U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended May 31, 2005
Commission file number 0-10783
BSD MEDICAL CORPORATION
DELAWARE 75-1590407
--------------------------- --------------------------------------
(State of Incorporation) (IRS Employer Identification Number)
2188 West 2200 South
Salt Lake City, Utah 84119
--------------------------------------------------- -------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (801) 972-5555
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of July 15, 2005, there were 20,365,070 shares of the Registrant's common
stock, $0.001 par value per share, outstanding.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
BSD MEDICAL CORPORATION
Condensed Balance Sheet
(Unaudited)
Assets May 31,
------ 2005
-------------------
Current assets:
Cash and cash equivalents $ 13,922,445
Receivables, net 215,924
Related party receivables 473,415
Inventories 1,076,735
Deferred tax asset 112,000
Other current assets 50,730
-------------------
Total current assets 15,851,249
Property and equipment, net 196,396
Patents, net 23,599
-------------------
$ 16,071,244
===================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 152,330
Accrued expenses 199,684
Customer deposits 87,358
Income tax payable 778,000
Deferred revenue 16,438
-------------------
Total current liabilities 1,233,810
Long term liabilities
Deferred tax liability 42,000
-------------------
Total liabilities 1,275,810
-------------------
Stockholders' equity:
Preferred stock, $.001 par value; 10,000,000 authorized,
no shares issued and outstanding -
Common stock, $.001 par value; authorized 40,000,000 shares;
issued 20,358,166 and outstanding 20,333,835 shares 20,334
Additional paid-in capital 23,566,869
Deferred compensation (34,050)
Accumulated deficit (8,757,485)
Common stock in treasury 24,331shares, at cost (234)
-------------------
Net stockholders' equity 14,795,434
-------------------
$ 16,071,244
===================
See accompanying notes to financial statements.
1
BSD MEDICAL CORPORATION
Condensed Statements of Operations
(Unaudited)
Three Months Ended May 31, Nine Months Ended May 31,
2005 2004 2005 2004
--------------- ---------------- --------------- ----------------
Sales $ 321,843 $ 147,899 $ 799,129 $ 560,156
Related party sales 43,370 285,823 539,431 981,241
--------------- ---------------- --------------- ----------------
Total revenues 365,213 433,722 1,338,560 1,541,397
--------------- ---------------- --------------- ----------------
Costs and expenses:
Cost of sales 284,252 117,855 734,945 448,068
Cost of related party sales 19,208 126,389 213,845 395,039
Research and development 270,803 160,715 645,683 490,006
Selling, general, and administrative 504,923 342,793 1,343,619 803,947
--------------- ---------------- --------------- ----------------
Total costs and expenses 1,079,186 747,752 2,938,092 2,137,060
--------------- ---------------- --------------- ----------------
Operating loss (713,973) (314,030) (1,599,532) (595,663)
--------------- ---------------- --------------- ----------------
Other income (expense):
Interest income 43,306 2,215 200,804 4,816
Interest expense - (124) - (477)
Other income 5,460,462 - 6,555,391 -
--------------- ---------------- --------------- ----------------
Total other income 5,503,768 2,091 6,756,195 4,339
--------------- ---------------- --------------- ----------------
Income (loss) before income taxes 4,789,795 (311,939) 5,156,663 (591,324)
Provision for income taxes (1,841,000) - (1,841,000) -
--------------- ---------------- --------------- ----------------
Net income (loss) $ 2,948,795 $ (311,939) $ 3,315,663 $ (591,324)
=============== ================ =============== ================
Net income (loss) per common and
common equivalent share,
Basic $ .15 $ (.02) $ .17 $ (.03)
=============== ================ =============== ================
Diluted $ .14 $ (.02) $ .16 $ (.03)
=============== ================ =============== ================
Weighted average number of shares outstanding,
Basic 20,144,000 19,912,000 20,108,000 19,246,000
=============== ================ =============== ================
Diluted 20,612,000 19,912,000 21,376,000 19,246,000
=============== ================ =============== ================
See accompanying notes to financial statements.
2
BSD MEDICAL CORPORATION
Condensed Statements of Cash Flows
(Unaudited)
Nine Months Ended May 31,
2005 2004
-------------------------------
Cash flows from operating activities:
Net Income (loss) $ 3,315,663 $ (591,324)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Provision for allowance for doubtful accounts - 14,569
Depreciation and amortization 45,106 33,597
Gain on sale of investment in TherMatrx (6,552,089) -
Gain on sale of property (1,050) -
Stock compensation expense 45,000 12,000
Deferred compensation 9,508 7,858
Deferred income taxes 708,000 -
(Increase) decrease in:
Receivables (430,035) 160,962
Inventories (336,319) 24,877
Prepaid expenses and deposits 336 (14,682)
Increase (decrease) in:
Accounts payable 53,199 (160,973)
Accrued expenses (224,233) (224,324)
Customer deposits 87,358 -
Income tax payable 1,008,182 -
Deferred revenue (30,785) (26,296)
-------------------------------
Net cash used in operating activities (2,302,159) (763,736)
-------------------------------
Cash flows from investing activities:
Proceeds from sale of investment in TherMatrx 6,552,089 -
Purchase of property and equipment (100,994) (11,038)
Proceeds from sale of property 1,050 -
-------------------------------
Net cash provided by (used in) investing activities 6,452,145 (11,038)
-------------------------------
Cash flows from financing activities:
Proceeds from issuance of common stock options 75,305 2,108,482
-------------------------------
Net cash provided by financing activities 75,305 2,108,482
-------------------------------
Increase in cash and cash equivalents 4,225,291 1,333,708
Cash and cash equivalents, beginning of period 9,697,154 136,003
-------------------------------
Cash and cash equivalents, end of period $ 13,922,445 $ 1,469,711
===============================
Supplemental Disclosure of Cash Flow Information
------------------------------------------------
o The Company paid no cash for interest and $124,919 for income taxes
during the nine months ended May 31, 2005 and $477 for interest and $0
for income taxes during the nine months ended May 31, 2004.
o The Company issued 75,000 stock options for each of the periods ended
May 31, 2005 and 2004, which resulted in an increase to Deferred
Compensation of $15,750 and $8,250, respectively.
o The Company had an income tax benefit from the exercise of stock
options of $230,182 during the period ended May 31, 2005, which was
recorded as an increase to additional paid-in capital.
3
BSD MEDICAL CORPORATION
Notes to Condensed Financial Statements
Note 1. Basis of Presentation
The Condensed Balance Sheet as of May 31, 2005, the Condensed
Statements of Operations for the three and nine months ended May 31, 2005 and
2004, and the Condensed Statements of Cash Flows for the nine months ended May
31, 2005 and 2004 have been prepared by the Company without audit. In the
opinion of management, all adjustments to the books and accounts (which include
only normal recurring adjustments) necessary to present fairly the financial
position, results of operations, and changes in financial position of the
Company have been made.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with U.S. generally accepted
accounting principles have been condensed or omitted. The results of operations
for the periods ended May 31, 2005 are not necessarily indicative of the results
to be expected for the full year.
Note 2. Net Income (Loss) Per Common Share
The computation of basic earnings per common share is based on the
weighted average number of shares outstanding during the period. The computation
of diluted earnings per common share is based on the weighted average number of
shares outstanding during the period plus the weighted average common stock
equivalents which would arise from the exercise of stock options outstanding
using the treasury stock method and the average market price per share during
the period. When common stock equivalents are anti-dilutive, they are not
included.
The shares used in the computation of the Company's basic and diluted
earnings per share are reconciled as follows:
Three Months Ended May 31, Nine Months Ended May 31,
---------------------------------- ----------------------------------
2004 2003 2004 2003
Weighted average number of
shares outstanding - basic 20,144,000 19,912,000 20,108,000 19,246,000
Dilutive effect of stock options 468,000 - 1,268,000 -
-------------- ----------------- -------------- -------------------
Weighted average number of
shares outstanding - diluted 20,612,000 19,912,000 21,376,000 19,246,000
============== ================= ============== ===================
Note 3. Related Party Transactions
During the nine months ended May 31, 2005 and May 31, 2004, the Company
had sales to an unconsolidated affiliate and an entity controlled by a
significant stockholder and member of the Board of Directors of $539,431 and
$981,241, respectively. These related party transactions represent 40.3% and
63.7% of total sales. Related party revenue from TherMatrx was $0 in the period
ended May 31, 2005 compared to $99,503 in period ended May 31, 2004. As of July
15, 2004, we no longer considered TherMatrx a related party since our investment
was sold to American Medical Systems, Inc.(AMS) on that date.
At May 31, 2005, receivables include $473,416 due from an entity
controlled by a significant stockholder and member of the Board of Directors.
Note 4. Stock-Based Compensation
The Company accounts for stock options granted to employees under the
recognition and measurement principles of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related Interpretations, and has adopted the
disclosure-only provisions of Statement of Financial Accounting Standards (SFAS)
No. 123, "Accounting for Stock-Based Compensation." Accordingly, only the
intrinsic value has been recognized in the financial statements as expense. Had
the Company's options been determined based on the fair value method, the
results of operations would have been reduced to the pro forma amounts indicated
below for the three and nine months ended May 31, 2005 and 2004:
4
Nine Months Ended Three Months Ended
May 31, May 31,
2005 2004 2005 2004
-----------------------------------------------------
Net income (loss) - as reported $ 3,515,663 $ (591,324) $ 2,948,795 $ (311,939)
Add: Stock based employee compensation expense included
in reported net income (loss), net of related tax effects
9,508 7,858 - -
Deduct: Total stock based employee compensation expense
determined under fair value based method for all awards,
net of related taxes (347,460) (25,000) (50,926) (25,000)
-----------------------------------------------------
Net income (loss) - pro forma $ 2,977,711 $ (608,466) $ 2,897,869 $ (336.939)
-----------------------------------------------------
Basic income (loss) per share - as reported $ .17 $ (.03) $ .15 $ (.02)
-----------------------------------------------------
Diluted income (loss) per share - as reported $ .16 $ (.03) $ .14 $ (.02)
-----------------------------------------------------
Basic income (loss) per share - pro-forma $ .15 $ (.03) $ .14 $ (.02)
-----------------------------------------------------
Diluted income (loss) per share - pro-forma $ .14 $ (.03) $ .14 $ (.02)
-----------------------------------------------------
The fair value of each option granted for the nine months ended May 31,
2005 and May 31, 2004 is estimated on the date of grant using the Black-Scholes
option pricing model with the following assumptions:
----------------------------------
2005 2004
----------------------------------
Expected dividend yield $ - $ -
Expected stock price volatility 81% 83%
Risk-free interest rate 3.32% 5.5%
Expected life of options 7 years 3 years
The weighted average fair value of options granted during the nine
months ended May 31, 2005 and 2004 was $1.97 and $1.01, respectively.
Note 5. Gain on Sale of Investment in TherMatrx
On July 15, 2004, the Company's investment in TherMatrx was sold to
American Medical Systems, Inc. (AMS). The Company's portion of the initial
payment from this sale, received in fiscal 2004, was nearly $9 million, with
additional payments contingent on the quarterly sales of TherMatrx through the
fourth calendar quarter of 2005. During the quarter ended February 28, 2005, the
Company received additional payments from the sale of TherMatrx that totaled
$1,094,406. During the quarter ended May 31, 2005, the Company received payments
of $5,457,683, to bring the total payments to date of $15,526,532. These amounts
were recorded as a gain and have been reflected in "Other income" in the
statement of operations. We anticipate that we will receive quarterly payments
from AMS with respect to the sale of our TherMatrxinvestment in August and
November of 2005 and February of 2006.
Note 6. Listing on AMEX
On July 9, 2005 the American Stock Exchange approved the listing for
BSD Medical Corporation and the Company started trading on that day under the
symbol "BSM".
5
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other parts of this report contain forward-looking
statements that involve risks and uncertainties. Forward-looking statements can
also be identified by words such as "anticipates," "expects," "believes,"
"plans," "predicts," and similar terms. Forward-looking statements are not
guarantees of future performance and our actual results may differ significantly
from the results discussed in the forward-looking statements. Factors that might
cause such differences include, but are not limited to; those discussed in the
subsections entitled "Forward-Looking Statements" below. The following
discussion should be read in conjunction with our consolidated financial
statements and notes thereto included in this report. We assume no obligation
to revise or update any forward-looking statements for any reason, except as
required by law.
General
-------
We develop, manufacture, market and service systems that deliver
precision focused electromagnetic energy to bring diseased parts of the body up
to temperature levels as required for use in a variety of medical therapies and
applications. Our objective is to commercialize our developed products and
further expand the application of our technology into new markets. We pioneered
the use of microwave thermal therapy for the treatment of the symptoms
associated with enlarged prostate, and are responsible for much of the
technology that has created a substantial medical industry using that therapy.
Our longest-term development has been the application of focused electromagnetic
energy for the treatment of cancer.
One of our significant contributions to the advancement of medical
therapy has been our pioneering efforts in developing a new treatment for
conditions associated with enlargement of the prostate that afflicts most men as
they age. As the prostate enlarges it constricts urine flow. The condition is
known medically as benign prostatic hyperplasia or BPH. We developed a
technology that allows men to be treated for BPH through an outpatient procedure
as an alternative to surgery or a lengthy regimen of medication.
We determined early in our planning that we would treat our BPH
development as a spin-off business with the intent of providing an asset that
could help fund our other business plans. As a result, we introduced the
opportunity to investment groups and subsequently, on October 31, 1997, entered
into an agreement with investors Oracle Strategic Partners, L.P. and Charles
Manker. Together we established a new company, TherMatrx, which was
independently managed.
On July 15, 2004, TherMatrx was sold to American Medical Systems, Inc.
(AMS). Our portion of the initial payment from this sale was nearly $9 million,
with additional payments contingent on the quarterly sales of TherMatrx through
the fourth calendar quarter of 2005. We received additional payments totaling
$1,094,406 during the quarter ended February 28, 2005. During the quarter ended
May 31, 2005, we received payments of $5,457,683, to bring the total payments to
date to $15,526,532. We have estimated that our portion of the total payout from
this sale will be between $30 and $40 million. If TherMatrx sales exceed our
projections, the maximum payout that we could receive from the sale is $62.5
million. If TherMatrx sales fall under our projections, there is no guarantee of
any further payment beyond those payments already received.
Since the inception of our company we have precision engineered systems
designed to increase the effectiveness of cancer treatment through the use of
focused electromagnetic energy. From this development our current BSD-500 and
BSD-2000 systems have emerged. We have also developed enhancements to our
BSD-2000 system, including the BSD-2000/3D that is designed to allow three
dimensional steering of deep focused energy and heat to targeted tumors and
tissue and the BSD-2000/3D/MR that includes an interface for magnetic resonance
imaging. These systems are sold with supporting software and may also be sold
with support services.
6
Our accumulated deficit since inception decreased from $12,073,146 as
of August 31, 2004 to $8,757,485 as of May 31, 2005 due to net income recorded
during the nine months ended May 31, 2005, as a result of our sale of our
investment in TherMatrx. We recorded an after tax net profit for the first nine
months of fiscal 2005 of $3,315,663.
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 $1,189,824 and $1,396,379 for the
nine months ended May 31, 2005 and 2004, respectively. Service revenue was
$148,736 and $145,018 for the nine months ended May 31, 2005 and 2004,
respectively.
We derived $539,431, or 40.3% of our revenue for the nine months ended
May 31, 2005 from sales to a related party, Medizin-Technik GmbH. Dr. Gerhard
Sennewald, one of our directors, is a stockholder, executive officer and a
director of Medizin-Technik GmbH.
In the nine months ended May 31, 2005, we derived $799,129, or 59.7%,
of our revenue from sales to unrelated parties. These revenues consisted of
product sales of approximately $667,791, consulting services of approximately
$91,979 and service contracts of approximately $39,359. Cost of sales for the
nine months ended May 31, 2005 includes raw material and labor costs. Research
and development expenses include expenditures for new product development and
development of enhancements to existing products.
Critical Accounting Policies and Estimates
------------------------------------------
The following is a discussion of our critical accounting policies and
estimates that management believes are material to an understanding of our
results of operations and which involve the exercise of judgment or estimates by
management.
Revenue Recognition. Revenue from the sale of cancer treatment systems
is recognized when a purchase order has been received, the system has been
shipped, the selling price is fixed or determinable, and collection is
reasonably assured. Most system sales are F.O.B. shipping point; therefore,
shipment is deemed to have occurred when the product is delivered to the
transportation carrier. Most system sales do not include installation. If
installation is included as part of the contract, revenue is not recognized
until installation has occurred, or until any remaining installation obligation
is deemed to be perfunctory. Some sales of cancer treatment systems may include
training as part of the sale. In such cases, the portion of the revenue related
to the training, calculated based on the amount charged for training on a
stand-alone basis, is deferred and recognized when the training has been
provided. The sales of our cancer treatment systems do not require specific
customer acceptance provisions and do not include the right of return except in
cases where the product does not function as guaranteed by BSD. We provide a
reserve allowance for estimated returns. To date, returns have not been
significant.
Revenue from manufacturing services is recorded when an agreement with
the customer exists for such services, the services have been provided, and
collection is reasonably assured. Revenue from training services is recorded
when an agreement with the customer exists for such training, the training
services have been provided, and collection is reasonably assured. Revenue from
service support contracts is recognized on a straight-line basis over the term
of the contract, which approximates recognizing it as it is earned.
Our revenue recognition policy is the same for sales to both related
parties and non-related parties. We provide the same products and services under
the same terms for non-related parties as with related parties. Sales to
distributors are recognized in the same manner as sales to end-user customers.
Deferred revenue and customer deposits payable include amounts from service
contracts as well as cash received for the sales of products, which have not
been shipped.
7
Inventory Reserves. As of May 31, 2005, we had recorded a reserve for
potential inventory impairment of $80,000. We periodically review our inventory
levels and usage, paying particular attention to slower-moving items. We have
projected no orders to be placed with us for TherMatrx systems, and do not
project a requirement for any inventory impairment based on this decline.
Product Warranty. We provide product warranties on our BSD-500 and
BSD-2000 systems. These warranties vary from contract to contract, but generally
consist of parts and labor warranties for one year from the date of sale. To
date, expenses resulting from such warranties have not been material. We record
a warranty expense at the time of each sale. This reserve is estimated based on
prior history of service expense associated with similar units sold in the past.
Allowance for Doubtful Accounts. We provide our customers with payment
terms that vary from contract to contract. Our allowance for doubtful accounts
at May 31, 2005 was $0. Bad debt expense for the period ended May 31, 2005 was
approximately $9,000. We perform ongoing credit evaluations of our customers and
maintain allowances for possible losses. Allowance estimates are recorded on a
customer-by-customer basis and are determined based on the age of the
receivable, compliance with payment terms, and prior history with existing
clients. The non-payment of a receivable related to the sale of a BSD-500 or
BSD-2000 could have a material adverse impact on our results of operations.
Results of Operations
---------------------
Three Months Ended May 31, 2005 compared to the Three Months Ended May 31, 2004
Revenue. Revenue for the three months ended May 31, 2005 was $365,213
compared to $433,722 for the quarter ended May 31, 2004, a decrease of $68,509,
or approximately 16%. The decrease in total revenue was primarily due to a
decrease in sales to related parties. Sales to Medizin-Technik totaled $43,370
in the quarter ended May 31, 2005 compared to $274,941 in the corresponding
quarter of fiscal 2004. Dr. Gerhard Sennewald, one of our directors, is a
stockholder, executive officer and a director of Medizin-Technik GmbH. Sales to
Medizin-Technik may fluctuate significantly depending on Medizin-Technik's
anticipated sales and ability to place orders in Europe. Our revenue can
fluctuate significantly from period to period because our sales, to date, have
been based upon a relatively small number of systems, the sales price of each
being substantial enough to greatly impact revenue levels in the periods in
which they occur. Sales of a few systems can cause a large change in the revenue
from period to period as noted in the decrease in sales to Medizin-Technik from
the third quarter of fiscal 2004 to the third quarter of fiscal 2005. Product
sales decreased to $349,506 as compared to $416,288 in the corresponding quarter
of fiscal 2004, a decrease of $66,782, or 16.0%.
Related Party Revenue. We derived $43,370, or approximately 12%, of our
revenue in the three months ended May 31, 2005 from sales to related parties as
compared to $285,823 or 65.9%, in the corresponding quarter of fiscal 2004. All
of the related party revenue in the 2005 period was from sales of systems and
component parts to Medizin-Technik. For the period ended May 31, 2004, the
related party revenue $274,941 for sales to Medizin-Technik and the remaining
sales of $10,882 was from services provided to TherMatrx. Since the sale of our
investment in TherMatrx in July 2004, TherMatrx is no longer considered a
related party. Sales to Medizin-Technik may fluctuate significantly from period
to period due to the high cost of a BSD-2000 or BSD-500 system. Sales increases
of one or two systems can have a material effect on our revenue.
Non-related Party Revenue. In the three months ended May 31, 2005, we
derived $321,843, or 88.1%, of our total revenue from sales to non-related
parties, as compared to approximately $147,899, or 34.1%, for the corresponding
period of fiscal 2004. Our fiscal 2005 non-related party revenue consisted of
product sales of approximately $300,852, consulting services of approximately
$7,872 and service contracts of approximately $13,119.
8
Gross Profit. Gross profit for the three months ended May 31, 2005 was
$61,753, or 16.9% as compared to $189,478, or 43.7%, of total product sales for
the corresponding period in fiscal 2004. Because we have not had employee
layoffs due to the specialized nature of our employees and because of the fixed
costs associated with production, as our sales declined in the 2005 period, it
resulted in a decline in gross profit percentage. As sales volumes increase, our
employees are more utilized, thus increasing the gross profit percentage.
Selling General and Administrative Expenses. Selling, general and
administrative expenses increased to $504,923 in the three months ended May 31,
2005, from $342,793 for the corresponding period of fiscal 2004, an increase of
$162,130, or 47.3%. This increase was primarily due to an increase in sales and
marketing costs supporting new product sales from $85,673 for the three months
ended May 31, 2004 to $169,269 for the three months ended May 31, 2005. We also
incurred higher consulting costs related to marketing and preparation of FDA
submissions. Consulting costs increased from $26,874 to $64,083 in the 2004 and
2005 periods, respectively. Payroll costs also increased from $134,550 to
$197,792, a result of wage and salary raises, the addition of new employees and
fewer BSD employees working as consultants for TherMatrx.
Research and Development Expenses. Research and development expenses
were $270,803 for the three months ended May 31, 2005, as compared to $160,715
for the corresponding period in fiscal 2004, an increase of $110,088, or 68.5%,
primarily due to an increase in payroll and consulting costs. Research and
development expenses for the period ended May 31, 2005 related primarily to the
conversion of systems software to foreign languages for international use and to
new developments in the areas of thermal therapy and thermal ablation.
Interest income. Interest income increased to $43,306 for the three
months ended May 31, 2005 as compared to $2,215 for the corresponding period in
fiscal 2004 due to the significantly higher levels of cash resulting from the
sale of our investment inTherMatrx.
Provision for income taxes. During the three months ended May 31, 2005,
we recorded a provision for income taxes of $1,841,000. Of this amount, $708,000
was deferred income tax expense and $1,133,000 was current income tax expense.
The income tax expense is a direct result of the payments received from the sale
of our investment in TherMatrx which resulted in significant net income for the
period.
Net income. The net income for the three months ended May 31, 2005 was
$2,948,795, after an income tax provision of $1,841,000, as compared with a net
loss of $311,939 for the corresponding period of fiscal 2004. The increase in
the net profit was primarily due to payments of $5,457,683 received during the
period ended May 31, 2005 from the sale of our investment in TherMatrx and the
increase in interest income.
Results of Operations
---------------------
Nine Months Ended May 31, 2005 compared to the Nine Months Ended May 31, 2004
Revenue. Revenue for the nine months ended May 31, 2005 was $1,338,560
compared to $1,541,397 for the corresponding period in fiscal 2004, a decrease
of $202,837, or 13.2%. The decrease in total revenue was primarily due to a
decrease in sales to related parties. Sales to Medizin-Technik totaled $539,431
for the nine months ended May 31, 2005 compared to $881,738 for the
corresponding period in fiscal 2004 and related party revenue from TherMatrx was
$0 for the nine months ended May 31, 2005 compared to $99,503 for the nine
months ended May 31, 2004. We no longer consider TherMatrx a related party since
it was sold to American Medical Systems, Inc. (AMS) on July 15, 2004. Dr.
Gerhard Sennewald, one of our directors, is a stockholder, executive officer and
a director of Medizin-Technik GmbH. Sales to Medizin-Technik may fluctuate
significantly depending on Medizin-Technik's anticipated sales and ability to
place orders in Europe. Our revenue can fluctuate significantly from period to
period because our sales, to date, have been based upon a relatively small
number of systems, the sales price of each being substantial enough to greatly
9
impact revenue levels in the periods in which they occur. Sales of a few systems
can cause a large change in the revenue from period to period as noted in the
decrease in sales to Medizin-Technik from the nine month period ended May 31,
2005 as compared to the corresponding period of fiscal 2004. Product sales
decreased to $1,189,824 as compared to $1,361,677 in the corresponding period of
fiscal 2004, a decrease of $171,853, or 12.6%.
Related Party Revenue. We derived $539,431, or 40.3%, of our revenue in
nine months ended May 31, 2005 from sales to related parties as compared to
$981,241 or 63.7%, in the corresponding period of fiscal 2004. All of the
related party revenue in the 2005 period was from sales of BSD systems and
component parts to Medizin-Technik. For the nine months ended May 31, 2004, the
related party revenue was $881,738 for sales to Medizin-Technik and the
remaining sales of $99,503 was from services provided to TherMatrx. Since the
sale of our investment in TherMatrx in July 2004, TherMatrx is no longer
considered a related party. Sales to Medizin-Technik may fluctuate significantly
from period to period due to the high cost of a BSD-2000 or BSD-500 system.
Sales increases of one or two systems can have a material effect on our revenue.
Non-related Party Revenue. In the nine months ended May 31, 2005, we
derived $799,129, or 59.7%, of our total revenue from sales to non-related
parties, as compared to $560,156, or 36.3%, for the corresponding period of
fiscal 2004. Our fiscal 2005 non-related party revenue consisted of product
sales of approximately $648,000, consulting services of approximately $91,979,
service contracts of approximately $39,358 and miscellaneous revenue of $19,792.
Gross Profit. Gross profit for the nine months ended May 31, 2005 was
$389,770, or 29.1%, of total sales as compared to $698,290, or 45.3%, of total
sales for the corresponding period in fiscal 2004. The decline in gross profit
margin was primarily due to the cost of excess production employees resulting
from the decrease in sales during period ended May 31, 2005. Because we have not
had employee layoffs and because of the fixed costs associated with production,
as our sales declined, it resulted in the decline of gross profit margin in the
period ended May 31, 2005.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $1,343,619 in the nine months ended May 31,
2005, from $803,947 for the corresponding period of fiscal 2004, an increase of
$539,672, or 67.1%. This increase was primarily caused by increases in sales and
marketing costs from approximately $182,566 in the nine months ended May 31,
2004 to approximately $419,370 in the nine months ended May 31, 2005, increases
in legal and accounting of approximately $86,486 in the 2004 period to
approximately $113,498 in the 2005 period, reflecting the use of legal counsel
in preparation for the shareholders meeting and the review of the Form 10-QSB
and proxy statements, as well as fees incurred in connection with tax consulting
and planning. Shareholder relations costs increased from approximately $15,765
in the 2004 period to approximately $54,838 in the 2005 period, reflecting costs
incurred in connection with our annual shareholders meeting and the issuance of
various press releases. Consulting costs increased from approximately $28,117 to
approximately $109,713 from the 2004 period to the 2005 period, respectively.
This increase was due to the use of consultants in marketing efforts and in
efforts to complete the FDA approval process and efforts to improve
reimbursement.
Research and Development Expenses. Research and development expenses
were $645,683 for the nine months ended May 31, 2005, as compared to $490,006
for the corresponding period in fiscal 2004, an increase of $155,677, or 31.8%,
primarily due to an increase in payroll and consulting costs. Research and
development expenses for the period ended May 31, 2005 related primarily to the
conversion of systems software to foreign languages for international use and to
new developments in the areas of thermal therapy and thermal ablation.
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Interest income. Interest income increased to $200,804 for the nine
months ended May 31, 2005 as compared to $4,816 for the corresponding period in
fiscal 2004 due to the significantly higher levels of cash resulting from the
sale of our investment in TherMatrx.
Provision for income taxes. During the nine months ended May 31, 2005,
we recorded a provision for income taxes of $1,841,000. Of this amount, $708,000
was deferred income tax expense and $1,133,000 was current income tax expense.
The income tax expense is a direct result of the payments received from the sale
of our investment in TherMatrx which resulted in significant net income for the
period.
Net income. The net income for the nine months ended May 31, 2005 was
$3,315,663, after an income tax provision of $1,841,000, as compared with a net
loss of $591,324 for the corresponding period of fiscal 2004. The increase in
the net profit was primarily due to payments of $6,552,089 received during the
2005 period from the sale of our investment in TherMatrx and the increase in
interest income.
Fluctuation in Operating Results. Our results of operations have
fluctuated in the past and may fluctuate in the future from year to year as well
as from quarter to quarter. Revenue may fluctuate as a result of factors
relating to the demand for thermotherapy systems and component parts supplied by
us to TherMatrx, market acceptance of our BSD hyperthermia systems, changes in
the medical capital equipment market, changes in order mix and product order
configurations, competition, regulatory developments and other matters.
Operating expenses may fluctuate as a result of the timing of sales and
marketing activities, research and development and clinical trial expenses, and
general and administrative expenses associated with our potential growth. For
these and other reasons described elsewhere, our results of operations for a
particular period may not be indicative of operating results for any other
period.
Liquidity and Capital Resources
-------------------------------
Our accumulated deficit since inception decreased from $12,073,146 as
of August 31, 2004 to $8,562,907 as of May 31, 2005, due to net income recorded
during the first nine months of fiscal 2005 as a result of our sale of
ourinvestment in TherMatrx. We have historically financed our operations through
cash from operations, licensing of technological assets, issuance of common
stock and through the sale of our investment in TherMatrx. We have projected
substantial payments yet to be made to us as a result of the sale of our
TherMatrx shares. However, these payments are contingent on the product sales
that TherMatrx achieves through December 31, 2005. We believe these payments, if
received, will contribute significantly to our future capital resources.
During the nine months ended May 31, 2005, we used $2,302,159 in
operating activities. The cash used in operating activities was mainly the
result of net income of $3,315,663, deferred income taxes of $708,000, and an
increase in income taxes payable of $1,008,182 offset by the gain on the sale of
our investment in TherMatrx of $6,552,089, a decrease in accrued expenses of
$224,233, an increase in accounts receivable of $430,035, and an increase in
inventory of $336,319. Our investing activities for the nine months ended May
31, 2005 generated net cash of $6,452,145 relating mainly to the proceeds
received from the sale of our investment in TherMatrx, offset by the purchase of
certain property and equipment of $100,994. Total cash increased from $9,697,154
at August 31, 2004 to $13,922,445 at May 31, 2005 primarily as a result of
payments received from the sale of our investment in TherMatrx.
We expect to use the payments from the sale of our TherMatrx shares,
including any contingent payments, for general corporate purposes, including the
sales and marketing effort for our FDA approved cancer therapy products,
supporting the FDA application for our cancer therapy products under
investigational status, the development of new products used in medical therapy
and the possibility of acquiring new companies or technology.
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We expect to incur additional expenses related to the commercialization
of our BSD-500 systems, which will precede any revenue from the sale of such
systems. Due to additional participation at trade shows, expenditures on
publicity, additional travel, higher sales commissions and other related
expenses, we project that our sales and marketing expenses will be approximately
$500,000 higher in fiscal 2005 than in the prior year to support the commercial
introduction of the BSD-500 systems. In addition, we anticipate that we will
incur expenses of approximately $110,000 related to governmental and regulatory,
including FDA, approvals during fiscal 2005 in excess of fiscal 2004. We are
making these investments in sales and marketing and on government and regulatory
activities to increase our revenue from sales of our BSD-500 system and, upon
receipt of FDA approval, from the sale of our BSD-2000 system in the United
States. These increased marketing and regulatory expenses are an investment in
generating offsetting revenue against the decline in TherMatrx sales, and to
provide future revenue growth over the long term. We also project that we will
incur approximately $250,000 in additional new development expenses associated
with developments for the treatment of non-cancerous diseases and medical
conditions.
We believe any cash shortfall during fiscal 2005 that results from a
decrease in revenues and increase in expenses can be covered through cash
received from the sale of our TherMatrx shares. We believe we can cover any cash
shortfall with cost cutting or available cash. If we cannot cover any such cash
shortfall with cost cutting or available cash, we would need to obtain
additional financing. We cannot be certain that any financing will be available
when needed or will be available on terms acceptable to us. Insufficient funds
may require us to delay, scale back or eliminate some or all of our programs
designed to facilitate the commercial introduction of our systems or entry into
new markets.
FORWARD-LOOKING STATEMENTS
With the exception of historical facts, the statements contained in
sections entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations" are forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995, which reflect our current
expectations and beliefs regarding our future results of operations, performance
and achievements. These statements are subject to risks and uncertainties and
are based upon assumptions and beliefs that may or may not materialize. These
forward-looking statements include, but are not limited to, statements
concerning:
o our anticipated financial performance and business plan;
o our expectations regarding the commercial introduction of the
BSD-500 system;
o our expectations and efforts regarding receipt of FDA approvals
relating to the BSD-2000 system;
o our technological developments to the BSD-500 and BSD-2000
systems;
o our ability to successfully develop our technology for new
applications and the expense of such developments;
o our development or acquisition of new technologies;
o our estimation of our portion of the total payout from this sale
of TherMatrx;
o the amount of expenses we will incur for the commercial
introduction of the BSD-500 system;
o the amount of expenses we will incur for governmental and
regulatory, including FDA, approvals;
o our expectation that related party revenue will continue to be a
significant portion of our total revenue;
o our belief that sales of BSD-500 and BSD-2000 systems will
increase through our future sales and marketing efforts;
o our assumption that we will receive contingent payments, and the
amount of such payments, in connection with the sale of our
ownership in TherMatrx to AMS; and
o our anticipated use of proceeds from the sale of our investment in
TherMatrx to AMS.
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We wish to caution readers that the forward-looking statements and our
operating results are subject to various risks and uncertainties that could
cause our actual results and outcomes to differ materially from those discussed
or anticipated, including the factors set forth in the section entitled "Risk
Factors" included in our Annual Report on Form 10-KSB for the year ended August
31, 2004 and our other filings with the Securities and Exchange Commission. We
also wish to advise readers not to place any undue reliance on the
forward-looking statements contained in this report, which reflect our beliefs
and expectations only as of the date of this report. We assume no obligation to
update or revise these forward-looking statements to reflect new events or
circumstances or any changes in our beliefs or expectations, other than as
required by law.
Item 3. Controls and Procedures
a. Evaluation of disclosure controls and procedures.
Under the supervision and with the participation of our
management, including our Principal Executive Officer and Principal
Financial Officer, we evaluated the effectiveness of the design and
operation of our disclosure controls and procedures as of May 31, 2005
(as defined in Rule 13a-15(e) or 15d-15(e) under the Securities
Exchange Act of 1934 (the "Exchange Act")). In connection with this
evaluation, management identified a deficiency that existed in the
design or operation of our internal control over financial reporting
that it considers to be a "material weakness." The Public Company
Accounting Oversight Board has defined a material weakness as a
"significant deficiency or combination of significant deficiencies that
results in more than a remote likelihood that a material misstatement
of the annual or interim financial statements will not be prevented or
detected."
The deficiency in our internal control related to accounting for
the provision for income taxes, deferred income taxes, and income taxes
payable. The adjustment to record the income tax provision and the
necessary adjustments to deferred income taxes and income taxes payable
were detected and have been appropriately recorded and disclosed in
this Form 10-QSB. We are in the process of improving our internal
control over financial reporting in an effort to remedy this
deficiency.
Based upon that evaluation and the deficiency identified above,
the Principal Executive Officer and Principal Financial Officer
concluded that, as of the end of the period covered by this report, our
disclosure controls and procedures were not effective in timely
alerting them to the material information relating to us, required to
be included in the reports we file or submit under the Exchange Act or
in ensuring that information required to be disclosed in the reports
that we file or submit under the Exchange Act is accumulated and
communicated to management, including the Principal Executive Officer
and Principal Financial Officer, to allow timely decisions regarding
required disclosures.
b. Changes in internal controls.
During the fiscal quarter covered by this report, there has been
no change in our internal control over financial reporting (as defined
in Rule 13a-15(f) or 15d-15(f) under the Exchange Act) that has
materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits
The following exhibits are filed as part of this report:
Exhibit No. Description of Exhibit
----------- ----------------------
31.1 Certification Required Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification Required Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification Required Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification Required Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
BSD Medical Corporation, the registrant, has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
BSD MEDICAL CORPORATION
Date: July 15, 2005 /s/ Hyrum A. Mead
-----------------------------------------
President (principal executive officer)
Date: July 15, 2005 /s/ Dennis E. Bradley
-----------------------------------------
Controller (principal financial officer)
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