932,361 1,094,406 11,815,286 1,094,929
--------------- ---------------- --------------- ----------------
Total other income: 6,236,951 1,181,311 12,364,499 1,252,426
--------------- ---------------- --------------- ----------------
Income before income taxes 4,868,150 871,202 9,875,086 366,865
Income tax provision (1,686,471) - (3,557,164) -
--------------- ---------------- --------------- ----------------
Net income $ 3,181,679 $ 871,202 $ 6,317,922 $ 366,865
=============== ================ =============== ================
Net income per common and common equivalent
Basic $ .15 $ .04 $ .30 $ .02
Diluted $ .14 $ .04 $ .28 $ .02
--------------- ---------------- --------------- ----------------
Weighted average number of shares outstanding,
Basic 20,575,000 20,136,000 20,556,000 20,060,000
--------------- ---------------- --------------- ----------------
Diluted 22,046,000 21,530,000 22,123,000 21,233,000
--------------- ---------------- --------------- ----------------
See accompanying notes to financial statements.
2
BSD MEDICAL CORPORATION
Condensed Statements of Cash Flows
(Unaudited)
Six Months
Ended:
------------------------------------
February 28, February 28
2006 2005
---------------- -----------------
Cash flows from operating activities:
Net income $ 6,317,922 $ 366,865
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization 43,588 24,150
Stock compensation expense 18,050 30,000
Gain on sale of investment in TherMatrx (11,550,120) -
Amortization of deferred compensation 56,300 9,508
(Increase) decrease in:
Receivables 20,330 (531,736)
Inventories (221,301) (154,226)
Deferred tax asset (199,000) -
Other current assets 56,208 (126,293)
Increase (decrease) in:
Accounts payable 121,753 163,457
Accrued expenses 282,460 -
Income taxes payable 3,239,505 (214,232)
Deferred revenue (221) (17,666)
---------------- -----------------
Net cash used in operating activities (1,814,527) (450,172)
------------------------------------
Cash flows from investing activities:
Proceeds from sale of investment in TherMatrx 11,550,120 -
Purchase of available-for-sale securities (9,948,404) -
Purchase of property and equipment (161,535) (49,324)
---------------- -----------------
Net cash provided by (used in) investing activities 1,440,181 (49,324)
Cash flows from by financing activities-
Proceeds from exercise of stock options 137,160 53,700
------------------------------------
Change in cash and cash equivalents (237,185) (445,796)
Cash and cash equivalents, beginning of period 908,674 9,697,154
------------------------------------
Cash and cash equivalents, end of period $ 671,489 $ 9,251,358
====================================
Supplemental Disclosure of Cash Flow Information
------------------------------------------------
o The Company paid no cash for interest during the six months ended
February 28, 2006 and 2005 and $392,311 and $0 for income taxes during
the six months ended February 28, 2006 and 2005.
o The Company issued 265,000 and 100,000 stock options during the six
month periods ended February 28, 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 $555,567 during the six months ended February 28, 2006,
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 $8,278 during the six months
ended February 28, 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 February 28, 2006 and for the three and six months
ended February 28, 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.
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 February 28,
2006 and our results of operations, financial position and changes therein for
the three and six months ended February 28, 2006 and 2005 have been included.
The results of operations for the three and six months ended February 28, 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 APB 25.
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 SFAS No. 123R (revised 2004),
"Share-Based Payment," which eliminates the alternative of applying the
intrinsic value measurement provisions of APB 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,
4
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.
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 SAB No. 107 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.
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 Six Months Ended
February 28, February 28,
2006 2005 2006 2005
---- ---- ---- ----
Weighted average number of
shares outstanding - basic 20,575,141 20,136,000 20,555,998 20,060,000
Dilutive effect of stock options 1,471,046 1,394,000 1,578,780 1,173,000
---------- ---------- ---------- ----------
Weighted average number of
shares outstanding - diluted 22,046,187 21,530,000 22,123,000 21,233,000
================ ================= ================= ================
Note 4. Inventories
Inventories consisted of the following as of February 28, 2006:
Raw materials $ 713,109
Work in process 722,545
Reserve for obsolete inventory (80,000)
--------------
$ 1,355,654
==============
Note 5. Related Party Transactions
During the six months ended February 28, 2006 and February 28, 2005,
the Company had sales of $208,453 and $496,060, respectively, to an entity
controlled by a significant stockholder and member of the Board of Directors.
These related party transactions represent 21.7% and 51% of total sales.
Note 6. Stock-Based Compensation
The Company accounts for stock options granted to employees under the
recognition and measurement principles of Accounting Principles Board Opinion
No. 25 (APB 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, the difference between the exercise price and the
6
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:
Six Months Ended Three Months Ended
February 28, February 28,
2006 2005 2006 2005
----------------------------------------------------
Net income as reported $ 6,317,922 $ 366,865 $ 3,181,679 $ 871,202
Add: Stock based employee compensation expense included
in reported net income net of related tax effects $ 56,300 9,508 19,650 -
Deduct: Total stock based employee compensation expense
determined under fair value based method for all awards,
net of related taxes $ (170,798) (103,089) - -
----------------------------------------------------
Net income - pro forma 6,203,424 $ 273,284 $ 3,201,329 $ 871,202
Basic income per share as reported $ .30 $ .02 $ .15 $ .04
----------------------------------------------------
Diluted income per share as reported $ .28 $ .02 $ .14 $ .04
Basic income per share - pro-forma $ .30 $ .02 $ .16 $ .04
----------------------------------------------------
Diluted income per share - pro forma $ .28 $ .01 $ .14 $ $.04
----------------------------------------------------
The fair value of each stock option granted for the six months ended
February 28, 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% 84%
Risk-free interest rate 4.10% 3.32%
Expected life of options 4.84 years 10 years
The weighted average fair value of options granted during the six
months ended February 28, 2006 and 2005 was $3.56 and $1.20, 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 February 28, 2006, the Company received an additional payment
from the sale of TherMatrx of $5,667,196, to bring the total received to date as
of February 28, 2006 to $27,076,952. This amount is recorded as a gain and has
been reflected as "other income" in the Statements of Operations.
7
Note 8. Subsequent Event
On March 6, 2006, the Company received an additional payment of
approximately $5.86 million from the earnout of TherMatrx, Inc. The amount of
the payment was based on the level of sales of TherMatrx products during the
fourth calendar quarter of 2005. This brings the total payments collected by
the Company from the sale of TherMatrx to over $32.9 million. This payment will
be reflected in the "other income" section of the Company's Statements of
Operations for the quarter ending May 31, 2006.
Note 9. Stockholders' Equity
During the six months ended February 28, 2006, 375,226 shares of common
stock were issued for cash of $137,160 and services of $18,050.
8
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 March 6, 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.
9
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 not announced.
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 $2,433,533 as of February 28, 2006 due to net income recorded
during the six months ended February 28, 2006. We recorded after tax net income
for the first six months of fiscal 2006 of $6,317,922.
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 $821,739 and $861,417 for the six months
ended February 28, 2006 and 2005, respectively. Service revenue was $138,804 and
$111,929 for the six months ended February 28, 2006 and 2005, respectively.
During the six month period ended February 28, 2006, we earned
$752,090, or 78.3%, of our revenue from sales to unrelated parties. These
revenues consisted of product sales of $644,805, consulting services of $36,709,
service contracts of $11,889, probes of $20,285 and other miscellaneous revenue
of $ 38,402.
Cost of sales for the period ended February 28, 2006 includes, raw
materials and labor costs of $422,276 and overhead costs of $238,954. 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.
10
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, 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 February 28, 2006 was $42,500. Bad debt expense for the six months ended
February 28, 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
---------------------
Three Months Ended February 28, 2006 Compared to the Three Months Ended February
28, 2005
Revenue. Revenue for the three months ended February 28, 2006 was
$439,376 compared to $715,413 for the three months ended February 28, 2005, a
decrease of $276,037, or approximately 39%. The decrease in total revenue was
primarily due to a decrease in sales to related parties. 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 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 our revenue
from period to period.
We earned $196,586, or approximately 45%, of our revenue in the three
months ended February 28, 2006 from sales to related parties as compared to
$488,906, or 68.33%, in the three months ended February 28, 2005. All of the
related party revenue in the 2006 period was from sales of systems and component
parts to Medizin-Technik. 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 February 28, 2006, we earned $242,790, or
55%, of our revenue from sales to unrelated parties, as compared to $226,507, or
32%, for the three months ended February 28, 2005. These revenues consisted of
product sales of $200,000, consulting services of $32,064, service contracts of
$7,094, probes of $2,362 and other miscellaneous revenue of $1,270.
Gross Profit. Gross profit for the three months ended February 28, 2006
was $135,645, or 31% as compared to $340,454, or 48% of total product sales for
the three months ended February 28, 2005. Because we have not had employee
layoffs due to the specialized nature of our employees and because of the fixed
costs associated with production, declining sales during the six months ended
February 28, 2006 resulted in increased costs for inventory and a decreased -
gross profit percentage.
Selling General and Administrative Expenses. Selling, general and
administrative expenses increased to $1,169,707 in the three months ended
February 28, 2006, up from $459,280 for the three months ended February 28,
2005, an increase of $710,427, or 155%. This increase was primarily due to an
11
increase in sales and marketing costs of $645,151 supporting new product sales.
We also incurred higher consulting costs related to preparation of FDA
submissions, higher legal and accounting costs and an increase in compensation
expense related to the issuance of stock options. Payroll costs also increased
as a result of wage and salary raises, the addition of new employees and fewer
BSD employees working as consultants for American Medical Systems, Inc.
Research and Development Expenses. Research and development expenses
were $334,739 for the three months ended February 28, 2006, as compared to
$191,283 for the three months ended February 28, 2005, an increase of $143,456,
or 75%, 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 $304,590 for the three
months ended February 28, 2006, as compared to $86,905 for the three months
ended February 28, 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 February 28, 2006 was
$3,181,679 after an income tax expense of $1,686,471, as compared to net income
of $871,202 for the three months ended February 28, 2005. The increase in the
net income was primarily due to a payment of $5,667,196 received during the
period ended February 28, 2006, from the sale of our investment in TherMatrx and
the increase in interest income.
Results of Operations
---------------------
Six Months Ended February 28, 2006 Compared to the Six Months Ended February
28, 2005
Revenue. Revenue for the six months ended February 28, 2006 was
$960,543, compared to $973,346 for the corresponding period in fiscal 2005, a
decrease of $12,803 or approximately 1%. The decrease in total revenue was
primarily due to a decrease in sales to related parties. Sales to
Medizin-Technik totaled $208,453 as compared to $496,060 for the corresponding
period -, in fiscal 2005. Dr. Gerhard Sennewald, one of our directors, is a
stockholder, executive officer and a director of Medizin-Technik GmbH. 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
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 our
revenue from period to period. Product sales decreased to $644,805 for the six
months ended February 28, 2006, as compared to $645,960 for the corresponding
periods of fiscal 2005.
In the six months period ended February 28, 2006, we derived $208,453,
or 22% of our revenue as compared to $496,060, or 51%, of our revenue in six
months ended February 28, 2005, from sales to related parties. All of the
related party revenue in the 2006 period was from sales of BSD systems and
component parts to Medizin-Technik. For the six months ended February 28, 2006
and 2005, all of the related party revenue was for sales to Medizin-Technik.
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.
In the six months ended February 28, 2006, we derived $752,090, or 78%
of our revenue to sales to non-related parties compared to $477,286, or 49% for
the corresponding period of fiscal 2005. Our fiscal 2006 non-related party
revenue consisted of product sales of approximately $644,805. The balance of our
non-related party revenue consisted of consulting services of approximately
$36,709, service contracts of approximately $11,937, probes of approximately
$20,285 and miscellaneous revenue of $38,354.
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Gross Profit. Gross profit for the six months ended February 28, 2006
was $299,313, or 31% as compared to $328,016, or 34% of sales in the
corresponding period in fiscal 2005. 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 second 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 lower gross profit margin
in the six months ended February 28, 2006.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $2,223,822 in the six months ended February
28, 2006, from $838,698 for the corresponding period of fiscal 2005, an increase
of $1,385,124, or 165%. Our sales and marketing costs increased from
approximately $125,000 in the six months ended February 28, 2005 to
approximately $1,172,937 in the six months ended February 28, 2006 due to
increased head count and to higher sales and marketing costs due to greater
emphasis on sales and marketing. Legal and accounting costs increased from
approximately $88,000 in the 2005 period to approximately $154,000 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 $42,000 in the 2005 period to
approximately $50,000 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 $46,000 to approximately $172,000
from the 2005 period to the 2006 period, respectively. This is due to the use of
consultants in marketing efforts and in efforts to file the FDA approval
application.
Research and Development Expenses. Research and development expenses
were $564,904 for the six months ended February 28, 2006, as compared to
$374,880 for the corresponding period in fiscal 2005, an increase of $190,024,
or 51%, 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 $549,213 in the six
months ended February 28, 2006 as compared $157,498 for the six months ended
February 28, 2005, due to the significantly higher levels of cash on hand
resulting from the sale of our shares in TherMatrx.
Net income. Net income after taxes for the six months ended February
28, 2006, was $6,317,922 as compared with a net income of $366,865 for the
corresponding period of fiscal 2005. The increase in the net income was
primarily due to payments of $11,550,120 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 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.
Liquidity and Capital Resources
-------------------------------
Our accumulated deficit since inception decreased from $8,751,454 as of
August 31, 2005 to $2,433,533 as of February 28, 2006, due to net income of
$6,317,922 recorded during the six months ended February 28, 2006. We have
historically financed our operations through cash from operations, licensing of
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technological assets, issuance of common stock and through the sale of our
investments in spinoff operations. We have received additional payments and
expect to receive additional payments as a result of the sale of our TherMatrx
shares. These payments were contingent on the product sales that TherMatrx
achieved through December 31, 2005. We believe these payments and the payments
yet to be received will contribute significantly to our future capital
resources.
During the three months ended February 28, 2006, we used $1,814,527 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 $3,239,505, an increase in accounts payable of $121,753, an increase in
accrued expenses of $282,460, a decrease in accounts receivable of $20,330, and
an increase in inventory of $221,301. Our investing activities for the six
months ended February 28, 2006 generated net cash of $1,440,181, relating mainly
to the proceeds received from the sale of our investment in TherMatrx of
$11,550,120 offset by the purchase of available-for-sale securities of
$9,948,404 and the purchase of certain property and equipment of $161,535. Total
cash decreased from $908,674 at August 31, 2005 to $671,489 at February 28,
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 under
investigational status, 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;
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;
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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 assumption that we will receive contingent payments, and the
amount of such payments, in connection with the sale of our
TherMatrx shares; and
o our belief that payments received in connection with the sale of
our TherMatrx shares will contribute significantly 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.
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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
The Company's Annual Meeting of Shareholders was held on February 13,
2006. Of the 20,519,632 shares of common stock outstanding and entitled to vote
at the meeting, 14,096,138 shares were present, either in person or by proxy.
The following proposals were submitted to a vote of security holders at the
meeting;
1. To elect six members of the Board of Directors to serve until the next
annual meeting of the Company and their successors have been duly
appointed and are qualified.
2. To approve and ratify an amendment to the 1998 Director Stock Plan to
extend the term of the plan and to increase the compensation paid to
directors under the plan.
3. To ratify the selection of Tanner LC as the Company's independent
registered public accounting firm for the fiscal year ending August 31,
2006.
The above proposals were approved and the results of the voting are
summarized in the following table:
Proposal For Against Withheld Abstain
-------- --- ------- -------- -------
1. Elect Board of Directors:
o Paul F. Turner 14,019,420 -- 76,718 --
o Hyrum A. Mead 14,027,420 -- 68,718 --
o Gerhard W. Sennewald 14,018,820 -- 77,318 --
o Steven G. Stewart 14,062,120 -- 34,018 --
o Michael Nobel 14,070,120 -- 26,018 --
o Douglas P. Boyd 14,062,120 -- 34,018 --
2. Approve and ratify an amendment 13,930,382 163,906 -- 23,350
to the 1998 Director Stock Plan
3. Ratify selection of Tanner LC as 14,076,780 8,335 -- 11,023
independent registered public
accounting firm
Item 5. Other Information
None.
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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: April 14, 2006 /s/ Hyrum A. Mead
---------------------------------------
President (principal executive officer)
Date: April 14, 2006 /s/ Dennis E. Bradley
----------------------------------------
Controller (principal financial officer)
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