UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Amendment No. 1
to
FORM 10-KSB/A
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended August 31, 2003
Commission file number 0-10783
BSD MEDICAL CORPORATION
(Name of small business issuer in its charter)
Delaware 75-1590407
(State of incorporation) (I.R.S. Employer Identification No.)
2188 West 2200 South
Salt Lake City, UT 84119
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (801) 972-5555
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of
the Act:
Common Stock, $0.001 par value
------------------------------
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 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 [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained herein, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
Issuer's revenues for its most recent fiscal year: $2,572,682
The approximate aggregate market value of the issuer's common stock held by
non-affiliates, computed by reference to the price at which the stock was sold,
or the average bid and asked prices of such stock, as of November 28, 2003, was
$28,529,666.
As of November 28, 2003, there were 19,675,632 shares of the issuer's common
stock, par value $0.001, outstanding.
Documents Incorporated by Reference: None
Transitional Small Business Disclosure Format: Yes [ ] No [X]
EXPLANATORY NOTE
This Amendment No. 1 to the issuer's Annual Report on Form 10-KSB for the fiscal
year ended August 31, 2003 is being filed solely to conform the information
herein with the information set forth in the issuer's Registration Statement on
Form SB-2, as amended, originally filed on January 27, 2004. Except as so
indicated, the issuer has made no other significant changes in this Amendment
No. 1 to its Annual Report on Form 10-KSB for the fiscal year ended August 31,
2003.
In order to preserve the nature and character of the disclosures set forth in
such Items as originally filed, this report speaks as of the date of the
original filing, and the issuer has not updated the disclosures in this report
to speak as of a later date. All information contained in this Amendment No. 1
is subject to updating and supplementing as provided in the issuer's reports
filed with the Securities and Exchange Commission subsequent to the date of the
original filing of the Annual Report on Form 10-KSB.
PART I
ITEM 1. BUSINESS
Overview
--------
We develop, manufacture, market and service hyperthermia microwave
systems used to treat cancer, the second leading cause of death in the United
States according to the National Cancer Society. Our treatment systems are
designed to precisely deliver microwave energy to elevate the temperature of
cancerous tumors, directly killing cancerous cells and enhancing the
effectiveness of certain other cancer therapies. We also manufacture products
and supply services for TherMatrx, Inc., a privately-held medical device company
in which we have ownership. For convenience, the terms "company," "BSD," "we"
and "our" refer to BSD Medical Corporation.
The focus of our cancer therapy business is to develop and
commercialize systems that can provide hyperthermia treatment for cancerous
tumors that occur anywhere in the body. To accomplish this, we have developed
systems capable of treating both superficial tumors, or tumors near the body's
surface, and deep tumors. These systems consist of two families of products: the
BSD-500 and the BSD-2000.
In October 2003, we announced that we had received FDA approval for a
new operating system, allowing us to launch the commercial market introduction
in the United States of a new family of four systems, including the BSD-500i-4,
BSD-500c-4, BSD-500i-8 and BSD-500c-8. These new systems enable us to treat
cancers near the surface of the body using heat created with focused microwave
energy, known as superficial hyperthermia, and also to treat cancers deeper in
the body or in natural orifices like the esophagus using microwave antennae,
known as interstitial hyperthermia. In addition to treating melanoma, recurring
breast cancer and other cancers requiring superficial hyperthermia therapy,
these new systems are used as companions to interstitial radiation systems,
called brachytherapy systems, that treat cancer with radioactive seeds. We
believe that over 1,500 brachytherapy systems have been installed, providing a
target customer base for our systems. We have also obtained the CE Mark
certification required to export these systems to Europe. The new BSD-500
systems are compact, portable and ergonomically engineered for use in a
demanding hospital environment.
Our BSD-2000 family of systems employs an array of microwave antennae
used to focus on and treat tumors located deep in the body. The BSD-2000 system
has not been submitted for FDA pre-market approval, or PMA. Accordingly, we do
not have authority to distribute the BSD-2000 system for sale in the United
States, except as an investigational device. The phase III clinical trial
through which we intend to seek a PMA for this system has already been
completed, and we are underway in developing the commercial version of the
BSD-2000 that we intend to use as the basis of the FDA submission.
In addition to systems for treating cancer, we have also developed a
system used in the therapy of a major benign, non-cancerous, condition. We
currently own approximately 30% of TherMatrx, which markets a medical device
that we developed for the treatment of benign prostatic hyperplasia, or BPH. BPH
results from enlargement of the prostate as men age, and is a major health
condition so prevalent that its symptoms, which include constriction of
urination, affect over half of men by age 60 and 90% of men by age 85, according
to data presented in a Mayo Clinic and Mayo Foundation study published in 1995
in the Archives of Internal Medicine. TherMatrx received FDA approval to market
its TMx-2000 thermotherapy system for treating BPH in July 2001, and since then
it has been marketing and selling the TMx-2000. TherMatrx had sales in excess of
$13 million and a net income in excess of $1.5 million in its second full fiscal
year since the FDA approval. In addition to being an equity owner of TherMatrx,
we provide technical and regulatory support services for TherMatrx on a
consulting basis, and manufacture and test some of its products. In both fiscal
1
2002 and 2003, while we were providing extensive support to help TherMatrx in
its startup launch, TherMatrx was our largest customer. As this startup period
is now behind us, we have projected more conservative sales to TherMatrx in the
future.
Cancer and Hyperthermia Therapy
-------------------------------
Despite the massive attention given to cancer prevention and treatment,
the American Cancer Society estimates that 1,334,100 new cancer cases will be
diagnosed and that 556,500 Americans will die from cancer during 2003 (up from
555,500 cancer deaths in 2002). Exceeded only by heart disease, cancer, as a
group of diseases, remains the second leading cause of death in the United
States. Cancer develops when abnormal cells in a part of the body begin to grow
out of control and spread to other parts of the body.
The primary cancer therapies currently used include:
o Radiation therapy, which is treatment with high-energy rays to
kill or shrink cancer cells. The radiation may come from outside
of the body (external radiation) or from radioactive materials
placed directly in a tumor (internal or implant radiation,
sometimes called brachytherapy).
o Chemotherapy, which is treatment with drugs to destroy cancer
cells.
o Surgery, which is the resection, or removal, of a tumor or organ
of the body.
Because cancer remains a significant cause of death, these three cancer
therapies are still grossly inadequate, and an enormous need for better
treatment is obvious. Hyperthermia is an emerging cancer therapy that both kills
cancer cells directly and has been shown to be a potent additive treatment in
making certain of the major existing cancer therapies more effective for some
cancers.
Cancerous tumors are uncontrolled growths of mutated cells that require
more energy to survive than do cells of normal tissue. As cancer cells grow
rapidly, they tend to outstrip their blood supply, leaving them oxygen-starved,
since there is not enough blood to carry sufficient oxygen to these cells.
Oxygen-starved cancer cells are resistant to radiation therapy because the
destructive power of radiation therapy depends heavily on tearing apart the
oxygen molecules located in cancer cells. When oxygen molecules are torn apart,
they form oxygen radicals that can attack and destroy cancer cell DNA. Blood
depletion also makes cancer resistant to chemotherapy, where blood transport is
required to deliver the drug into the tumor. Our hyperthermia therapy systems
precisely deliver microwave energy to elevate the temperature of tumors, usually
between 40(degree)C and 45(degree)C. The elevated temperatures draw blood to the
tumor as the body's natural response to the stimulus of heat. The increased
blood supply to the tumor improves delivery of drugs to tumors in chemotherapy.
It also delivers more oxygen to the tumor, increasing the effectiveness of
radiation therapy.
While sensitizing tumors for more effective treatment from radiation
and/or chemotherapy, hyperthermia also destroys cancer cells directly through
damage to the plasma membrane, the cytoskeleton and the cell nucleus, and by
disrupting the stability of cellular proteins. Tumors with poor blood supply
systems lack the natural cooling capacity provided by efficient blood flow in
normal tissues, making them selectively susceptible to the cancer-destructive
effects of hyperthermia therapy. While temperatures between 40(degree)C and
45(degree)C are used to kill cancer cells in combination with radiation and
chemotherapy, higher temperature treatments, called "thermal therapy" or
"thermotherapy," are used when treatment of cancer is accomplished by heat
alone.
2
Hyperthermia has other therapeutic uses. It can be used to shrink
tumors prior to surgery, potentially making resection easier or even possible.
Research has shown hyperthermia to be an activator for gene therapies by
speeding gene production (heat mediated gene therapy). Hyperthermia may play a
role in the development of new anti-tumor vaccines that are based on the
production of heat shock proteins. Research has shown hyperthermia to be an
angiogenesis inhibitor, which means it helps prevent cancer from inducing growth
of new blood vessels to expand its blood supply. Hyperthermia could also become
a follow-up therapy for other angiogenesis inhibitors, used in the final
destruction of cancer cells depleted of blood by angiogenesis inhibitor therapy.
Hyperthermia has been shown to improve a patient's quality of life. Even in
situations where there is no hope for survival, hyperthermia may provide
benefits through alleviation of such effects of cancer as bleeding, pain and
infection.
Since 1978, we have been heavily involved in developing technological
advances to expand the use of hyperthermia therapy for the treatment of cancer.
Our efforts have included joint work with many notable cancer research centers
in the United States and Europe. In past years, funding for our research efforts
has been provided by such sources as the National Institutes of Health in the
United States and major European government agencies. In recent years, we have
focused our efforts in perfecting the technology required to precisely deliver
deep, non-invasive hyperthermia therapy for the treatment of pelvic and other
deep cancers and to demonstrate effective use of deep hyperthermia through
clinical trials. We believe that our BSD-2000 system has emerged from this
development effort as the world's most advanced system for deep hyperthermia
therapy.
In the opening address at the April 21, 2001 annual meeting of the
North American Hyperthermic Society (sponsored by the Radiologial Society of
North America), P. K. Sneed, M.D. of the University of California at San
Francisco summarized the results of completed randomized clinical trials in
which the effectiveness of radiation therapy combined with hyperthermia therapy
were compared with the results of radiation therapy alone in cancer treatment.
The summary of the report on these trials was that for melanoma, after two
years, local control (local regression or disappearance of the tumor) was 28%
for the control group of patients who received radiation therapy alone versus
46% local control for the patients who received both hyperthermia and radiation
therapy. For recurrent breast cancer, the complete response rate (complete
disappearance of the tumor) increased from 38% for those receiving radiation
therapy alone to 60% for those patients who received both hyperthermia and
radiation therapy. For glioblastoma (brain cancer), the two-year survival rate
for patients who received radiation therapy alone was 15%, compared to 31%
survival rate two years after treatment for those who received both hyperthermia
and radiation therapy. For advanced cervical cancer, the complete response rate
(disappearance of the tumor) rose from 57% for patients who received radiation
treatments alone to 83% for patients receiving both hyperthermia and radiation
therapy. The cervical cancer data was based on the condition of patients three
years after treatment.
Our Products and Services
-------------------------
We have developed the technology and products required to approach
hyperthermia therapy through three different techniques, which collectively
allow cancer to be treated virtually anywhere in the body:
o Superficial hyperthermia non-invasively treats cancerous tumors
located within a few centimeters of the surface of the body, such
as melanoma and recurrent breast cancer.
o Internal or interstitial hyperthermia treats tumors in combination
with internal radiation therapy by inserting tiny microwave
antennae that deliver hyperthermic microwave energy to tumors
through the same catheters used to deliver radioactive materials,
or "seeds," to tumors for radiation therapy. This technique can be
employed in treating prostate cancer, breast cancer, head and neck
cancer and a variety of other cancer sites.
3
o Deep hyperthermia non-invasively treats tumors located deep within
the body, including many problematic cancer sites located in the
pelvis, abdomen and chest areas.
BSD-500 Systems. Our BSD-500 systems are used to deliver either
superficial or interstitial hyperthermia therapy or both. There are four
configurations of the BSD-500. The BSD-500i-4 and BSD-500i-8 provide
interstitial hyperthermia treatment using four or eight channel generators,
respectively. Each channel can control three interstitial applicators. The
BSD-500c-4 and BSD-500c-8 provide both superficial and interstitial hyperthermia
treatments using four or eight channel generators. These systems include a touch
screen display monitor by which the operator controls the hyperthermia
treatment, computer equipment and software that controls the delivery of
microwave energy to the tumor, and a generator that creates the needed microwave
energy for the treatment. Additionally, the systems include a variety of
applicators, depending on each system configuration. Non-invasive superficial
applicators are used for superficial hyperthermia treatments. For interstitial
hyperthermia treatments, the system may include up to 24 tiny microwave
heat-delivering antennae that are inserted into catheters used in the standard
practice for internal radiation therapy (called brachytherapy).
In October 2003, we announced that we had received FDA approval for a
new operating system, allowing us to commercially introduce this new family of
four systems. Our FDA approval (described as a pre-market approval, or PMA, the
standard FDA approval required to market Class III medical devices in the United
States) for the BSD-500 family of systems is applicable to the marketing of all
four configurations of the BSD-500 in the United States. We have also certified
the BSD-500 systems for the CE Mark, which is required for export into some
European countries. Obtaining FDA approval and CE Mark for the new BSD-500
operating systems were major milestones for us.
BSD-2000. The BSD-2000 family of products includes the BSD-2000, the
BSD-2000/3D and the BSD-2000/3D/MR. These systems non-invasively deliver
hyperthermic microwave energy to cancerous tumors, including those located deep
within the body. These systems include a computer and software that control the
delivery of microwave energy to the tumor, a microwave energy generator, an
amplifier that boosts the microwave power, and a special applicator that
delivers the microwave energy to the patient lying in a prone position on a
specially designed support table. The BSD-2000 systems are able to direct, focus
and deliver microwave energy deep within the body by precisely "steering" the
energy to the tumor from an array of cylindrical antennae. The basic BSD-2000
has eight microwave antennae enabling this electronic steering of energy within
the patient's body. The BSD-2000/3D has 24 microwave antennae enabling
additional electronic steering along the long axis of the body. The 3D steering
is particularly useful when implemented with a magnetic resonance system that is
capable of non-invasive 3D imaging showing the heated regions, thus permitting
the 3D steering to more accurately target the energy to the tumor site.
The BSD-2000 systems have not yet received pre-market approval from the
FDA for commercial marketing in the United States, but the BSD-2000 has obtained
an investigational device exemption, or IDE, for sale in the United States for
research purposes only. We have also certified the BSD-2000 family for the CE
Mark required for export into certain European countries. We are engaged in the
extensive and time consuming process of preparing an FDA submission requesting a
PMA for the BSD-2000 based on clinical data we have already obtained. While we
believe that this data has great merit and is worthy of submission, due to the
inherent uncertainties of the FDA approval process there can be no assurance
that FDA approval will be obtained through our submissions.
Development of the BSD-2000, the BSD-2000/3D and the BSD-2000/3D/MR has
required substantial effort involving the cooperative work of such American
research institutions as Duke University, Northwestern University, University of
Southern California, Stanford University, University of Utah and University of
Washington St. Louis. Contributing European research institutions include Daniel
den Hoed Cancer Center of the Academisch Ziekenhuis (Rotterdam, Netherlands),
Haukeland University Hospital (Bergen, Norway), Dusseldorf University Medical
School, Tubingen University Medical School, Essen University Hospital, Charite
4
Medical School of Humboldt University (Berlin), Luebeck University Medical
School, Munich University Medical School Grosshadern, Interne Klinik Argirov of
the Munich Comprehensive Cancer Center, University of Erlangen (all of Germany),
University of Verona Medical Center (Italy), Graz University Medical School
(Austria) and Kantonsspital Aarau (Switzerland).
BSD-2000/3D. Through research funded by the National Cancer Institute
in the United States and supportive efforts by other domestic and international
research institutions, we enhanced the BSD-2000 to create the new BSD-2000/3D.
The BSD-2000/3D adds three-dimensional steering of deep focused energy, as
opposed to the two-dimensional steering of energy available in the BSD-2000,
delivering even more precise heating the tumor. As part of our international
collaborative research efforts, sophisticated treatment planning software for
the BSD-2000/3D has also been developed.
As previously noted, we have not yet submitted to the FDA a pre-market approval
application for the BSD-2000/3D. However, we have obtained the CE Mark necessary
to export the BSD-2000/3D to certain European countries and other countries
requiring CE Mark certification.
BSD-2000/3D/MR. As a further enhancement of the BSD-2000/3D, we have
added to it the option of concurrent magnetic resonance imaging, or MRI, used
for monitoring of the delivery of deep hyperthermia therapy. Using sophisticated
microwave filtering and imaging software, the BSD-2000/3D/MR allows an MRI
system to be interfaced with and operate simultaneously with a BSD-2000/3D. The
development of MRI treatment monitoring is a significant breakthrough in the
development of hyperthermic oncology primarily because it allows non-invasive
"on-line" review of hyperthermic treatment progress.
We installed and tested the first BSD-2000/3D/MR system at a leading
German oncological research institution, the Clinic of Medical Oncology of the
Klinikum Gro(beta)hadern Medical School of Ludwigs-Maximilians-Universitat
Munchen, in Munich, Germany. We installed a second BSD-2000/3D/MR system at the
Department of Radiology of Charite University Medical School of Humboldt
University in Berlin, Germany, as part of a collaborative effort with Siemens
Medical Systems. The funding for purchase and development of these systems was
provided by the German government and public foundation funds.
As is the case for the BSD-2000/3D, we have not yet submitted to the
FDA a pre-market approval application for the BSD-2000/3D/MR. We can, however,
market the BSD-2000/3D/MR in Europe as we have CE Mark approval for the
BSD-2000/3D and only need to ensure that we interface the system with an MRI
system that also is approved in Europe.
Other Products and Services. In addition to our hyperthermia therapy
systems, we manufacture for, and supply treatment systems and related equipment
components to, other medical device companies, as described below.
TherMatrx, Inc. We manufacture, assemble and test for TherMatrx its
FDA-approved TMx-2000 thermotherapy system that treats benign prostatic
hyperplasia, or BPH, a condition associated with an enlarged prostate that
commonly affects men over age 50. We also supply TherMatrx with equipment
components used for its TMx-2000 system, including probes, applicators and
temperature components. We also have provided regulatory compliance and other
consulting services to TherMatrx.
In November 1997, we entered into an agreement with Oracle Strategic
Partners and Charles Manker to form TherMatrx as a jointly-owned private
company. In return for an equity interest in TherMatrx, we transferred to
TherMatrx four patents related to the thermal treatment of BPH. Currently, we
own approximately 30% of TherMatrx.
5
TherMatrx's TMx-2000 system is a non-surgical, catheter-based therapy
that has been shown to provide safe and effective relief from BPH symptoms. The
treatment can be performed in a clinic or physician's office. The therapy avoids
the side effects and complications of surgery. TherMatrx obtained FDA approval
to begin marketing its products in July of 2001 and began marketing the TMx-2000
shortly after receiving FDA approval.
In manufacturing, assembling and testing the TMx-2000 system and
supplying equipment components and providing consulting services to TherMatrx,
TherMatrx has been our largest customer. For the year ended August 31, 2003,
TherMatrx accounted for $1,454,943, or approximately 57% of our revenue.
TherMatrx is under no contractual obligation to obtain from us products or
manufacturing, assembling, testing or other services, and is free to obtain such
products and services from another source at any time. We believe TherMatrx
purchases the majority of its products from other sources.
Medizin-Technik GmbH. Additionally, we supply equipment components to
Medizin-Technik located in Munich, Germany, which is a significant distributor
of our hyperthermia therapy systems in Europe. Medizin-Technik purchases
equipment and components to service our hyperthermia therapy systems that it
sells to its customers in Europe. The President and Chief Executive Officer of
Medizin-Technik is Dr. Gerhard W. Sennewald, one of our directors and
significant stockholders. Medizin-Technik was a significant customer for us in
fiscal 2003 with sales of $517,979 or 20% of our revenue. Medizin-Technik has
been a significant customer in prior years and we anticipate that it will be a
significant customer for us in the future. The loss of Medizin-Technik as a
distributor and significant customer would have a material adverse effect on our
business. The distribution rights of Medizin-Technik have been in place since
the early 1980s.
Sales, Marketing and Distribution
---------------------------------
In the United States, our target market includes clinics, hospitals and
institutes in which cancer is treated. In the international market we similarly
target cancer treatment centers in clinics, hospitals and institutes.
In May 2002, we entered into an agreement with Nucletron B.V. under
which Nucletron became our exclusive sales agent in most of the world for our
BSD-500i interstitial hyperthermia therapy system. Nucletron is one of the
leading providers of high-dose internal radiation therapy throughout the world.
Because our interstitial hyperthermia therapy is typically administered in
combination with internal radiation therapy like Nucletron provides, we believe
our relationship with Nucletron will be complementary. Nucletron has over 1,500
radiation therapy systems installed in cancer treatment centers throughout the
world, and we anticipate Nucletron will primarily target these customers as
prospective customers for the enhanced BSD-500i. Our agreement with Nucletron
can be terminated by either party upon written notice to the other party within
thirty days prior to termination. Three months prior to the renewal date of the
agreement (which extends until May 1, 2004), the parties may negotiate the
conditions of the extension of the agreement or the conversion of the Agreement
in a full distribution agreement. Nucletron has a first right of refusal to
obtain exclusive distribution rights to sell our BSD-500i in the same territory
in which it now acts as our sales agent if Nucletron performs adequately under
our current sales agent agreement. To date, we have sold only one BSD-500i
through Nucletron.
For our other products that deliver deep hyperthermia therapy,
including the BSD-2000 and related products, we sell our equipment directly to
end-users in the United States. We make international sales of these products
through distributors located in various foreign countries.
Medizin Technik is our exclusive distributor of hyperthermia systems in
Germany, Austria and Switzerland and to certain medical institutions in Belgium
and the Netherlands. Medizin Technik is required to use best efforts to sell our
product within its territory. Due to the limited number of systems that are sold
6
through this relationship, we do not have pre-negotiated price terms with
Medizin Technik. If Medizin Technik identifies a potential customer, it will
negotiate the price of a hyperthermia system with us, purchase the system, and
resell the system to the customer on terms it negotiates with the customer. Our
distributorship agreement with Medizin Technik runs from year-to-year and may be
terminated by either party by providing written notice to the other party before
December 31 and automatically terminates upon the occurrence of certain events,
including the retirement or death of Dr. Sennewald. Dr. Sennewald is a director
and shareholder of BSD and of Medizin Technik.
Our sales and marketing strategy involves three main components:
o promoting acceptance by the scientific community and
cancer-treating healthcare professionals of hyperthermia therapy
as a viable and effective therapy for treating cancer, either in
combination with other therapies or as a stand alone therapy;
o disseminating information about and marketing our hyperthermia
therapy systems to the scientific community, cancer-treating
healthcare professionals, cancer patients and the general public;
and
o working to continuously improve third-party reimbursement for
medical services performed with our products.
We disseminate information about our company and our hyperthermia
therapy systems by encouraging articles about hyperthermia therapy to be
published in scientific journals, periodicals and other publications, and
promoting dissemination of BSD information through television, radio and other
media outlets. We post information about our products on our web site,
www.bsdmc.com, and our materials are also posted on many other sites. We have
developed promotional materials for our products, including product brochures,
patient brochures and newsletters. We also participate actively in trade shows
and scientific symposia, make public presentations delivered by our scientific
staff and by scientists and researchers using our systems, and we actively
participate in a variety of medical associations. We are co-sponsors of the
annual international BSD Users' Conference in Europe.
Third-Party Reimbursement
-------------------------
We view obtaining adequate third-party reimbursement arrangements as
essential to achieving commercial acceptance of our hyperthermia therapy
products. Our products are purchased primarily by clinics, hospitals and other
medical institutions that bill various third-party payers, such as Medicare,
Medicaid, other government programs and private insurance plans, for the health
care services provided to their patients using our products. Additionally,
managed care organizations and insurance companies directly pay for services
provided to their patients. The Center for Medicare and Medicaid Services, or
CMS, has established 23 billing codes that allow for third-party reimbursement
and can be used for or in combination with the delivery of hyperthermia therapy,
depending on the circumstances of the treatment. Appropriate codes apply to
billing for superficial and interstitial hyperthermia delivered using our
BSD-500 systems when used in combination with radiation therapy or chemotherapy.
Codes also have been established for providing deep hyperthermia therapy.
Billing codes are available for both institutions and physicians.
In November 1995, HCFA, the predecessor agency to CMS, authorized
Medicare reimbursement for all investigational therapies and devices for which
underlying questions of safety and effectiveness of that device type have been
resolved, based on categorization by the FDA. Our BSD-2000 system, which has
been given IDE status by the FDA, has been placed in this category by the FDA,
and thus may be reimbursed by Medicare.
7
General hyperthermia reimbursement has been approved in the United
States, Germany, Holland, Switzerland and Japan. CMS has also provided billing
codes for thermotherapy/thermal therapy treatment of BPH. These billing codes
apply to TherMatrx's TMx-2000 system treatments of BPH.
Medical reimbursement rates are unpredictable, and we cannot project
the extent to which our business may be affected by future legislative and
regulatory developments. There can be no assurance that future health care
legislation or regulation will not have a material adverse effect on BSD's
business, financial condition and results of operations, or that reimbursement,
existing or in the future, will be adequate for all customers.
Competition
-----------
Competition in the medical products industry is intense. We believe
that established product lines and cancer therapies, FDA approvals, know-how and
reputation in the industry are key competitive factors. Currently, only a few
companies besides BSD have received FDA approval to manufacture and sell
hyperthermia therapy systems within the United States, including U.S.
Labthermics and Celsion Corporation. Celsion is principally involved with
clinical trials related to thermotherapy, hyperthermia and related fields.
Labthermics produces ultrasound-based systems which compete with our microwave
hyperthermia systems. Several other companies have received IDEs in the United
States or other international clearance for certain experimental hyperthermia
systems designed to treat both malignant and benign diseases. Additionally,
other companies, particularly established companies that currently manufacture
and sell other cancer therapy systems, could potentially become competitors (in
that they are also engaged in cancer treatment businesses), and they have
significantly greater resources than we do.
BSD participates in the BPH market as a stockholder in TherMatrx. In
the BPH market, competitive companies offering products similar to TherMatrx's
products include Urologix and Dornier (which both have received pre-market
approvals from the FDA for their treatment systems), VidaMed, a subsidiary of
Medtronics (which has 510(k) clearance from the FDA) and other foreign
manufacturers. These competitors have significantly greater resources than
TherMatrx and may be better positioned to compete in TherMatrx's market. In
addition to thermotherapy equipment made by TherMatrx's competitors, there are
other competitive treatments for BPH that are currently being developed,
clinically investigated and/or actively marketed.
Product Service
---------------
We provide a 12-month warranty following installation on all cancer
treatment systems and a 90-day limited warranty on individual components. We
install and service the hyperthermia systems we sell to domestic customers. In
addition, we or our consultants provide technical and clinical training to our
customers. Subsequent to the applicable warranty period, we offer our domestic
customers full or limited service contracts.
Generally, our distributors install and service systems sold to foreign
customers and are responsible for managing their own warranty programs for their
customers, including labor and travel expenses. We provide warranties for the
replacement and/or repair of parts for 12 months for systems sold
internationally through distributors and for 90 days for individual components.
Spare parts are generally purchased by the distributors and stored at the
distributors' maintenance facilities to allow prompt repair. Distributor service
personnel are usually trained at customer sites and at our facilities in Salt
Lake City, Utah.
8
Production
----------
We manufacture and test our systems and products at our facilities in
Salt Lake City, Utah. Our manufacturing facility is ISO 9001-1994 certified and
follows FDA quality systems regulations. Some equipment components we purchase
from suppliers are customized to our specifications. Key factors in our
manufacturing process are assembly and testing. We purchase component parts and
other materials from a variety of suppliers. We do not depend on a single
supplier for any item, and believe we can acquire materials and parts from
multiple sources on a timely basis.
Product Liability Exposure
--------------------------
The manufacturing and marketing of medical devices involves an inherent
risk of product liability. Because our products are intended to be used in
hospitals on patients who may be physiologically unstable and severely ill, we
are exposed to potential product liability claims. We presently carry product
liability insurance with coverage limits of $1 million. However, we cannot
assure you that our product liability insurance will provide adequate coverage
against potential claims that might be made against us. No product liability
claims are presently pending against us; however, we cannot assume that product
liability claims will not be filed in the future or that such claims will not
exceed our coverage limits.
Government Regulation
---------------------
The medical devices that we have developed and are developing are
subject to extensive and rigorous regulation by numerous governmental
authorities, principally by the United States Food and Drug Administration, or
FDA, and comparable foreign agencies. Pursuant to the Federal Food, Drug and
Cosmetic Act, as amended, the FDA regulates and must approve the clinical
testing, manufacture, labeling, distribution, and promotion of medical devices
in the United States.
Most of our hyperthermia treatment systems, including the BSD-500 and
the BSD-2000 and related products, have required or require pre-market approval
from the FDA instead of the simpler 510(k) approval, and we anticipate that our
future systems will similarly require pre-market approval. Pre-market approval
requires that we demonstrate that the medical device is safe and effective. To
do this, we conduct either laboratory and/or clinical testing. The FDA will
grant approval of the product if it determines there is reasonable assurance
that the medical device is safe and effective. FDA approval must be obtained
before commercial distribution of the product. We intend to continue to make
improvements in and to our existing products. Significant product changes must
be submitted to the FDA under investigational device exemptions, or IDEs, or
pre-market approval supplements. As described in the Section entitled "Our
Products and Services" above, we have obtained a PMA for our BSD-500 systems and
IDE status for our BSD-2000 system.
Foreign countries in which our products are or may be sold, have
regulatory requirements that can vary widely from country to country. Sales into
the European Union, or EU, require compliance with the Medical Devices
Directive, or MDD, and require us to obtain the necessary certifications to have
a CE Mark affixed to our products. We have obtained necessary ISO certification
of our quality, development, and manufacturing processes, and we have
successfully completed the CE Mark testing and Annex II audit. This allows us to
certify our own products and to affix the CE Mark label on them. However, we
must maintain compliance with all current and future directives and requirements
to maintain ISO certification and to continue to affix the CE Mark, and there
can be no assurance that we will continue to maintain compliance with regulatory
requirements imposed on us.
After we receive FDA approval to distribute a medical device, we
continue to have ongoing responsibilities under the Federal Food, Drug, and
Cosmetic Act and FDA regulations. The FDA reviews design and manufacturing
practices, labeling, record-keeping, and required reporting of adverse
experiences. All medical devices must be manufactured in accordance with
regulations specified in the FDA Quality System regulations, or QSR, and in
9
compliance with the ISO and other applicable standards. In complying with these
regulations, we must continue to expend time, money and effort in the areas of
design control, production, and quality control to ensure full compliance. The
FDA's mandatory Medical Device Reporting regulation requires us to provide
information to the FDA on death or serious injuries alleged to have been
associated with the use of our products, as well as information on product
malfunctions that would likely cause or contribute to a death or serious injury
if the malfunctions were to recur. In Europe, the MDD vigilance system
regulations require that we, through a representative in Europe, provide
information to authorities on death or serious injuries alleged to have been
associated with the use of our products, as well as information on product
malfunctions that would likely cause or contribute to a death or serious injury
if the malfunctions were to recur. If FDA were to assert that we are not in
compliance with applicable laws or regulations, or that any of our medical
devices are ineffective or pose an unreasonable risk to patient health, the FDA
could seize our medical devices, ban such medical devices, or order a recall,
repair, replacement or refund of such devices, and require us to notify health
care professionals and others that the devices present unreasonable risk of
substantial harm to the public. The FDA may also impose operating restrictions,
restrain certain violations of law, and assess civil or criminal penalties
against us. The FDA can also recommend prosecution to the Department of Justice.
Certain regulations are subject to administrative interpretation and we cannot
assure that future interpretations made by the FDA or other regulatory bodies,
with possible retroactive effect, will not adversely affect us.
International sales of medical devices are subject to FDA export
requirements. We have obtained export approvals for all countries into which we
have delivered products. This includes countries in Western Europe and much of
Eastern Europe and many Asian countries.
International sales are subject to the regulatory and safety
requirements of the country into which the sale occurs. There can be no
assurance that all of the necessary approvals will be granted on a timely basis
or at all. Delays in receipt of or failure to receive such approvals would have
a material adverse effect on our financial condition and results of operations.
In addition to FDA regulations, certain U.S. health care laws apply
when a claim for reimbursement for one of our medical devices is submitted to
Medicare, Medicaid, or other federal health care programs. For instance, federal
law prohibits the filing of false or improper claims for federal payments. In
addition, federal law prohibits the payment of anything of value for the purpose
of inducing referrals of business reimbursable under a federal health care
program. Other federal laws prohibit physicians from making referrals for
certain services and items payable under certain federal programs if the
physician has a financial relationship with the entity providing the service or
item.
All of these laws are subject to evolving interpretations. If the
federal government were to conclude that we are not in compliance with any of
these health care laws, we could be subject to substantial criminal and civil
penalties, and could be excluded from participation as a supplier to
beneficiaries in federal health care programs.
The Federal Communications Commission, or FCC, regulates the
frequencies of microwave and radio frequency emissions from medical and other
types of equipment to prevent interference with commercial and governmental
communications networks. The BSD-500 fixed frequency systems and applicators
emit 915 MHz for U.S. and some European installations and 433.92 MHz for some
European installations, which is approved by the FCC for medical applications.
Accordingly, these systems do not require shielding to prevent interference with
communications. Our BSD-2000 deep hyperthermia variable-frequency generators and
applicators require electromagnetic shielding.
10
Patents, Licenses, and Other Rights
-----------------------------------
Because of the substantial length of time and expense associated with
bringing new products through development and regulatory approval to the
marketplace, the medical device industry places considerable importance on
obtaining patent and trade secret protection for new technologies, products and
processes. Our policy is to file patent applications to protect significant
technology, inventions and product improvements. We currently own six patents in
the United States and two patents outside the United States. Four additional
patents were assigned to TherMatrx, for which we obtained a license, and one
patent license was obtained by us from University of California San Francisco
and another license was obtained by us from the National Institutes of Health. A
European patent for the BSD-2000/3D system has been issued. We believe that our
patents represent the early pioneering and dominant patents in this field. These
patents along with the advanced product development and leadership in the field
are key elements for our current and future market position.
In July 1979, we entered into an exclusive worldwide license for a
unique temperature probe called the Bowman Probe. The license will remain in
effect as long as the technology does not become publicly known as a result of
actions taken by the licensor. We pay royalties based upon our sales of the
Bowman Probe. The license agreement was amended and renewed in August 2000 and
is currently in effect.
On October 21, 1999, we acquired from the University of California San
Francisco (UCSF) the exclusive patent license (U.S. Patent 4,825,880) for small
microwave antennae that can be inserted into cancerous tumors to destroy them
from the inside. The innovative microwave antenna design enables the therapeutic
heating length to be tailored to match the tumor size. This license requires
payment of 2.5% of sales on licensed products sold and payment of patent
maintenance fees and other annual payments of $4,000 to maintain the exclusive
license. We remain current on these payments.
We also acquired on December 13, 2001 a patent license from the
National Institutes of Health (NIH) for the U.S. Patent 5,284,114. This patent
is for the combination of magnetic resonance integrated hyperthermia systems,
including our BSD-2000/3D/MR system, and is based on a patent obtained by NIH in
early research of the concept. The license agreement requires annual payment of
$1,000, $4,000 per licensed product sold in the U.S., and $1,000 per licensed
product manufactured in the U.S. and sold outside the U.S. There is also to be a
single payment of $10,000 upon PMA or 510(k) FDA approval.
On July 1, 2001, we acquired the rights to all FDA approvals and the
rights to manufacture all cancer products formerly owned by Clini-Therm Corp.
These products are related to the hyperthermia therapy delivered by our BSD-500
systems, the exclusive patent obtained from UCSF, and our enhancements to such
systems involve incorporating some of the Clini-Therm rights we acquired into
such systems. This involved only a one-time cash payment with no continuing
costs.
From time to time, we have had and may continue to have discussions
with other companies, universities and private individuals concerning the
possible granting of licenses covering technology and/or patents. There can be
no assurance that such discussions will result in any agreements. In the past,
we have granted non-exclusive practice licenses for a few selected patents to
three companies. One of these companies is no longer in business.
We cannot assure that the patents presently issued to us will be of
significant value to us in the future or will be held valid upon judicial
review. Successful litigation against these patents by a competitor would have a
material adverse effect upon our business, financial condition and results of
operations. We believe that we possess significant proprietary know-how in our
hardware and software capabilities. However, we cannot assure that others will
not develop, acquire or patent technologies similar to ours or that such secrecy
will not be breached.
11
Research and Development
------------------------
During the fiscal years ended August 31, 2003, and August 31, 2002, we
expended $676,867 and $603,137 respectively for research and development,
representing 26% and 23% of total revenues. Research and development
expenditures increased in fiscal 2003 due to costs associated with the
development of the BSD-2000/3D/MR system, the continued enhancements of our
BSD-500 systems and the development of new products not yet announced.
Technological changes play an important part in the advancement of our industry.
We intend to continue to devote substantial sums to research and development.
Research and development efforts inherently involve risks and uncertainties that
could aversely affect our projections, outlook and operating results.
Company History
---------------
BSD was originally incorporated under the laws of the State of Utah on
March 17, 1978. In July 1986, BSD was reincorporated in Delaware.
Employees
---------
As of November 28, 2003, we had 26 employees; 23 of whom were full time
employees. None of our employees is covered by a collective bargaining
agreement. We consider our relations with our employees to be satisfactory. We
depend upon a limited number of key management, manufacturing, and technical
personnel. Our future success will depend in part on our ability to retain these
highly qualified employees.
Risks Related to Our Business
-----------------------------
Our future operating results are highly uncertain. Before deciding to
invest in BSD Medical or to maintain or increase your investment, you should
carefully consider the risks described below, in addition to the other
information contained in this prospectus. If any of these risks actually occur,
our business, financial condition or results of operations could be seriously
harmed. In that event, the market price for our common stock could decline and
you may lose all or part of your investment.
We have a history of significant losses and such losses may continue in the
future.
Since our inception in 1978, our expenses have substantially exceeded
our revenue, resulting in continuing losses and an accumulated deficit of
$20,486,107 at August 31, 2003. In fiscal 2003, we recorded a net loss of
$570,285. Our net loss was primarily due to a write-off of a significant
receivable of approximately $300,000 to bad debt expense, an increase to
inventory reserve of $90,000 and lower overall sales. We may continue to incur
operating losses in the future as we continue to incur costs to develop our
products, protect our intellectual property and expand our sales and marketing
activities. To become profitable we will need to increase significantly the
revenues we receive from sales of our hyperthermia therapy products to sustain
and increase our profitability on a quarterly or annual basis. We may be unable
to do so, and therefore may never achieve profitability.
Our hyperthermia therapy products may not achieve market acceptance,
which could limit our future revenue and ability to achieve profitability.
To date, hyperthermia therapy has yet to gain wide acceptance by
cancer-treating physicians. We believe this is due in part to the lingering
impression created by the inability of early hyperthermia therapy technologies
to focus and control heat directed at specific tissue locations and conclusions
drawn in early scientific studies that hyperthermia was only marginally
effective. Additionally, market acceptance depends upon physicians and hospitals
obtaining adequate reimbursement rates from third-party payers to make our
products commercially viable, and we believe that reimbursement rates have not
12
been adequate to stimulate strong interest in adopting hyperthermia as a new
cancer therapy. If our sales and marketing efforts to promote hyperthermia
therapy acceptance in the medical community fail, or our efforts to improve
third-party reimbursement rates for hyperthermia therapy are not successful,
then our future revenue from sales of our products may be limited, and we may
never sustain profitable operations.
While a substantial portion of our revenue in recent periods has been
derived from TherMatrx, we expect revenue from this customer to decline in the
current and future periods.
For the year ended August 31, 2003, TherMatrx accounted for $1,454,943,
or approximately 57% of our net sales and was our largest customer. We
manufacture, assemble and test TherMatrx's TMx-2000 system, and also supply
equipment components and provide consulting services to TherMatrx. TherMatrx is
under no contractual obligation to obtain from us products or manufacturing,
assembling, testing and other services. TherMatrx now purchases most of its
products from other sources. A decline in sales to TherMatrx will lead to a
substantial decline in our revenue if we are unsuccessful in our efforts to
generate an offsetting increase in sales of our hyperthermia cancer treatment
systems.
Some of the medical institutions to which we have sold in the past have
not been able to pay for their equipment, and some of our sales have therefore
become substantial bad debts, a risk that could continue into the future.
Some of our customers have been developing clinics, and these customers
have been particularly vulnerable to financial difficulties that can cause them
to be unable to pay for equipment that they have purchased. For example, in the
fourth quarter of fiscal 2003 we had a particularly high write off of over
$300,000 resulting from the default of a customer under contract. If we choose
to accept higher risk sales opportunities to clinics in the future, we will be
subject to these customer credit risks that could lower future net sales due to
bad-debt write offs, resulting in losses in future periods and potentially
lowering the value of your stock. While we attempt to provide for foreseeable
doubtful accounts, we cannot assure you that this provision will always be
adequate to cover our credit risks.
Increasing sales of our hyperthermia systems depends on our ability to
successfully expand our sales distribution channels; we have had failures with
the productivity of new channels of distribution in the past. Expanding our
channels of distribution will also significantly increase our sales expenses,
which could negatively impact our financial performance.
We believe that the success of our efforts to increase sales of our
hyperthermia systems in the future depends on our ability to successfully expand
our sales distribution channels. Historically, we have sometimes failed in
establishing successful new sales channels. In May 2002, we entered into an
agreement with Nucletron B.V. under which Nucletron became our exclusive sales
agent in most of the world for our BSD-500i interstitial hyperthermia therapy
system. To date, we have sold only one BSD-500i through Nucletron.
We anticipate that the success of our multi-year plan for selling
hyperthermia systems will require expanding our sales and marketing organization
through a combination of direct sales people, distributors and internal and
external marketing expertise. However, as we pursue our marketing plan, there
can be no assurance that we will be successful in securing reliable channels of
distribution to meet our plan through expanded sales. Recruiting and training
new distribution channels can take time and considerable expense. We project
that sales and marketing expenses will increase substantially in the future as
compared to past years. This added expense could have an adverse effect on our
future financial performance that is greater than any potential increases in
sales.
In addition, there can be no assurance that our channels of
distribution that have been successful in the past will be successful in the
future. We have derived most of our revenue from sales in Europe through our
distributor Medizin-Technik, GmbH, which also purchases equipment components and
parts from us. Medizin-Technik sold none of our hyperthermia therapy systems in
Europe in fiscal 2003. The loss or ineffectiveness of Medizin-Technik as a
distributor and significant customer could result in lower revenue.
13
We are subject to government regulations that can delay our ability to
sell our products and cause us to incur substantial expenses.
Our research and development efforts, pre-clinical tests and clinical
trials, and the manufacturing, marketing, distribution and labeling of our
products are subject to extensive regulation by the FDA and comparable
international agencies. The process of obtaining FDA and other required
regulatory approvals is lengthy and expensive and our financial resources are
limited.
We are currently enhancing our BSD 500 systems. These enhancements will
require FDA pre-market approval supplements. In addition, we have not yet
received pre-market approval for our BSD-2000 systems. Obtaining these
pre-market approvals from the FDA are necessary for us to commercially market
these systems in the United States. We may not be able to obtain these approvals
on a timely basis, if at all, and such failure could harm our business prospects
substantially. Further, even if we are able to obtain the approvals we seek from
the FDA, the approvals granted may include significant limitations on the
indicated uses for which the products may be marketed, which restrictions could
negatively impact our business.
After a product is approved for commercial distribution by the FDA, we
have ongoing responsibilities under the Federal Food, Drug, and Cosmetic Act and
FDA regulations, including regulation of our manufacturing facilities and
processes, labeling and record-keeping, and reporting of adverse experiences and
other information. Failure to comply with these ongoing requirements could
result in the FDA imposing operating restrictions on us, enjoining or
restraining certain violations, or imposing civil or criminal penalties on us.
Sales of our product could be significantly reduced if government,
private health insurers and other third-party payors do not provide sufficient
coverage or reimbursement.
Our success in selling our products will depend in large part on the
extent to which reimbursement for the costs of our products and related
treatments are available from government health agencies, private health
insurers and other third-party payors. Despite the existence of general
reimbursement policies, local medical review policies may differ for public and
private insurance payors, which may cause payment to be refused for some
hyperthermia treatments. Private payors may refuse reimbursement for
hyperthermia treatments.
Medical reimbursement rates are unpredictable and we cannot predict the
extent to which our business may be affected by future legislative and
regulatory developments. Future health care legislation or regulation may limit
our business or impose additional delays and costs on our business and
third-party reimbursement may not be adequate to cover our costs associated with
producing and selling our products.
Cancer therapy is subject to rapid technological change and therapies
that are more effective than ours could render our technology obsolete.
The treatment of cancer is currently subject to extensive research and
development. Many cancer therapies are being researched and our products may be
rendered obsolete by existing therapies and as a result of therapy innovations
by others. If our products are rendered obsolete, our revenue will decline, we
may never achieve profitability, and we may not be able to continue in business.
14
We depend on adequate protection of our patent and other intellectual
property rights to stay competitive.
We rely on patents, trade secrets, trademarks, copyrights, know-how,
license agreements and contractual provisions to establish and protect our
intellectual property rights. Our success will substantially depend on our
ability to protect our intellectual property rights and maintain rights granted
to us through license agreements. Our intellectual property rights may only
afford us limited protection and may not adequately protect our rights or
remedies to gain or keep any advantages we may have over our competitors, which
could reduce our ability to be competitive and generate sales and profitability.
In the past, we have participated in substantial litigation regarding
our patent and other intellectual property rights in the medical device
industry. We have previously filed lawsuits for patent infringement against
three of our competitors and subsequently settled all three of those lawsuits.
Additional litigation against other parties may be necessary in the future to
enforce our intellectual property rights, to protect our patents and trade
secrets, and to determine the validity and scope of our proprietary rights. This
litigation may require more financial resources than are available to us. We
cannot guarantee that we will be able to successfully protect our rights in
litigation. Failure to successfully protect our rights in litigation could
reduce our ability to be competitive and generate sales and profitability.
A product liability settlement could exceed our ability to pay.
The manufacturing and marketing of medical devices involves an inherent
risk of product liability. Because our products are intended to be used in
hospitals on patients who may be physiologically unstable and severely ill, we
are exposed to potential product liability claims. We presently carry product
liability insurance with coverage limits of $1 million. Our product liability
insurance does not cover intended injury, injury or damage resulting from the
intoxication of any person, payment of workers' compensation benefits, injury of
our own employee, injury or damage due to war, damage to property that we own,
damage to our work, loss of use of property, patent infringements, pollution
claims, interest payments, depreciation of property, or injury or damage
resulting from asbestos inhalation. We are responsible to pay the first $10,000
resulting from any claim up to a maximum of $50,000 in one year. We cannot
assure you that our product liability insurance will provide adequate coverage
against potential claims that might be made against us. If we were to be subject
to a claim in excess of our coverage or to a claim not covered by our insurance
and the claim succeeded, we would be required to pay the claim from our limited
resources, which would reduce our limited capital resources and liquidity and
reduce capital we could otherwise use to obtain approvals for and market our
products. In addition, liability or alleged liability could harm our business by
diverting the attention and resources of our management and by damaging our
reputation.
Our directors and executive officers own a sufficient number of shares
of our capital stock to control our company, which could discourage or prevent a
takeover, even if an acquisition would be beneficial to our stockholders.
Our directors and executive officers own approximately 46% of our
outstanding voting power. Accordingly, these stockholders, individually and as a
group, may be able to influence the outcome of stockholder votes involving the
election of directors, the adoption or amendment of provisions in our
certificate of incorporation and bylaws and the approval of certain mergers or
other similar transactions, such as a sale of substantially all of our assets.
Such control by existing stockholders could have the effect of delaying,
deferring or preventing a change in control of our company.
We are dependent upon key personnel, some of whom would be difficult to
replace.
15
Our success will be largely dependent upon the efforts of Paul F.
Turner, our Chairman and Senior Vice President, Hyrum A. Mead, our President,
and Dixie T. Sells, our Vice President of Regulatory Affairs and other key
employees. We do not maintain key-person insurance on any of these employees.
Our future success also will depend in large part upon our ability to identify,
attract and retain other highly qualified managerial, technical and sales and
marketing personnel. Competition for these individuals is intense. The loss of
the services of any of our key personnel, the inability to identify, attract or
retain qualified personnel in the future or delays in hiring qualified personnel
could make it more difficult for us to manage our business and meet key
objectives such as the sale of our products and the introduction of new
products.
Because our common stock is traded on the OTC Bulletin Board, your
ability to sell your shares in the secondary trading market may be limited.
Our common stock currently is traded on the over-the-counter market on
the OTC Bulletin Board. Consequently, the liquidity of our common stock is
impaired, not only in the number of shares that are bought and sold, but also
through delays in the timing of transactions and lack of coverage by security
analysts and the news media. As a result, prices for shares of our common stock
may be lower than might otherwise prevail if our common stock were quoted on the
Nasdaq Stock Market or traded on a national securities exchange, like the New
York Stock Exchange or the American Stock Exchange.
Because our common stock is a "penny stock," you may have difficulty
selling our shares in the secondary trading market.
Federal regulations under the Securities Exchange Act of 1934 regulate
the trading of so-called "penny stocks," which are generally defined as any
security not listed on a national securities exchange or Nasdaq, priced at less
than $5.00 per share and offered by an issuer with limited net tangible assets
and revenues. Since our common stock currently trades on the OTC Bulletin Board
at less than $5.00 per share, our common stock is a "penny stock" and may not be
traded unless a disclosure schedule explaining the penny stock market and the
risks associated therewith is delivered to a potential purchaser prior to any
trade.
In addition, because our common stock is not listed on Nasdaq or any
national securities exchange and currently trades at less than $5.00 per share,
trading in our common stock is subject to Rule 15g-9 under the Exchange Act.
Under this rule, broker-dealers must take certain steps prior to selling a
"penny stock," which steps include:
o obtaining financial and investment information from the investor;
o obtaining a written suitability questionnaire and purchase
agreement signed by the investor; and
o providing the investor a written identification of the shares
being offered and the quantity of the shares.
If these penny stock rules are not followed by the broker-dealer, the
investor has no obligation to purchase the shares. The application of these
comprehensive rules will make it more difficult for broker-dealers to sell our
common stock and our stockholders, therefore, may have difficulty in selling
their shares in the secondary trading market.
16
The market for our stock is limited and our stock price may be
volatile.
The market for our common stock has been limited due to low trading
volume and the small number of brokerage firms acting as market makers. Because
of the limitations of our market and volatility of the market price of our
stock, investors may face difficulties in selling shares at attractive prices
when they want to. The average daily trading volume for our stock has varied
significantly from week to week and from month to month, and the trading volume
often varies widely from day to day. The following factors could impact the
market for our stock and cause further volatility in our stock price:
o announcements of new technological innovations;
o FDA and other regulatory developments;
o changes in third-party reimbursements;
o developments concerning proprietary rights;
o third parties receiving FDA approval for competing products; and
o market conditions generally for medical and technology stocks.
If we sell shares of our common stock at a per share price of less than
$1.10 to raise additional capital, we will have to issue additional shares to
the investors in our November and December private placement, which will dilute
our other stockholders' ownership.
To execute our business plan, and in particular to market our recently
FDA approved products, we may need to raise additional capital. We agreed with
the investors in our November and December private placement transactions that
we would issue them additional shares of our common stock if we sold shares of
common stock within one year of their investment at a per share price of less
than the price they paid, which was $1.10 per share. The anti-dilution
protection provided to these investors, commonly referred to as ratchet
anti-dilution, would require us to issue to these investors additional shares
equal to the difference between the number of shares that they would have been
issued if the per share price they paid equaled the lowest price at which we
issued shares to raise capital within one year of their investment, regardless
of the number that we issue, and the number of shares they were issued. If this
anti-dilution protection were triggered, the investors would not be required to
pay any additional consideration for the additional shares issued to them, and
our other stockholders' ownership would be diluted by the issuance. Because of
the significant dilution that could occur if this anti-dilution protection were
triggered, we may choose to not raise additional capital if we cannot raise it
at a per share price that would avoid triggering the anti-dilution protection.
This could delay the execution of our business plan.
Anti-takeover provisions in our certificate of incorporation may have a
possible negative effect on our stock price.
Certain provisions of our certificate of incorporation and bylaws may
make it more difficult for a third party to acquire, or discourage a third party
from attempting to acquire, control of us. We have in place several
anti-takeover measures that could discourage or prevent a takeover, even if an
acquisition would be beneficial to our stockholders. The increased difficulties
faced by a third party who wishes to acquire us could adversely affect our stock
price.
ITEM 2. PROPERTIES
Our office, production and research facilities are located in Salt Lake
City, Utah. The complete headquarters and production facility occupies
approximately 20,000 square feet. We have leased the building for an annual
rental expense of approximately $78,000. In November 2002, we renewed our lease
17
for five years, which includes payments of approximately $82,000 per year for
five years adjusted annually for increases in the cost of living based on the
Consumer Price Index for Urban Consumers. We have an option to purchase the
building for $1,000,000 upon 60 days notice for six years beginning December 1,
2002. Thereafter, the purchase price increases by $50,000 each year, and the
option expires at the end of the tenth year. The building lease is accounted for
as an operating lease for financial statement purposes. The building is
currently in good condition, is adequate for our needs, is suitable for all
company functions and provides room for future expansion. We believe that we
carry adequate insurance on the property.
ITEM 3. LEGAL PROCEEDINGS
There are no legal proceedings pending against or being taken by BSD
Medical Corporation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock trades publicly on the OTC Bulletin Board under the
symbol "BSDM." The following table sets forth the high and low bid transactions,
as provided by the OTC Bulletin Board, for the quarters in fiscal year 2002 and
2003. The amounts reflect inter-dealer prices, without retail mark-up, markdown
or commission, and may not represent actual transactions.
Bid
---------------------------
Quarter Ended: High Low
----------------------------------------------------------------
November 30, 2001.............. .90 .90
February 28, 2002............... 1.16 1.10
May 31, 2002..................... 1.00 .95
August 31, 2002.................. .66 .66
November 30, 2002.............. .42 .42
February 29, 2003............... .65 .60
May 31, 2003..................... .45 .45
August 31, 2003.................. .80 .78
As of November 19, 2003, there were approximately 592 holders of record
of our common stock. We have not paid any cash dividends on our common stock
since our inception and we have no intention of declaring any common stock
dividends in the foreseeable future.
ITEM 6. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other parts of this prospectus contain forward-looking
statements that involve risks and uncertainties. Forward-looking statements can
also be identified by words such as "anticipates," "expects," "believes,"
"plans," "predicts," and similar terms. Forward-looking statements are not
guarantees of future performance and our actual results may differ significantly
from the results discussed in the forward-looking statements. Factors that might
cause such differences include, but are not limited to, those discussed in the
subsections entitled "Forward-Looking Statements and Factors That May Affect
Future Results and Financial Condition" below and the subsection entitled "Risk
Factors" above. The following discussion should be read in conjunction with our
consolidated financial statements and notes thereto included in this prospectus.
All information presented herein is based on our fiscal year ended August 31,
2003. We assume no obligation to revise or update any forward-looking statements
for any reason, except as required by law.
General
-------
We develop, manufacture and market microwave systems used in the
treatment of cancer. Our microwave systems are used in cancer treating therapies
that elevate the temperature of tumors or other targeted tissue to conditions
classified as either hyperthermia or thermal therapy, also called thermotherapy,
through precisely delivered microwave energy. We also own approximately 30% of
TherMatrx, Inc., a company engaged in the development and marketing of a medical
device designed to be used in the treatment of benign prostatic hyperplasia. We
supply thermotherapy systems, component parts and contract manufacturing
services to TherMatrx.
19
Since our inception, we have been engaged in the development and
improvement of technology that can better accomplish cancer treatment through
hyperthermia therapy. From our predecessor hyperthermia systems, our current
BSD-500 and BSD-2000 hyperthermia systems have emerged. We have also developed
enhancements to our BSD-2000 system including the BSD-2000/3D that is designed
to allow three dimensional steering of deep focused energy and heat to targeted
tumors and tissue and the BSD-2000/3D/MR that includes an interface for magnetic
resonance imaging. Our hyperthermia systems are sold with supporting software
and may also be sold with support services.
Since inception, we have generated substantial operating losses and at
August 31, 2003, had an accumulated deficit of $20,486,107. We recorded net loss
for fiscal 2003 of $570,285.
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 $1,956,270 and $1,866,192 for the
years ended August 31, 2003 and 2002, respectively. Service revenue was $212,181
and $716,240 for the years ended August 31, 2003 and 2002, respectively
We derived $1,907,585, or 74% of our revenue in fiscal 2003 from sales
to related parties. Approximately $1,391,443 of such related party revenue was
from manufacturing, assembling and testing thermotherapy systems for TherMatrx
and selling probes, applicators and temperature sensors and other components and
contract services to TherMatrx. We also realized $63,500 of royalty revenue from
TherMatrx, which is included in other revenue. The remaining related party
revenue of approximately $516,142 was for one BSD-2000 system and component
parts sold to Medizin-Technik GmbH. Dr. Gerhard Sennewald, one of our directors,
is a stockholder, executive officer and a director of Medizin-Technik GmbH.
In fiscal 2003, we derived $326,597, or 13% of our revenue from sales
to unrelated parties. These revenues consisted of the sale of two BSD 500
systems for $203,386, billable labor of $20,863, service contracts of $65,731,
and sales of consumable devices used with our hyperthermia systems of $36,617.
During the fiscal year ended August 31, 2003, we also recognized revenue of
$275,000 for royalties in arrears that were collected from a legal settlement.
Such royalties were owing pursuant to a 1996 agreement in which we granted a
license to use our patented technology related to benign prostatic hyperplasia,
or BPH. This payment from the licensee was for settlement in full of all royalty
obligations on the part of the licensee and such royalties will not continue in
future periods.
Cost of sales for the year ended August 31, 2003, included raw material
and labor costs. Research and development expenses include expenditures for new
product development and development of enhancements to existing products.
Recent Developments
On November 28, 2003, we completed the sale of an aggregate of
1,820,000 shares of our common stock to three institutional investors. The
shares of common stock were sold for cash consideration of $1.10 per share, or a
total of $2,002,000, pursuant to the terms of the Securities Purchase Agreement
entered into by and among the investors and our company as of November 28, 2003.
These shares were issued in a private placement transaction pursuant to Section
4(2) and Regulation D under the Securities Act of 1933, as amended. As provided
in the Securities Purchase Agreement, we also agreed to cause a shelf
registration statement covering the resale of these shares to be filed no later
than 60 days after the closing of the private placement. We estimate that our
20
net proceeds from the transaction, after paying a commission to our placement
agent, T.R. Winston & Company, LLC, and legal other expenses related to the
transaction, will be approximately $1,850,000. We also have agreed to issue to
our placement agent a three-year warrant to purchase up to 91,000 shares at an
exercise price per share of $1.80 as provided in the Securities Purchase
Agreement.
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 August 31, 2003, we had recorded a reserve
for potential inventory impairment of $140,000. During fiscal 2003, due to the
level of usage of certain inventory items, we estimated that such items on hand
potentially exceeded the estimated near-term usage. As a result, we determined
to increase the inventory reserve by $90,000 in the fourth quarter of fiscal
2003. This estimate is determined based on our forecasted sales and related
inventory usage to fill such sales orders as well as evaluation of technological
enhancements that may render inventory items obsolete in the near-term. We
periodically review our inventory levels and usage, paying particular attention
to slower-moving items. If projected sales for fiscal 2004 do not materialize or
if our hyperthermia systems do not receive increased market acceptance, we may
be required to increase the reserve for inventory in future periods. We have
projected a decrease in future orders placed with us for TherMatrx systems, but
do not project a requirement for any inventory impairment based on this decline.
In the past we have purchased inventory only after receiving orders for
TherMatrx systems, and only in quantities sufficient to fulfill those orders. We
have no inventory for TherMatrx systems that is currently at risk, whether or
not future orders are placed with us for TherMatrx systems.
21
Product Warranty. We provide product warranties on our BSD-500 and
BSD-2000 systems. These warranties vary from contract to contract, but generally
consist of parts and labor warranties for one year from the date of sale. To
date, expenses resulting from such warranties have not been material. We record
a warranty expense at the time of each sale. This reserve is estimated based on
prior history of service expense associated with similar units sold in the past.
Allowance for Doubtful Accounts. We provide our customers with payment
terms that vary from contract to contract. We perform ongoing credit evaluations
of our customers and maintain allowances for possible losses which, when
realized, have been within the range of management's expectations with exception
of the bad debt expense of approximately $300,000 recorded in fiscal 2003 as
discussed below. Our allowance for doubtful accounts at August 31, 2003 was
approximately $67,000, or approximately 14% of the total outstanding
receivables. Bad debt expense for the fiscal year ended August 31, 2003 was
approximately $300,000. This resulted from a sale of BSD-2000 that was recorded
in fiscal year 2002 to a customer that was determined to be uncollectible in the
fourth quarter of fiscal 2003. Allowance estimates are recorded on a
customer-by-customer basis and are determined based on the age of the
receivable, compliance with payment terms, and prior history with existing
clients. To date, actual results have not differed materially from management's
estimates, with the exception of the above-mentioned bad debt. 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: Comparison of Fiscal Years ended August 31, 2003 and 2002
--------------------------------------------------------------------------------
Revenue. Revenue for fiscal 2003 was $2,572,682 compared to $2,672,472
for fiscal 2002, a decrease of $99,790, or approximately 4%. The decrease in
total revenue was primarily due to a decrease in sales during fiscal 2003 to
TherMatrx of approximately $390,000 and a decrease in sales of products to
non-related parties of approximately $474,000, offset by an increase in sales to
Medizin-Technik of $442,000, and an increase in royalty revenue of $338,000. We
expect sales to TherMatrx to decline in fiscal 2004. We also expect royalty
revenue to decline significantly as $275,000 of the total $338,000 in royalty
revenue received during fiscal 2003 was related to a one-time settlement. 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 and these systems are expensive.
Sales of very 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 2002 to 2003
and the decrease in sales to non-related parties from 2002 to 2003. Product
sales increased to approximately $1,956,000 in fiscal 2003 from approximately
$1,866,000 in fiscal 2002, an increase of approximately $90,000, or 5%.
Related Party Revenue. We derived $1,907,585, or 74% of our revenue in
fiscal 2003 from sales to related parties as compared to $1,854,714, or 69%, in
fiscal 2002. Approximately $1,391,443 of such related party revenue in fiscal
2003 was from the sales of thermotherapy systems, component products and
contract services to TherMatrx. We also received a royalty payment of $63,500
paid to us by TherMatrx that is included in other revenue. During fiscal 2002,
sales to TherMatrx were approximately $1,781,000. This decline in sales to
TherMatrx in fiscal 2003 was due to increased use of other suppliers in
providing products and services. We believe that we provided approximately 38%
of the inventory and related manufacturing services purchased by TherMatrx in
fiscal 2003 as compared to approximately 55% in fiscal 2002. The remaining
related party revenue of approximately $516,142 in fiscal 2003 was for one
BSD-2000 system and various component parts sold to Medizin-Technik. During
fiscal 2002, we had sales of approximately $74,000 to Medizin-Technik. The
significant increase in sales to Medizin-Technik in fiscal 2003 was due to the
sale of a BSD-2000 system in fiscal 2003. In 2002, Medizin-Technik did not
purchase a complete system. 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.
22
Non-related Party Revenue. In fiscal 2003, we derived approximately
$601,597, or 23% of our total revenue as compared to approximately $817,758, or
31%, in fiscal 2002 from non-related party sales. Our fiscal 2003 non-related
party revenue consisted of sales of two BSD-500 systems in fiscal 2003 for
approximately $203,386. The balance of our non-related party revenue consisted
of consumable devices of $36,617, billable labor of $20,863, service contracts
of $65,731 and royalty revenue of $275,000. As noted above, we expect royalty
revenue to decline significantly as the $275,000 in royalty revenue was related
to a one-time settlement. During fiscal 2002, we sold two BSD-2000 systems and
one BSD-500 system for a aggregate of approximately $630,000. The unit price at
which these systems sold was lower than our normal unit price for new systems
because they were refurbished. The two BSD-2000 systems sold in fiscal 2002 were
purchased by research facilities in the United States. Because the BSD-2000
system can only be sold in the United States pursuant to an IDE under FDA
regulations, sales in the United States may only be made to customers using the
system for research purposes.
Cost of Sales. Cost of sales for fiscal 2003 was $1,227,377 compared to
$1,114,846 for fiscal 2002, an increase of $112,531, or approximately 10%. This
increase resulted primarily from charges to cost of sales for obsolete inventory
of $90,000. Cost of sales for fiscal 2003 to unrelated parties decreased to
$94,619 from $302,431 primarily because of the decrease in sales to unrelated
customers. Cost of sales to related parties in fiscal 2003 increased to
$1,042,758 from $812,415 in fiscal 2002 primarily due to the increase in related
party sales and the change in product mix sold to related parties from
$1,854,714 of systems, component products and services in fiscal 2002 to
$1,907,585 of systems, component products and services in fiscal 2003. During
fiscal 2003, approximately $748,000, or 74% of the related party cost of sales
were attributable to sales to TherMatrx and approximately $295,000, or 26%, were
attributable to Medizin-Technik. The products sold to TherMatrx generally
require less cost per unit to manufacture than our BSD-2000 and BSD-500 systems.
Gross Profit. Gross profit for fiscal 2003 was $1,006,805 or 45% of
total product sales and related service compared to $1,557,626, or 58%, of total
product sales in fiscal 2002. The gross margin percentage on sales to TherMatrx
decreased from 56% in 2002 to 39% in 2003.
During fiscal 2002 and the first half of fiscal 2003, we only provided
labor in connection with the manufacture of the systems sold to TherMatrx. The
parts and materials for such systems were purchased from suppliers by TherMatrx
and assembled by us. During the second half of fiscal 2003, we began providing
both the labor and materials for the systems sold to TherMatrx. While the total
revenue recorded per system increased from approximately $5,000 per unit to
$10,000 per unit, our total gross margin on the systems declined from
approximately 38% to approximately 28%. During fiscal 2002, we sold 150 systems
to TherMatrx, as compared to 87 in fiscal 2003. We sold 28 systems in the first
half of fiscal 2003 and 59 in the last half of fiscal 2003. In addition, sales
of our applicators, probes, and other component products to TherMatrx declined
as TherMatrx purchased some of its inventory of such products from another
supplier. These items have a higher gross margin than the systems we sold to
TherMatrx.
Our gross margins for sales to Medizin-Technik improved from 55% in
fiscal 2002 to 62% in fiscal 2003. This improvement was due to the sale of the
BSD-2000 unit in fiscal 2003 while we did not sell any complete units to
Medizin-Technik in fiscal 2002. The gross margins on the BSD-2000 and BSD-500
units are higher than the gross margin recognized on component parts, supplies,
and contract services.
Our gross margins for sales to non-related parties improved from 63% in
2002 to 71% in fiscal 2003. This was primarily due to the higher margin that we
received from the first sale of our new BSD-500 system.
23
Research and Development Expenses. Research and development expenses
for fiscal 2003 were $676,867 compared to $603,137 for fiscal 2002, an increase
of $73,730, or 12%. Research and development expenses in fiscal 2003 related
primarily to development of a commercial version of the BSD-2000/3D/MR
hyperthermia system and to our BSD-500 systems.
Inventory Impairment Expense. We recorded an inventory impairment
charge in fiscal 2003 of $90,000 increasing our total inventory reserve at
August 31, 2003 to $140,000. On at least an annual basis, we attempt to identify
inventory items that have shown relatively no movement or very slow movement.
Generally, if an item has shown little or no movement for over a year, it is
examined for obsolescence. If it is determined that recoverability of the item
is impaired, a reserve is established for that item. In addition, if we identify
products that have become obsolete due to product upgrades or enhancements, a
reserve is established for such products.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for fiscal 2003 were $1,241,561 compared to $1,667,042
in fiscal 2002, a decrease of $425,481, or approximately 26%. This decrease was
primarily due to decrease in compensation expense in fiscal 2003 as compared to
fiscal 2002. This decrease was offset by increases in bad debt expense of
approximately $257,000 and increases in legal fees of approximately $30,000,
mainly resulting from legal assistance provided in our settlement of the royalty
dispute discussed elsewhere herein.
During fiscal 2002, we issued to certain employees and board members
options to purchase 179,300 common shares of TherMatrx, or approximately 7% of
our interest in TherMatrx, at an exercise price of $.001 per share. In
connection with the issuance of these options, we recorded $717,000 of
compensation expense. This expense was computed based on the estimated fair
value of the options. We conservatively estimated the fair value of the options
to be $4.00 per option. This fair value was determined based on a December 2001
private offering of TherMatrx shares in which 525,321 shares of common stock
were sold for $4.00 per share to existing TherMatrx stockholders who elected to
purchase shares in the offering. For accounting purposes, because of the lack of
other contemporaneous transaction data indicating the value of these shares in
July 2002, and to record a conservative estimate of compensation expense, we
recorded the value of each option at $4.00, resulting in $717,000 of
compensation expense. Because all of the options were exercised prior to
year-end, we also recorded a gain of $717,000 because the TherMatrx stock issued
to settle the compensation liability had a book value of $0. The gain is
reflected in the statement of operations as "Gain on transfer of equity interest
in affiliate to related parties." The exercise of these options reduced our
holdings in TherMatrx from 2,700,000 shares, or approximately 32%, to 2,520,700
shares, or approximately 30%.
We recorded a bad debt expense of $300,394 in fiscal 2002 as a result
of a receivable write-off due to our inability to collect payment relating to
the sale of a BSD-2000 system in fiscal 2002. The sale in fiscal 2002 was to a
non-related party. At the time the sale was made, we were led to believe that
the customer had secured payment for the system. After our efforts to collect
the receivable failed, we determined to seek return of the system and write off
the receivable. Accordingly, during the fourth quarter of fiscal 2003, we
recorded a bad debt expense of $300,394. This bad debt expense was the net
result of a receivable write-off of approximately $346,000 and the value of
returned inventory of approximately $46,000. We believe this is an isolated case
and not indicative of a trend. Historically, our bad debt expense has been
substantially lower than fiscal 2003 levels. Generally, we require a significant
deposit on the sales of our BSD systems which reduces the likelihood of bad debt
expense.
Other Income. Other income for fiscal 2003 was $2,838 compared to
$722,198 in fiscal 2002, a decrease of $719,360. This decrease resulted almost
entirely from a gain recognized in 2002 on transfer of equity interest in
affiliate to related parties as noted above.
Net Loss. In fiscal 2003 we had a net loss of $570,285 as compared to
net income in fiscal 2002 of $9,645. The net loss was primarily caused by an
increase in bad debt expense of $300,394, an increase in inventory reserve of
$90,000 and lower overall sales for fiscal 2003.
24
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
-------------------------------
Since inception, we have generated an accumulated deficit of
$20,486,107. We have historically financed our operations through cash from
operations, licensing of technological assets and issuance of common stock.
We used $227,298 in cash from operating activities in fiscal 2003
compared to cash generated of $19,800 in fiscal 2002. This was a result of a
significant uncollectible receivable of $300,000 that contributed to a net loss
of $570,285 for fiscal 2003 compared to net income of $9,645 in 2002, and a
reduction of accounts receivable of $9,614 as compared to $55,173 in fiscal 2002
offset by an increase in accounts payable of $217,447 compared to a reduction in
accounts payable of $51,121 in fiscal 2002. Accrued expenses decreased by
$133,066 primarily as a result of a decrease in customer deposits as orders were
shipped. Our investing activities resulted in net cash used of $60,599 relating
to the purchase of certain property and equipment. Cash provided by financing
activities totaled $2,000 reflecting proceeds from the issuance of common stock
in connection with the exercise of outstanding stock options.
On November 28, 2003, we completed the sale of an aggregate of
1,820,000 shares of our common stock to investors for cash consideration of
$1.10 per share, or gross proceeds of $2,002,000. On December 10, 2003, we
issued an additional 239,600 shares to investors at a price per share of $1.10
for gross proceeds of $263,560. The net proceeds from the transactions, after
paying a commission to our placement agent, T.R. Winston & Company, LLC, and
legal and other expenses related to the transaction, were approximately
$2,079,000.
Our ability to fund our cash needs and grow our business depends on our
ability to generate cash flow from operations and capital from financing
activities. Our operating cash flow has fluctuated significantly in the past and
may continue to do so in the future. We believe that our current working capital
and anticipated cash flow from future operations will be sufficient to fund our
anticipated operations for fiscal 2004. We have based this belief, however, on
assumptions that may prove to be wrong.
We expect our revenue from sales of products to TherMatrx to decline in
fiscal 2004. We also expect to incur additional expenses related to the
commercial introduction of our BSD-500 systems, which will precede any revenue
from the sale of such systems. Due to additional participation at trade shows,
expenditures on publicity, additional travel, higher sales commissions and other
related expenses, we project that our sales and marketing expenses will be
approximately $250,000 higher in fiscal 2004 than in the prior year to support
the commercial introduction of the BSD-500 systems. In addition, we anticipate
that we will incur expenses of approximately $100,000 related to governmental
and regulatory, including FDA, approvals during fiscal 2004 in excess of fiscal
2003. We are making these investments in sales and marketing and on government
and regulatory activities to increase our revenue from sales of our BSD-500
system and, upon receipt of FDA approval, from the sale of our BSD-2000 system
in the United States. These increased marketing and regulatory expenses are an
investment in generating offsetting revenue against the decline in TherMatrx
sales that we have projected, and to provide future revenue growth over the long
term.
25
We believe any cash shortfall during fiscal 2004 that results from this
decrease in revenues and increase in expenses can be covered through the cash
raised in our November and December 2003 private placements. However, if our
revenues from TherMatrx decrease more rapidly than we currently expect or
revenues from the sale of our systems is lower than we currently expect, we will
have to cut expenses or use more of our available cash than we anticipated. We
believe we can cover any such cash shortfall with cost cutting or available
cash. If we cannot cover any such cash shortfall with cost cutting or available
cash, we would need to obtain additional financing. We cannot be certain that
any financing will be available when needed or will be available on terms
acceptable to us. Insufficient funds may require us to delay, scale back or
eliminate some or all of our programs designed to facilitate the commercial
introduction of our systems.
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" and "Business" 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 development or acquisition of new technologies;
o our expectation is that sales to TherMatrx will decline and the
rate at which sales to TherMatrx decline;
o the amount of expenses we will incur for the commercial
introduction of the BSD-500 system;
o the amount of expenses we will incur for governmental and
regulatory, including FDA, approvals;
o our expectation that related party revenue will continue to be a
significant portion of our total revenue;
o our belief that sales of BSD-500 and BSD-2000 systems will
increase through our future sales and marketing efforts; and
o our belief that our current working capital and cash from
operations will be sufficient to fund our anticipated operations
for fiscal 2004.
We wish to caution readers that the forward-looking statements and our
operating results are subject to various risks and uncertainties that could
cause our actual results and outcomes to differ materially from those discussed
or anticipated, including the factors set forth in the section entitled "Risk
Factors" included elsewhere in this prospectus. We also wish to advise readers
not to place any undue reliance on the forward-looking statements contained in
this prospectus, which reflect our beliefs and expectations only as of the date
of this prospectus. We assume no obligation to update or revise these
forward-looking statements to reflect new events or circumstances or any changes
in our beliefs or expectations, other than as required by law.
26
ITEM 7. FINANCIAL STATEMENTS
BSD MEDICAL CORPORATION
Financial Statements
August 31, 2003 and 2002
BSD MEDICAL CORPORATION
Index to Financial Statements
--------------------------------------------------------------------------------
Page
----
Independent Auditor's Report F-1
Balance Sheet F-2
Statement of Operations F-3
Statement of Stockholders' Equity F-4
Statement of Cash Flows F-5
Notes to Financial Statements F-6
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of BSD Medical Corporation
We have audited the balance sheet of BSD Medical Corporation (the Company) as of
August 31, 2003, and the related statements of operations, stockholders' equity,
and cash flows for the years ended August 31, 2003 and 2002. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of BSD Medical Corporation as of
August 31, 2003, and the results of its operations and cash flows for the years
ended August 31, 2003 and 2002 in conformity with accounting principles
generally accepted in the United States of America.
TANNER + CO.
Salt Lake City, Utah
September 29, 2003
F-1
BSD MEDICAL CORPORATION
Balance Sheet
August 31, 2003
--------------------------------------------------------------------------------
Assets
------
Current assets:
Cash and cash equivalents $ 136,003
Receivables, net 60,844
Related party receivables 342,878
Inventories 802,473
Other current assets 43,238
--------------
Total current assets 1,385,436
Property and equipment, net 141,294
Patent, net of amortization of $5,043 26,885
--------------
$ 1,553,615
--------------
--------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 280,068
Accrued expenses 614,470
Current portion of deferred revenue 43,220
--------------
Total current liabilities 937,758
Deferred revenue 40,900
--------------
Total liabilities 978,658
--------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value; 10,000,000 authorized,
no shares issued and outstanding -
Common stock, $.001 par value; authorized 40,000,000
shares; issued and outstanding 17,839,633 shares 17,840
Additional paid-in capital 21,070,874
Deferred compensation (27,416)
Accumulated deficit (20,486,107)
Treasury stock, at cost (234)
--------------
Total stockholders' equity 574,957
--------------
$ 1,553,615
--------------
--------------------------------------------------------------------------------
See accompanying notes to financial statements. F-2
BSD MEDICAL CORPORATION
Statement of Operations
Years Ended August 31,
--------------------------------------------------------------------------------
2003 2002
----------------------------------
Revenues:
Sales $ 326,597 $ 817,758
Sales to related parties 1,907,585 1,854,714
Revenue from royalties in arrears 275,000 -
Other revenue - related party 63,500 -
----------------------------------
2,572,682 2,672,472
----------------------------------
Costs and expenses:
Cost of sales 94,619 302,431
Cost of sales to related parties 1,132,758 812,415
Research and development 676,867 603,137
Selling, general, and administrative 1,241,561 1,667,042
----------------------------------
3,145,805 3,385,025
----------------------------------
Operating loss (573,123) (712,553)
----------------------------------
Other income (expense):
Gain on transfer of equity interest in
affiliate to related parties - 717,000
Interest income 2,838 5,198
----------------------------------
2,838 722,198
----------------------------------
Net (loss) income $ (570,285) $ 9,645
----------------------------------
Income (loss) per common share -
basic and diluted $ (0.03) $ -
----------------------------------
Weighted average shares - basic 17,805,000 17,699,000
----------------------------------
Weighted average shares - diluted 17,805,000 17,932,000
----------------------------------
--------------------------------------------------------------------------------
See accompanying notes to financial statements. F-3
BSD MEDICAL CORPORATION
Statement of Stockholders' Equity
Years Ended August 31, 2003 and 2002
-----------------------------------------------------------------------------------------------------------------------------
Common Stock Additional Deferred Treasury Stock
------------------- Paid-in Compen- Accumulated ----------------
Shares Amount Capital sation Deficit Shares Amount Total
-----------------------------------------------------------------------------------------
Balance, September 1, 2001 17,602,619 $ 17,603 $ 20,969,196 $ (25,097)$ (19,925,467) 24,331 $ (234) $ 1,036,001
Common stock issued for:
Cash 109,633 110 34,492 - - - - 34,602
Services 27,264 27 23,973 - - - - 24,000
Options 16,812 17 (17) - - - - -
Amortization of deferred
compensation - - - 8,636 - - - 8,636
Deferred compensation - - 9,813 (9,813) - - - -
Net income - - - - 9,645 - - 9,645
-----------------------------------------------------------------------------------------
Balance August 31, 2002 17,756,328 17,757 21,037,457 (26,274) (19,915,822) 24,331 (234) 1,112,884
Common stock issued for:
Cash 20,000 20 1,980 - - - - 2,000
Services 38,106 38 23,962 - - - - 24,000
Warrants 25,199 25 (25) - - - - -
Amortization of deferred
compensation - - - 6,358 - - - 6,358
Deferred compensation - - 7,500 (7,500) - - - -
Net loss - - - - (570,285) - - (570,285)
-----------------------------------------------------------------------------------------
Balance August 31, 2003 17,839,633 $ 17,840 $ 21,070,874 $ (27,416)$ (20,486,107) 24,331 $ (234) $ 574,957
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements F-4
BSD MEDICAL CORPORATION
Statement of Cash Flows
Years Ended August 31,
-----------------------------------------------------------------------------------------
2003 2002
---------------------------
Cash flows from operating activities:
Net (loss) income $ (570,285) $ 9,645
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Provision for doubtful accounts 284,393 42,403
Provision for inventory write-off 90,000 30,000
Depreciation and amortization 48,678 48,965
Deferred gain on sale of building (15,275) (61,416)
Amortization of deferred compensation 6,358 8,636
Stock compensation expense 24,000 24,000
Compensation expense resulting from options
granted to purchase TherMatrx shares - 717,000
Gain on issuance of options of TherMatrx shares
as settlement of compensation - (717,000)
Decrease (Increase) in:
Restricted certificate of deposit - 15,313
Receivables 9,614 55,173
Inventories (85,743) (109,095)
Other current assets (24,901) 16,767
Increase (decrease) in:
Accounts payable 217,447 (51,121)
Accrued expenses (133,066) 40,043
Deferred revenue (78,518) (49,513)
---------------------------
Net cash (used in) provided by
operating activities (227,298) 19,800
---------------------------
Cash flows from investing activities:
Purchase of property and equipment (60,599) (22,532)
Purchase of patent license - (18,000)
---------------------------
Net cash used in
investing activities (60,599) (40,532)
---------------------------
Cash flows from financing activities-
proceeds from issuance of common stock 2,000 34,602
---------------------------
Increase (decrease) in cash and cash equivalents (285,897) 13,870
Cash and cash equivalents, beginning of year 421,900 408,030
---------------------------
Cash and cash equivalents, end of year $ 136,003 $ 421,900
---------------------------
-----------------------------------------------------------------------------------------
See accompanying notes to financial statements F-5
BSD MEDICAL CORPORATION
Notes to Financial Statements
August 31, 2003 and 2002
--------------------------------------------------------------------------------
1. Organization Organization
of BSD Medical Corporation (the Company) was incorporated
Significant in the State of Delaware on July 3, 1986. The Company
Accounting develops, produces, markets, and services systems used
Policies for the treatment of cancer and other diseases. These
systems are sold worldwide. In addition, the Company
currently has an approximate 30% interest in TherMatrx,
Inc. (TherMatrx) a corporate joint venture that is
engaged in the manufacture and sale of medical
equipment.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and
investments with original maturities to the Company of
three months or less.
Inventories
Parts and supplies inventories are stated at the lower
of cost or market. Cost is determined using the average
cost method. Work-in-process and finished goods are
stated at the lower of the accumulated manufacturing
costs or market.
Property and Equipment
Property and equipment are stated at cost less
accumulated depreciation. Depreciation and amortization
are determined using the straight-line method over the
estimated useful lives of the assets. Expenditures for
maintenance and repairs are expensed when incurred and
betterments are capitalized. Gains and losses on sales
of property and equipment are reflected in operations.
Investment in Joint Venture
The Company has an approximate 30% ownership in
TherMatrx, a corporate joint venture that is engaged in
the manufacture and sale of medical devices. The
investment is accounted for on the equity method of
accounting. Because the Company's percent share of
accumulated losses in TherMatrx has exceeded its
original investment no asset is recorded on the balance
sheet. The Company has included in accrued liabilities
$136,467 of potential obligations to TherMatrx, which it
incurred in a prior year. No further obligations have
been recognized as the Company has not guaranteed or
otherwise committed to provide further financial
funding.
--------------------------------------------------------------------------------
F-6
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
1. Organization Patents
of Patents are carried at cost and are being amortized over
Significant 17 years.
Accounting
Policies Warranty Reserve
Continued The Company provides limited warranties to its customers
for products sold. Estimated future warranty obligations
are accrued each period. As of August 31, 2003 the
accrued warranty reserve was approximately $3,000.
During the fiscal years ended August 31, 2003 and 2002
total warranty expense was $11,502 and $15,170,
respectively.
Income Taxes
The Company accounts for income taxes using the asset
and liability method. Under the asset and liability
method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable
to differences between the financial statement carrying
amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in
which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment
date.
Warranty Reserve
The Company provides limited warranties to its customers
for products sold. Estimated future warranty obligations
are accrued each period. As of August 31, 2003 the
accrued warranty reserve was approximately $3,000.
During the fiscal years ended August 31, 2003 and 2002
total warranty expense was $11,502 and $15,170,
respectively.
Income (Loss) Per Common Share
The computation of basic income (loss) per common share
is based on the weighted average number of shares
outstanding during each year.
The computation of diluted earnings per common share is
based on the weighted average number of shares
outstanding during the year, plus the common stock
equivalents that would arise from the exercise of stock
options and warrants outstanding, using the treasury
stock method and the average market price per share
during the year. Common stock equivalents are not
included in the diluted loss per share calculation when
their effect is anti-dilutive. Options to purchase
1,275,303 shares and 1,258,901 shares of common stock at
prices ranging from $.10 to $1.76 per share were
outstanding at August 31, 2003 and 2002, respectively.
Options outstanding during the fiscal year ended August
31, 2003 were not included in the calculation of diluted
earnings per share because their effect was
anti-dilutive.
--------------------------------------------------------------------------------
F-7
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
1. Organization Income (Loss) Per Common Share - Continued
of The shares used in the computation of the Company's
Significant basic and diluted income (loss) per share are reconciled
Accounting as follows:
Policies
Continued 2003 2002
-------------------------------
Weighted average number of shares
outstanding - basic 17,805,000 17,699,000
Dilutive effect of stock options - 233,000
-------------------------------
Weighted average number of shares
outstanding, assuming dilution 17,805,000 17,932,000
-------------------------------
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,
no compensation cost has been recognized in the
financial statements, as all options granted under those
plans had an exercise price equal to or greater than the
market value of the underlying common stock on the date
of grant. 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:
Years Ended August 31,
-------------------------------
2003 2002
-------------------------------
Net income (loss) - as reported $ (570,285) $ 9,645
Deduct total stock based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (123,770) (126,225)
-------------------------------
Net loss - pro forma (694,055) (116,580)
-------------------------------
Basic and diluted loss per share - as $ (.03) $ -
reported
-------------------------------
Basic and diluted loss per share - pro forma $ (.04) $ -
-------------------------------
--------------------------------------------------------------------------------
F-8
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
1. Organization The fair value of each option grant is estimated on the
of date of grant using the Black-Scholes option pricing
Significant model with the following assumptions:
Accounting
Policies
Continued 2003 2002
-------------------------------
Expected dividend yield $ - $ -
Expected stock price volatility 122% 143%
Risk-free interest rate 4.3% 4.3%
Expected life of options 5 years 5 years
The weighted average fair value of options granted
during the years ended August 31, 2003 and 2002 were
$.57 and $.73, respectively.
Revenue Recognition
The Company recognizes 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, providing training, and service support
contracts. Product sales were $1,956,270 and $1,866,192
for the years ended August 31, 2003 and 2002,
respectively. Service revenue was $277,912 and $806,280
for the years ended August 31, 2003 and 2002,
respectively.
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 the Company. We provide a
reserve allowance for estimated returns. To date,
returns have not been significant.
--------------------------------------------------------------------------------
F-9
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
1. Organization Revenue Recognition - Continued
and Revenue from the sale of software license rights is
Significant recognized when a valid purchase order has been
Accounting received, the software license has been delivered to the
Policies customer, the selling price is fixed or determinable,
Continued and collection is reasonably assured. Delivery is deemed
to have occurred if diskettes have been shipped, or if
the software has been delivered electronically by email.
To date, the sale of software license rights has not
been material.
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.
The Company's revenue recognition policy is the same for
sales to both related parties and non-related parties.
The Company provides 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.
Research and Development Costs
Research and development costs are expensed as incurred.
--------------------------------------------------------------------------------
F-10
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
1. Organization Concentration of Credit Risk
of Financial instruments that potentially subject the
Significant Company to concentration of credit risk consists
Accounting primarily of trade receivables. In the normal course of
Policies business, the Company provides credit terms to its
Continued customers. Accordingly, the Company performs ongoing
credit evaluations of its customers and maintains
allowances for possible losses. During the year ended
August 31, 2003, the Company wrote off a receivable of
approximately $346,000. This receivable was recorded as
a sale in fiscal year 2002 and resulted in a significant
write-off in the fourth quarter of 2003.
The Company has cash in bank and short-term investments
that, at times, may exceed federally insured limits. The
Company has not experienced any losses in such accounts.
The Company believes it is not exposed to any
significant credit risk on cash and short-term
investments.
Use of Estimates in the Preparation of Financial
Statements
The preparation of financial statements in conformity
with accounting principles generally accepted in the
United States of America requires management to make
estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of
revenues and expenses during the reporting period.
Actual results could differ from those estimates.
2. Detail of Details of certain balance sheet accounts as of August
Certain 31, 2003, are as follows:
Balance
Sheet
Accounts Receivables:
Trade receivables $ 455,093
Less allowance for doubtful
accounts (67,371)
---------------
$ 403,722
---------------
Inventories:
Parts and supplies $ 385,825
Work-in-process 556,648
Reserve for obsolete inventory (140,000)
---------------
$ 802,473
---------------
--------------------------------------------------------------------------------
F-11
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
2. Detail of Accrued expenses:
Certain Customer deposits $ 272,132
Balance Accrued loss in equity affiliate 136,467
Sheet Accrued vacation 96,254
Accounts Accrued payroll and taxes 67,232
Continued Other accrued expenses 42,385
---------------
$ 614,470
---------------
3. Property Property and equipment consists of the following:
and
Equipment Equipment $ 680,630
Furniture and fixtures 297,741
---------------
978,371
Less accumulated depreciation (837,077)
---------------
$ 141,294
---------------
4. Deferred During the year ended August 31, 1998, the Company
Gain entered into a sale-leaseback transaction on its
and building. The sale-leaseback resulted in a gain of
Operating $325,513 of which $307,000 was deferred and is being
Lease credited to income as rent expense adjustments over the
term of the lease. The lease required monthly payments
of $6,533 through November 2002. During the year ended
August 31, 2003, the Company renewed its lease for five
years, which includes payments of approximately $82,000
per year, adjusted annually for increases in the cost of
living based on the Consumer Price Index for Urban
Consumers.
--------------------------------------------------------------------------------
F-12
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
4. Deferred Future minimum payments at August 31, 2003, are as
Gain follows:
and
Operating Years Ending August 31, Amount
Lease ----------------------- ------
Continued
2004 $ 82,320
2005 82,320
2006 82,320
2007 82,320
2008 20,580
--------------
$ 349,860
--------------
Annual rent expense on this operating lease for the
years ended August 31, 2003 and 2002 amounted to
approximately $67,000 and $17,000, net of sale-leaseback
gain.
5. Deferred The Company has entered into certain service contracts
Revenue for which it has received payment in advance. The
Company is recognizing these service revenues over the
life of the service agreements as follows:
Years Ending August 31, Amount
----------------------- ---------------
2004 $ 43,220
2005 40,900
---------------
84,120
Less current portion (43,220)
---------------
Long-term deferred revenue $ 40,900
---------------
--------------------------------------------------------------------------------
F-13
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
6. Income The income tax benefit (expense) differs from the amount
Taxes computed at federal statutory rates as follows:
Years Ended August 31,
-------------------------------
2003 2002
-------------------------------
Income tax benefit
(expense) at
statutory rate $ 198,000 $ (3,000)
Expiration of net
operating loss
carryforwards (19,000) -
Change in valuation
allowance (179,000) 3,000
-------------------------------
$ - $ -
-------------------------------
Deferred tax assets (liabilities) are comprised of the
following:
Net operating loss carryforwards $ 1,843,000
General business and AMT credit
carryforwards 170,000
Accrued expenses and deposits 128,000
Deferred revenue 29,000
Inventory reserve 48,000
Allowance for bad debts and reserves 17,000
Depreciation (21,000)
Deferred compensation expense (9,000)
---------------
2,205,000
Valuation allowance (2,205,000)
---------------
$ -
---------------
--------------------------------------------------------------------------------
F-14
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
6. Income At August 31, 2003, the Company has net operating
Taxes losses (NOL) as follows:
Continued
Expiration Date NOL
--------------- ---------------
2005 $ 1,270,000
2007 190,000
2008 99,000
2009 671,000
2010 170,000
2012 838,000
2016 153,000
2018 1,052,000
2019 731,000
---------------
$ 5,174,000
---------------
At August 31, 2003, the Company has Research and
Experimentation Tax Credits (RETC) and Alternative
Minimum Tax Credits (AMTC) as follows:
Expiration Date RETC AMTC
--------------- -------------------------------
2004 $ 41,000 $ -
2005 - -
No expiration date 72,000 57,000
-------------------------------
$ 113,000 $ 57,000
-------------------------------
The Company has experienced a greater than 50 percent
change of ownership. Consequently, use of the Company's
carryovers against future taxable income in any one year
may be limited and those carryovers may expire
unutilized due to limitations imposed by the change of
ownership rules.
--------------------------------------------------------------------------------
F-15
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
7. Stock Stock Options
Options and The Company's 1987 Employee Stock Option Plan authorizes
Warrants the granting of incentive options to certain key
employees of the Company and nonqualified stock options
to certain key employees, non-employee directors, or
individuals who provide services to the Company. The
Plan, as amended, provides for the granting of options
for an aggregate of 950,000 shares. The options vest
according to a set schedule over a five-year period and
expire upon the employee's termination or after ten
years from the date of grant.
The Company's 1998 Employee Stock Option Plan authorizes
the granting of incentive stock options to certain key
employees and non-employees who provide services to the
Company. The Plan provides for the granting of options
for an aggregate of 2,000,000 shares. The options vest
subject to management's discretion.
The Company's 1998 Director Stock Plan authorizes an
annual compensation of $12,000 to each non-employee
director. The annual compensation may be satisfied by
issuing common stock, with the number of shares issued
calculated by dividing the unpaid compensation by a
daily average of the preceding twenty day closing price
of the Company's common stock. The Plan also grants each
non-employee outside director 25,000 options each year
at an exercise price of 85% of the fair market value of
the common stock at the date the option is granted. The
Plan allows for an aggregate of 1,000,000 shares to be
granted. The options vest according to a set schedule
over a five-year period and expire upon the director's
termination, or after ten years from the date of grant.
For certain options issued under this plan, the Company
has recorded as deferred compensation the excess of the
market value of common stock at the date of grant over
the exercise price.
--------------------------------------------------------------------------------
F-16
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
7. Stock A schedule of the options and warrants are as follows:
Options and
Warrants
Continued Price Per
Options Warrants Share
-----------------------------------------
Outstanding at September 1, 2001 1,306,434 87,133 $ .10 to 3.00
Granted 75,000 - .73
Exercised (114,312) (12,133) .10 to .37
Forfeitures (8,221) (75,000) .10 to 3.00
-----------------------------------------
Outstanding at August 31, 2002 1,258,901 - .10 to 1.76
Granted 75,000 - .56
Exercised (58,598) - .10 to .65
Forfeitures - -
-----------------------------------------
Outstanding at August 31, 2003 1,275,303 - $ .10 to 1.76
-----------------------------------------
The following table summarizes information about stock
options and warrants outstanding at August 31, 2003:
Options and Warrants Options and Warrants
Outstanding Exercisable
-------------------------------------------------------------------
Weighted
Average
Remaining Weighted Weighted
Range of Contractual Average Average
Exercise Number Life Exercise Number Exercise
Prices Outstanding (Years) Price Exercisable Price
-------------------------------------------------------------------------------
$ .10-.25 430,703 2.41 $ .13 415,703 $ .12
.37-1.11 794,600 7.65 .61 427,780 .58
1.76 50,000 7.82 1.76 50,000 1.76
-------------------------------------------------------------------------------
$ .10-1.76 1,275,303 5.23 $ .49 893,483 $ .43
-------------------------------------------------------------------------------
8. Foreign During the years ended August 31, 2003 and 2002 the
Customer Company had sales of $1,391,443 and $1,844,500
and Major (including $63,500 in royalty revenues), respectively,
Customer to TherMatrx, an unconsolidated affiliate of which it
owns approximately 30%. During the years ended August
31, 2003 and 2002 the Company had sales to a European
entity controlled by a significant stockholder and
member of the Board of Directors of the Company of
approximately $518,000 and $74,000, respectively. The
Company also had a sale to an unrelated entity of
approximately $344,000 or approximately 12.9% of total
sales for the year ended August 31, 2002.
--------------------------------------------------------------------------------
F-17
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
9. Related Party At August 31, 2003, accrued expenses include
Transactions approximately $272,132, due to an entity controlled by a
Not otherwise significant stockholder and member of the Board of
disclosed Directors and an unconsolidated affiliate. These amounts
represent deposits to purchase product from the Company
and will be recognized as revenue when all performance
and delivery obligations have been met.
At August 31, 2003, accounts receivable includes
approximately $38,225, due from an entity controlled by
a significant stockholder and member of the Board of
Directors. Accounts receivable also include $304,653 due
from TherMatrx at August 31, 2003.
10. Supplemental Actual amounts paid for interest and income taxes are as
Cash Flow follows:
Information
Years Ended
August 31,
-------------------------------
2003 2002
-------------------------------
Interest expense $ - $ -
-------------------------------
Income taxes $ - $ -
-------------------------------
During the year ended August 31, 2002, the Company
exchanged a restricted CD to a bank for accounts
receivable of $73,604. The receivable exchanged was
allowed for by $57,403 that was offset by $15,000 of
accrued commissions payable related to the receivable.
--------------------------------------------------------------------------------
F-18
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
11. Significant The Company has an approximate 30% interest in an
Unconsolidated unconsolidated affiliate (TherMatrx) at August 31, 2003.
Affiliate During the year ended August 31, 2002 the Company
compensated certain employees and directors by issuing
options to purchase 179,300 shares of TherMatrx, or
approximately 2% of the Company's interest in TherMatrx
at $.001 per share. This resulted in compensation
expense of $717,000, which is included in general and
administrative expenses in the statement of operations
for the year ended August 31, 2002. The Company
estimated the fair value of the options to be $4.00 per
option. This fair value was determined based on a
December 2001 private offering of TherMatrx shares in
which 525,321 shares of common stock were sold for $4.00
per share to existing TherMatrx stockholders who elected
to purchase shares in the offering. For accounting
purposes, because of the lack of other contemporaneous
transaction data indicating the value of these shares in
July 2002, the Company recorded the value of each option
at $4.00, thus resulting in $717,000 of compensation
expense. Because the TherMatrx shares used to settle the
compensation obligation had a book value of $0, such
issuance of TherMatrx shares upon exercise of the
options resulted in a gain of $717,000, which is
reflected as gain on transfer of equity interest in
affiliate in the statement of operations. All of the
options had been exercised as of August 31, 2002.
Summarized financial information for the significant
unconsolidated affiliate of the Company, at September
30, 2003 and 2002 (the affiliate's fiscal year runs from
October 1, through September 30) are as follows:
2003 2002
-------------------------------
Result for year:
Gross revenue $ 13,298,422 $ 7,714,313
Gross profit $ 9,589,803 $ 4,484,253
Net income (loss) $ 1,520,190 $ (1,875,003)
Year-end financial
position
Current assets $ 6,313,746 $ 4,337,756
Non-current assets $ 2,335,232 $ 2,549,626
Current liabilities $ 1,913,453 $ 1,672,047
Non-current liabilities $ 474,748 $ 474,748
--------------------------------------------------------------------------------
F-19
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
12. Commitments The Company has an employment agreement with the
and President of the Company. The agreement provides that
Contingencies the President's salary will be based upon a reasonable
mutual agreement. Additionally, in the case of
non-voluntary termination, the acting president will
receive severance pay for a six-month period, which
includes an extension of all employee rights,
privileges, and benefits, including medical insurance.
The six-month severance pay would be the salary at the
highest rate paid to the president prior to such a
non-voluntary termination. The agreement also requires
the Company to pay the acting president for any accrued
unused vacation and bonuses.
The Company has an exclusive worldwide license for a
unique temperature probe. The license has no
determinable life. The Company pays royalties based upon
its sales of this probe. Royalties accrued as of August
31, 2003 and 2002, were $1,000. Royalty expense amounted
to approximately $5,000 and $11,000 for the years ended
August 31, 2003 and 2002, respectively.
13. Fair Value of None of the Company's financial instruments are held for
Financial trading purposes. The Company estimates that the fair
Instruments value of all financial instruments at August 31, 2003
and 2002 does not differ materially from the aggregate
carrying values of its financial instruments recorded in
the accompanying balance sheet. The estimated fair value
amounts have been determined by the Company using
available market information and appropriate valuation
methodologies. Considerable judgment is necessarily
required in interpreting market data to develop the
estimates of fair value, and, accordingly, the estimates
are not necessarily indicative of the amounts that the
Company could realize in a current market exchange.
--------------------------------------------------------------------------------
F-20
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
14. Recent In April 2002, the FASB issued SFAS No. 145, Rescission
Accounting of SFAS Nos. 4, 44, and 64, Amendment of SFAS 13, and
Pronounce- Technical Corrections as of April 2002 (SFAS 145). This
ments standard rescinds SFAS No. 4, Reporting Gains and Losses
from extinguishment of Debt, and an amendment of that
Statement, SFAS No. 64, Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements and excludes
extraordinary item treatment for gains and losses
associated with the extinguishment of debt that do not
meet the APB Opinion No. 30, Reporting the Results of
Operations -- Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions (APB 30)
criteria. Any gain or loss on extinguishment of debt
that was classified as an extraordinary item in prior
periods presented that does not meet the criteria in APB
30 for classification as an extraordinary item shall be
reclassified. SFAS 145 also amends SFAS 13, Accounting
for Leases as well as other existing authoritative
pronouncements to make various technical corrections,
clarify meanings, or describe their applicability under
changed conditions. Certain provisions of SFAS are
effective for transactions occurring after May 15, 2002
while others are effective for fiscal years beginning
after May 15, 2002. The adoption of SFAS No. 145 by the
Company did not have a material impact on the Company's
financial position or operations.
In June 2002, the FASB issued SFAS No. 146, Accounting
for Costs Associated with Exit or Disposal Activities
(SFAS 146). This standard addresses financial accounting
and reporting for costs associated with exit or disposal
activities and replaces Emerging Issues Task Force Issue
No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)
(EITF 94-3). SFAS 146 requires that a liability for
costs associated with an exit or disposal activity be
recognized when the liability is incurred. Under EITF
94-3, a liability for exit costs, as defined in EITF No.
94-3 were recognized at the date of an entity's
commitment to an exit plan. The provisions of SFAS 146
are effective for exit or disposal activities that are
initiated by the Company after December 31, 2002. The
adoption of SFAS No. 146 by the Company did not have a
material impact on the Company's financial position or
operations.
--------------------------------------------------------------------------------
F-21
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
14. Recent In December 2002, the FASB issued SFAS No. 148
Accounting "Accounting for Stock-Based Compensation--Transition and
Pronounce- Disclosure--an amendment of FASB Statement No. 123,"
ments which is effective for all fiscal years ending after
Continued December 15, 2002. SFAS No. 148 provides alternative
methods of transition for a voluntary change to the fair
value based method of accounting for stock-based
employee compensation under SFAS No. 123 from the
intrinsic value based method of accounting prescribed by
Accounting Principles Board Opinion No. 25. SFAS 148
also changes the disclosure requirements of SFAS 123,
requiring a more prominent disclosure of the pro-forma
effect of the fair value based method of accounting for
stock-based compensation. The adoption of SFAS No. 148
by the Company did not have a material impact on the
Company's financial position or operations.
In January 2003, the FASB issued Interpretation No. 46,
"Consolidation of Variable Interest Entities" (FIN No.
46), which addresses consolidation by business
enterprises of variable interest entities. FIN No. 46
clarifies the application of Accounting Research
Bulletin No. 51, "Consolidated Financial Statements", to
certain entities in which equity investors do not have
the characteristics of a controlling financial interest
or do not have sufficient equity at risk for the entity
to finance its activities without additional
subordinated financial support from other parties. FIN
No. 46 applies immediately to variable interest entities
created after January 31, 2003, and to variable interest
entities in which an enterprise obtains an interest
after that date. It applies in the first fiscal year or
interim period beginning after June 15, 2003, to
variable interest entities in which an enterprise holds
a variable interest that it acquired before February 1,
2003. The Company does not expect to identify any
variable interest entities that must be consolidated. In
the event a variable interest entity is identified, the
Company does not expect the requirements of FIN No. 46
to have a material impact on its financial condition or
results of operations.
--------------------------------------------------------------------------------
F-22
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
14. Recent In November 2002, the FASB issued Interpretation No. 45,
Accounting "Guarantor's Accounting and Disclosure Requirements for
Pronounce- Guarantees, Including Indirect Guarantees of
ments Indebtedness of Others" (FIN No. 45). FIN No. 45
Continued requires certain guarantees to be recorded at fair
value, which is different from current practice to
record a liability only when a loss is probable and
reasonably estimable, as those terms are defined in FASB
Statement No. 5, "Accounting for Contingencies". FIN No.
45 also requires the Company to make significant new
disclosures about guarantees. The disclosure
requirements of FIN No. 45 are effective for the Company
in the first quarter of fiscal year 2003. FIN No. 45's
initial recognition and initial measurement provisions
are applicable on a prospective basis to guarantees
issued or modified after December 31, 2002. The adoption
of FIN No. 45 did not have a material impact on the
Company's financial position, results of operations or
cash flows.
In April 2003, the FASB issued SFAS No. 149, "Amendment
of Statement 133 on Derivative Instruments and Hedging
Activities." SFAS No. 149 amends and clarifies financial
accounting and reporting for derivative instruments,
including certain derivative instruments embedded in
other contracts (collectively referred to as
derivatives) and for hedging activities under SFAS No.
133, "Accounting for Derivative Instruments and Hedging
Activities". This Statement is effective for contracts
entered into or modified after June 30, 2003, with
certain exceptions, and for hedging relationships
designated after June 30, 2003, with certain exceptions,
and for hedging relationships designated after June 30,
2003. Management is currently evaluating the effect that
the adoption of SFAS No. 149 may have, but believes it
will not have a material effect on its results of
operations and financial position.
--------------------------------------------------------------------------------
F-23
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
14. Recent In May 2003, the FASB issued SFAS No. 150, "Accounting
Accounting for Certain Financial Instruments with Characteristics
Pronounce- of both Liabilities and Equity." This new statement
ments changes the accounting for certain financial instruments
Continued that, under previous guidance, issuers could account for
as equity or classifications between liabilities and
equity in a section that has been known as "mezzanine
capital." It requires that those certain instruments be
classified as liabilities in balance sheets. Most of the
guidance in SFAS 150 is effective for all financial
instruments entered into or modified after May 31, 2003.
Management anticipates that the adoption of SFAS No. 150
may have a material impact on the Company's consolidated
financial statements if in the future the Company issues
mandatorily redeemable preferred stock. Such mandatorily
redeemable preferred stock, previously included as
"mezzanine capital", would be included as a liability in
accordance with SFAS 150.
15. Subsequent On November 28, 2003, the Company completed the sale of
Event an aggregate of 1,820,000 shares of common stock to
three institutional investors. The shares of common
stock were sold for cash consideration of $1.10 per
share, or a total of $2,002,000, pursuant to the terms
of the Securities Purchase Agreement entered into by and
among the investors and the Company as of November 28,
2003. These shares were issued in a private placement
transaction pursuant to Section 4(2) and Regulation D
under the Securities Act of 1933, as amended. As
provided in the Securities Purchase Agreement, the
Company also agreed to cause a shelf registration
statement covering the resale of these shares to be
filed no later than 60 days after the closing of the
private placement. The Company estimates that the net
proceeds from the transaction, after paying a commission
to the placement agent, T.R. Winston & Company, LLC, and
legal other expenses related to the transaction, will be
approximately $1,850,000. The Company also has agreed to
issue to the placement agent a three-year warrant to
purchase up to 91,000 shares at an exercise price per
share of $1.80 as provided in the Securities Purchase
Agreement.
--------------------------------------------------------------------------------
F-24
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 8A. 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; provided,
however, our principal executive officer and principal financial officer have
determined that we will need to receive the audited financial statements of our
unconsolidated subsidiary in a more timely manner in the future and that review
of our SEC filings by our outside advisors will need to occur earlier in the
process of preparing such filings so such advisors can assist us in better
understanding and satisfying rapidly developing regulatory and disclosure
requirements. We believe the only consequence of the disclosed deficiency was
the delay in filing our Form 10-KSB and the need to file Form 12b-25.
During the fourth fiscal quarter, 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.
27
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The following table sets forth certain information concerning our
directors, executive officers and key employees. The directors have served in
their respective capacities since their election and/or appointment and will
serve until the next annual stockholders' meeting or until a successor is duly
elected, unless the office is vacated in accordance with our certificate of
incorporation or bylaws. The next annual meeting is tentatively scheduled to be
held April 25, 2004. The executive officers serve at the pleasure of the Board
of Directors. There are no family relationships among any of our directors or
officers.
Initial Date as
Officer or
Name Age Position Director
------------------------------------------------------------------------------------------------------------------
Paul F. Turner, MSEE(1) 56 Chairman of the Board, Senior Vice President, 1986
and Chief Technology Officer
Hyrum A. Mead, MBA(1) 56 President and Member of the Board of Directors 1999
Gerhard W. Sennewald, Ph.D. 67 Member of the Board of Directors 1994
J. Gordon Short, M.D. 72 Member of the Board of Directors 1994
Michael Nobel, Ph.D. 63 Member of the Board of Directors 1997
Dixie Toolson Sells 53 Vice President of Regulatory Affairs 1987
Ray Lauritzen 53 Vice President of Field Service 1988
---------------
(1) Executive officers of BSD.
Paul F. Turner, MSEE, has served as a director of BSD since 1994 and
currently serves as Chairman of the Board of Directors. Mr. Turner also has
served as the Senior Vice President and Chief Technology Officer of BSD since
August 1999. From October 1995 to August 1999, Mr. Turner also served as the
Acting President of BSD. From 1986 to October 1995, Mr. Turner served in various
capacities with BSD, including Staff Scientist, Senior Scientist, Vice President
28
of Research, and Senior Vice President of Research. Mr. Turner has led the
design of microwave treatment systems for tumors, including the development of
external phased array antenna technology to focus radiated microwave energy deep
into the central area of the body to treat deep tumors. He has also integrated
this novel technology with Magnetic Resonance Imaging (MRI) to non-invasively
monitor treatments within the patient's body.
Hyrum A. Mead, MBA, has served as President and a director of BSD since
August 1999. Previously, he served five years as Vice President of Business
Development at ZERO Enclosures, a leading manufacturer in the
telecommunications, computer and aerospace enclosures industry and seven years
as President of Electro Controls, a manufacturer of computer controlled power
systems. Mr. Mead began his career in marketing with IBM where he was involved
with the introduction of many new products.
Gerhard W. Sennewald, Ph.D., has served as a director of BSD since
1994. Dr. Sennewald has served as the President and Chief Executive Officer of
Medizin-Technik GmbH, of Munich, Germany, a firm which is engaged in the
business of distributing hyperthermia equipment and diagnostic imaging equipment
and services, from April 1985 to the present. In connection with his service to
Medizin-Technik GmbH, Dr. Sennewald has been BSD's key European representative
and distributor for 17 years and has been instrumental in obtaining the majority
of BSD's foreign sales. He also serves on the Board of Directors of TherMatrx,
Inc.
J. Gordon Short, M.D., has served as a director of BSD since 1994. From
1978 to 2000, Dr. Short served as President of Brevis Corporation, a
privately-held medical products company which specializes in consumable
specialty supplies and in hand hygiene products, and from 1978 to the present,
Dr. Short has served as the Chairman of the Board of Brevis Corporation. From
1978 to 1982, Dr. Short served BSD as a Medical Director. In that capacity, he
participated in the initial development and establishment of certain of BSD's
products. He also previously served on BSD's Medical Advisory Board.
Michael Nobel, Ph.D., has served as a director of BSD since January
1998. From 1991 to the present, Dr. Nobel has served as the Executive Chairman
of the MRAB Group, a privately-held company which provides diagnostic imaging
services. From 1995 to the present, Dr. Nobel has served as the Chairman of the
Board of the Nobel Family Society. From 1995 to the present, he also has served
as Chairman of the American Non-Violence Project Inc., and has served as a
consultant to Unesco in Paris and the United Nations Social Affairs Division in
Geneva. Dr. Nobel participated in the introduction of magnetic resonance imaging
as European Vice President for Fonar Corp.
Dixie Toolson Sells has served as Vice President of Regulatory Affairs
of BSD since December 1994. Ms. Sells served as Administrative Director of BSD
from 1978 to 1984; as Director of Regulatory Affairs from 1984 to September
1987; and as Vice President of Regulatory Affairs from September 1987 to October
1993. In October 1993, Ms. Sells resigned as Vice President of Regulatory
Affairs, and she served as Director of Regulatory Affairs from October 1993 to
December 1994. In December 1994, Ms. Sells was re-appointed as Vice President of
Regulatory Affairs and was appointed as Corporate Secretary by the Board of
Directors. Ms. Sells also serves on the Board of Directors of the Intermountain
Biomedical Association. Ms. Sells resigned as Corporate Secretary of BSD in
March 2002.
Ray Lauritzen served as Field Service Manager of BSD from 1982 to
January 1988 and has served as Vice President of Field Service Operations from
January 1988 to the present.
Section 16(a) of the Securities Act of 1934 requires our directors,
executive officers, and any persons who own more than 10% of a registered class
of our equity securities, to file reports of ownership and changes in ownership
with the Securities and Exchange Commission. SEC regulation requires executive
29
officers, directors and greater than 10% stockholders to furnish us with copies
of all Section 16(a) forms they file. Based solely on our review of the copies
of such forms received by us, or written representations from certain reporting
persons, we believe that during the fiscal year ended August 31, 2003 our
executive officers, directors, and greater than 10% stockholders complied with
all applicable filing requirements.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth certain information regarding all
compensation earned by Paul Turner, our Senior Vice President and Chief
Technology Officer, and Hyrum Mead, our President, for services rendered to us
during fiscal 2003, 2002 and 2001.
SUMMARY COMPENSATION TABLE
------------------------------- ---------- ---------------------------------- ---------------------------------------
Annual Compensation Long-Term Compensation Awards
---------------------------------- ---------------------------------------
Name and Principal Position Securities Underlying
Year Salary ($) Bonus ($) Options / SARs (#)
=============================== ========== ================= ================ =======================================
Paul Turner, 2003 $145,000 $400
Chairman of the Board, Senior 2002 $145,000 $400 45,000(1)
Vice President, Chief 2001 $145,000 $400 -
Technology Officer -
------------------------------- ---------- ----------------- ---------------- ---------------------------------------
Hyrum A. Mead, 2003 $125,000 $400
President, Director 2002 $125,000 $30,000 45,000(1)
2001 $125,000 $400 -
------------------------------- ---------- ----------------- ---------------- ---------------------------------------
(1) Represents options to purchase shares of TherMatrx common stock we owned on
the date of grant. These options were granted by us in July 2002 and were
exercised in the fourth quarter of fiscal 2002 at an exercise price per
share of $0.001. We recognized a compensation expense related to these
TherMatrx options computed using a value of $4.00 per share. The $4.00 per
share value is based solely on the price per share for common stock sold by
TherMatrx to existing TherMatrx stockholders in December 2001.
There were no stock options granted to Messrs. Turner and Mead during
fiscal 2003.
No shares of stock options were exercised during fiscal year 2003 by
Messrs. Turner and Mead.
COMPENSATION OF DIRECTORS
-------------------------
We provide annual compensation in the amount of $12,000 to each
non-employee director. Of this amount, $4,000 is to be paid in cash and the
balance is to be paid in the form of restricted shares of our common stock under
our 1998 Director Stock Option Plan. In addition to the annual compensation to
directors, each non-employee director will receive an annual option to purchase
25,000 restricted shares of our common stock at a purchase price of 85% of the
fair market value at the date the option is granted. The options vest ratably
over 5 years and expire in 10 years.
30
Paul F. Turner and Hyrum A. Mead are the only members of the Board of
Directors who are employed by us. Messrs. Turner and Mead do not receive any
separate compensation for services performed as directors.
EMPLOYMENT CONTRACTS
--------------------
We entered into an employment agreement with Mr. Mead dated August 10,
1999. This agreement provides that Mr. Mead shall receive an annual base salary
of $125,000, which shall be reviewed annually by the Board of Directors. The
agreement provides that if Mr. Mead is involuntarily terminated, Mr. Mead will
receive severance compensation for a period of six months, including an
extension of all benefits and perquisites. The severance amount shall include
six months of salary at the highest rate paid to Mr. Mead prior to termination
and an additional amount equal to all bonuses received by Mr. Mead during the
12-month period preceding termination (excluding any signing bonus received
during such period). The agreement also requires us to vest any options granted
to Mr. Mead for the purchase of our common stock, allowing a 90-day period for
Mr. Mead to exercise those options. Mr. Mead's agreement includes a
non-competition covenant prohibiting him from competing with us for one year
following his termination.
We entered into an employment agreement with Mr. Turner dated November
2, 1988. The agreement provides that Mr. Turner's salary will be based upon a
reasonable mutual agreement. The agreement provides that if Mr. Turner's
employment is involuntarily terminated, he will receive severance pay for a
one-year period, which pay includes an extension of all of his rights,
privileges and benefits as an employee (including medical insurance). The one
year severance pay shall be equal to Mr. Turner's regular salary for the
12-month period immediately prior to the termination. The agreement also
requires us to pay Mr. Turner for any accrued, unused vacation at the time of
termination. We are also obligated to pay Mr. Turner $1,000 (or the equivalent
value in stock options) for each newly issued patent obtained by us as a result
of Mr. Turner's efforts (Mr. Turner receives only $500 if multiple inventors are
involved). Mr. Turner's agreement includes a non-competition covenant
prohibiting him from competing with us for one year following his termination.
We may continue the non-competition period for up to four additional years by
notifying Mr. Turner in writing and by continuing the severance payments for the
additional years during which the non-competition period is extended.
CODE OF ETHICS
--------------
We have adopted a Code of Ethics that applies to all employees,
including our principal executive officers. Our Code of Ethics is available on
our website (www.bsdmc.com) on our investor information webpage. We intend to
post amendments to or waivers from our Code of Ethics (to the extent applicable
to our chief executive officer, principal financial officer or principal
accounting officer) on our website.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The following table sets forth, as of November 19, 2003, the beneficial
ownership of our outstanding common stock by:
o each person (including any group) known to us to own more than 5%
of any class of our common stock,
o each of our executive officers,
o each of our directors, and
31
o all executive officers and directors as a group.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission, and generally includes voting or investment
power with respect to securities. For purposes of calculating the percentages
shown in the table, each person listed is deemed to beneficially own any shares
issuable on the exercise of vested options and warrants held by that person that
are exercisable within 60 days after November 28, 2003. Except as indicated by
footnote, the persons named in the table have sole voting and investment power
with respect to all shares of common stock shown beneficially owned by them. The
inclusion of any shares as beneficially owned does not constitute an admission
of beneficial ownership of those shares. The percentage calculation of
beneficial ownership is based on 20,367,584 shares of common stock outstanding
as of November 28, 2002. Except as otherwise noted, the address of each person
listed on the following table is 2188 West 2200 South, Salt Lake City, Utah
84119.
Common Stock Beneficially Owned
Title of Class Name of Beneficial Owner Shares Percent
------------------------------------------------------------------------------------------------------------
Officers and Directors
Common Stock Dr. Gerhard W. Sennewald(1) 6,771,814 33.24%
Common Stock Paul F. Turner(2) 1,995,871 9.79%
Common Stock Hyrum A. Mead(3) 280,000 1.37%
Common Stock Dr. J. Gordon Short(4) 217,635 1.06%
Common Stock Dr. Michael Nobel(5) 155,635 *
Holders of More Than 5%
Common Stock John E. Langdon(6) 1,295,010 6.35%
Common Stock All Executive Officers and Directors as a Group 9,420,955 46.25%
(5 persons)(7)
---------------
* Less than 1.0%.
(1) Includes 90,000 shares subject to options. Does not include 500,000 shares
held by Dr. Sennewald's spouse, for which he disclaims beneficial
ownership.
(2) Includes 180,953 shares subject to options.
(3) Includes 200,000 shares subject to options.
(4) Includes 110,000 shares subject to options.
(5) Includes 75,000 shares subject to options.
(6) Includes 351,862 shares owned directly by Mr. Langdon. The remaining shares
are held in trusts for which Mr. Langdon is Trustee. Does not include
50,000 shares held by Mr. Langdon's spouse, for which he disclaims
beneficial ownership. Mr. Langdon's address is: 2501 Parkview Drive, Suite
500, Fort Worth, TX 76102.
32
(7) Includes 655,953 shares subject to options.
We have two equity compensation plans, our 1998 Employee Stock Option
Plan and our 1998 Director Stock Plan, both of which were approved by our
stockholders. Shown below on an aggregate basis is a summary of equity
compensation plan information with respect to our equity compensation plans:
EQUITY COMPENSATION PLAN INFORMATION
------------------------------- ---------------------------- ------------------------- -------------------------------
Number of Securities to Weighted-Average Number of Securities
be Issued Upon Exercise Exercise Price of Remaining Available for
of Outstanding Options, Outstanding Options, Future Issuance Under Equity
Warrants and Rights Warrants and Rights Compensation Plans (Excluding
Securities Reflected in
Column (a))
Plan Category (a) (b) (c)
------------------------------- ---------------------------- ------------------------- -------------------------------
Equity Compensation Plans 1,258,901 $0.47 1,691,099
Approved by Security Holders
------------------------------- ---------------------------- ------------------------- -------------------------------
Equity Compensation Plans - - -
not Approved by Security
Holders
------------------------------- ---------------------------- ------------------------- -------------------------------
Total 1,258,901 $0.47 1,691,099
------------------------------- ---------------------------- ------------------------- -------------------------------
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TherMatrx, Inc. We manufacture, assemble and test for TherMatrx, Inc.
its TMx-2000 thermotherapy system and supply TherMatrx with equipment components
used for its TMx-2000 system. We also have provided regulatory compliance and
other consulting services to TherMatrx. TherMatrx has become our largest
customer, and for the year ended August 31, 2003, TherMatrx accounted for
$1,391,443, or approximately 54%, of our revenue. We also received a royalty
payment of $63,500 from TherMatrx in fiscal 2003. During fiscal 2002, sales to
TherMatrx were approximately $1,781,000. We currently own approximately 30% of
TherMatrx's outstanding common stock, and Dr. Gerhard W. Sennewald, a director
and significant shareholder of BSD, is also a director of TherMatrx.
During 2002, we issued to certain employees and board members options
to purchase 179,300 common shares of TherMatrx, or approximately 7% of our
interest in TherMatrx, at an exercise price of $.001 per share. In connection
with the issuance of these options, we recorded $717,000 of compensation
expense. This expense was computed based on the estimated fair value of the
options. We estimated the fair value of the options to be $4.00 per option. This
fair value was determined based on a December 2001 private offering of TherMatrx
shares in which 525,321 shares of common stock were sold for $4.00 per share to
existing TherMatrx stockholders who elected to purchase shares in the offering.
We issued options to the following officers and directors in the following
amounts: Hyrum Mead, 45,000; Paul Turner, 45,000; Gerhard Sennewald, 30,000; J.
Gordon Short, 10,000; Michael Nobel, 10,000; Dixie Sells, 2,450; and Ray
Lauritzen, 2,600.
Medizin-Technik GmbH. Additionally, we supply equipment components to
Medizin-Technik GmbH located in Munich, Germany, which is a significant
distributor of our products in Europe. Medizin-Technik purchases equipment,
which it installs, and components to service our hyperthermia therapy systems
33
that it sells to its customers in Europe. We had revenue of approximately
$516,142 in fiscal 2003 from the sale of one BSD-2000 system and various
component parts sold to Medizin-Technik. During fiscal 2002, we had sales of
approximately $74,000 to Medizin-Technik. Dr. Gerhard W. Sennewald, one of our
directors and significant stockholders, is the President and Chief Executive
Officer of Medizin-Technik and its sole stockholder.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are incorporated herein by reference as
indicated:
Exhibit
Number Description
------- -----------
3.1 Amended and Restated Certificate of Incorporation. Incorporated by
reference to Exhibit 3.1 of the BSD Medical Corporation Form
10-KSB filed December 1, 2003.
3.2 By-Laws. Incorporated by reference to Exhibit 3.2 of the BSD
Medical Corporation Registration Statement on Form S-1, filed
October 16, 1986.
4.1 Specimen Common Stock Certificate. Incorporated by reference to
Exhibit 4 of the BSD Medical Corporation Registration Statement on
Form S-1, filed October 16, 1986.
4.2 Emerson Securities Purchase Agreement. Incorporated by reference
to Exhibit 4.1 of the BSD Medical Corporation Form 10-KSB filed
December 1, 2003.
10.1 Transfer of Trade Secrets Agreement dated December 7, 1979, among
BSD Medical Corporation, Vitek, Incorporated and Ronald R. Bowman.
Incorporated by reference to Exhibit 10.6 of the BSD Medical
Corporation Registration Statement on Form S-1, filed October 16,
1986.
10.2 Second Addendum to Exclusive Transfer of Trade Secrets Agreement
dated April 2, 1987. Incorporated by reference to Exhibit 10 of
the BSD Medical Corporation Form 10-K, filed April 8, 1988.
10.3 License Agreement between BSD Medical Corporation and EDAP
Technomed, Inc., dated July 3, 1996. Incorporated by reference to
Exhibit 10 of Form 8-K, filed August 7, 1996.
10.4 Stock Purchase Agreement dated October 31, 1997, by and among
TherMatrx, Inc., BSD Medical Corporation, Oracle Strategic
Partners, L.P., and Charles Manker. Incorporated by reference to
Exhibit 10.6 of the BSD Medical Corporation Form 10-KSB filed
December 10, 1998.
10.5 BSD Medical Corporation 1998 Director Stock Plan. Incorporated by
reference to Exhibit A of the BSD Medical Corporation Schedule
14A, filed July 27, 1998.
10.6 BSD Medical Corporation 1998 Stock Incentive Plan. Incorporated by
reference to Exhibit B of the BSD Medical Corporation Schedule
14B, filed July 27, 1998.
34
21 Subsidiary List. Incorporated by reference to Exhibit 21 of the
BSD Medical Corporation Form 10-KSB filed December 1, 2003.
31.1 Certification of Chief Executive Officer of BSD pursuant to Rule
13a-14.
31.2 Certification of Chief Financial Officer of BSD pursuant to Rule
13a-14.
32.1 Certification of Chief Executive Officer attached pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes Oxley Act of 2002.
32.2 Certification of the Chief Financial Officer of BSD pursuant to 18
U.S.C.ss.1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
None.
35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
BSD MEDICAL CORPORATION
Date: July 22, 2004 By: /s/ Hyrum A. Mead
---------------------------------
Hyrum A. Mead
President and Member of the
Board of Directors
(principal executive officer)
Date: July 22, 2004 By: /s/ Dennis Bradley
---------------------------------
Dennis Bradley
Controller
(principal financial and
accounting officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: July 22, 2004 By: /s/ Paul F. Turner
---------------------------------
Paul F. Turner
Chairman of the Board, Senior
Vice President and Chief
Technology Officer
Date: July 22, 2004 By: /s/ Hyrum A. Mead
---------------------------------
Hyrum A. Mead
President and Member of the
Board of Directors
(principal executive officer)
Date: July 22, 2004 By: /s/ Gerhard W. Sennewald
---------------------------------
Dr. Gerhard W. Sennewald
Member of the Board of
Directors
Date: July 22, 2004 By: /s/ J. Gordon Short
---------------------------------
Dr. J. Gordon Short
Member of the Board of
Directors
Date: July 22, 2004 By: /s/ Michael Nobel
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Dr. Michael Nobel
Member of the Board of
Directors
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