UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended August 31, 2004
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: $1,630,648
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 10,
2004, was $13,415,112.
As of November 10, 2004, there were 20,057,333 shares of the issuer's
common stock, par value $0.001, outstanding.
Documents Incorporated by Reference: Portions of the issuer's proxy
statement to be filed in connection with its annual meeting of stockholders are
incorporated by reference into Part III of this Form 10-KSB.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
PART I
ITEM 1. BUSINESS
Overview
--------
We develop, manufacture, market and service systems that deliver
focused electromagnetic energy for use in a variety of medical therapies and
applications. Focused electromagnetic energy (non-ionizing electromagnetic
radiation) is used to heat diseased sites in the body to temperatures as
required by a number of medical therapies. Our business objectives are to
commercialize our products developed for the treatment of cancer, and further
expand our developments to treat other diseases and medical conditions. For
convenience, the terms "company," "BSD," "we" and "our" refer to BSD Medical
Corporation.
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. Since the inception of our company, our primary research has centered
on the application of focused electromagnetic energy for the treatment of
cancer. Our technology can be used both as a combination therapy with existing
cancer treatments or as a stand-alone cancer therapy. Current and possible
expansion of our cancer treatment sites include cancers of the prostate, breast,
head, neck, bladder, cervix, colon/rectum, esophagus, liver, brain, bone,
stomach and lung.
In addition, although we have not entered these markets, we believe our
technology has application for numerous other medical purposes, including the
treatment of such conditions as psoriasis, arthritis, fibroids, hemorrhoids,
menorrhagia (excessive menstrual bleeding), benign tumors and cysts. We believe
our technology is also applicable in treating special medical problems such as
sleep apnea, and in the treatment of varicose veins and cosmetic skin tightening
without surgery (face lifts). Our objective is to commercialize our developed
products and further expand our developments into new markets.
Sale of TherMatrx
-----------------
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
would fund our other business objectives. 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, Inc. TherMatrx
received capital from these investors to conduct clinical trials, and after
obtaining FDA approval in July 2001, the funding to commercialize the
development. We were compensated for providing manufacturing, regulatory and
engineering support to assure the success of the new company.
On July 15, 2004, American Medical Systems Holdings, Inc., or AMS,
acquired TherMatrx for $40 million in cash plus future payments contingent upon
the combined entity's future sales of TherMatrx's DOT systems. The sale included
all of our TherMatrx shares. Our approximate 30% ownership in TherMatrx was
reduced to approximately 25% because of the exercise of outstanding options to
1
acquire common stock of TherMatrx at the closing. We received an initial cash
payment, after the withholding of escrow funds and the payment of other initial
obligations, of approximately $9 million. We may also receive future contingent
payments. Contingent payments to TherMatrx shareholders will be four times
quarterly sales of TherMatrx's DOT systems during the six quarters beginning
July 5, 2004 and ending December 31, 2005. We will receive quarterly contingent
payments when the accumulated value of four times quarterly sales has exceeded
the initial $40 million payment to TherMatrx shareholders. The contingent
payments are also subject to certain set-off rights in favor of AMS. The
aggregate maximum amount of the initial payment and any contingent payments is
$250 million.
While the contingent payments are not guaranteed and are subject to the
future sales of TherMatrx products, we have offered the following projections.
If the sale of TherMatrx products were to remain flat at the recent sales rates,
the total payment for our TherMatrx shares would be about $30 million, including
the initial payment of approximately $9 million. Since the sale of TherMatrx
products has been increasing in the current year over previous years, we have
projected a continued growth trend during the earn-out period. If that growth
trend were realized, the projected total payment for our TherMatrx shares would
be about $40 million, including the initial payment of approximately $9 million.
However, any future payments are not guaranteed and are subject to
uncertainties, and we may not receive any contingent payments in addition to the
initial $9 million, which is the only amount guaranteed. If TherMatrx sales
exceed our projections, the maximum payout that we could receive from the sale
of our TherMatrx shares is approximately $62.5 million. If TherMatrx sales fall
below our projections and the past sales rates, there is no guarantee of payment
beyond the initial payment, which is non-refundable. AMS has reported that
TherMatrx sales for the first quarter since the sale of TherMatrx were $5.2
million, which is consistent with our projection.
Cancer Therapy Systems
----------------------
Since the inception of our company we have engineered systems designed
to increase the effectiveness of cancer treatment through the use of focused
electromagnetic energy. This focused energy is used to selectively heat
cancerous tissue. Heat is used to destroy cancer cells directly, and also to
condition tumors for more effective treatment by radiation and chemotherapy.
Heat stimulates tumor blood flow and the consequent absorption of chemotherapy
drugs. Heating also increases the presence of oxygen in the tumor needed to form
the hydroxide radicals used to destroy cancer cell DNA in radiation treatments.
We have developed various technologies for heating cancerous tumors,
depending on their location in the body. Through our development efforts,
cancers such as melanomas or recurrent breast cancer located near the surface of
the body can be treated with superficial cancer treatment applicators and
systems. Cancers that can be accessed through natural body orifices, or that are
accessible through catheters inserted into the tumor as part of invasive
radiation techniques (such as used to treat prostate cancer or head and neck
cancer) can be treated with tiny, inserted antennae that we have developed to
deliver focused electromagnetic energy into the cancerous tissue. We have also
developed systems to non-invasively treat cancers located deep in the body by
focusing electromagnetic energy on the cancer through a cylindrical applicator
that surrounds the body. This cylindrical applicator contains an array of
multiple antennae that focus electromagnetic energy, and therefore heat, on the
tumor. Temperature levels for treatments are monitored through small temperature
sensors, and some of our systems can be interfaced with magnetic resonance
imaging so that the treatment in progress can be observed, and temperatures can
be monitored through images.
Our BSD-500 is used to treat cancers located near the surface of the
body, or areas that can be accessed using inserted antennae. The BSD-500 comes
in several versions, depending on the customer requirements. The BSD-2000 is
used to non-invasively treat deep cancers. This system also comes in several
versions, including models with 3D steering of electromagnetic energy, as well
as the ability to be integrated with an MRI.
2
The BSD-500 has received FDA approval. In addition the system has gone
through an extensive revision, and has obtained two FDA supplements to this
approval to further refine its commercial presentation.
In October 2004, we entered into an agreement with Best Medical
International, Inc. to act as our exclusive sales agent for the BSD-500 in the
United States. Best Medical is a leading supplier of products in the target
market for the BSD-500. In this sales launch, our first objective is to sell the
BSD-500 to well known, progressive cancer treatment centers that can act as
spokesmen and reference sites for our systems. We believe that these centers
will be an important catalyst for broader, general sales of the BSD-500.
The list price for the BSD-500 varies from $175 thousand to $225
thousand, depending on the features of the system. Our target is to sell BSD-500
systems as companions for the over 1,500 installed brachytherapy systems
(radiation systems using targeted radiation sources) that the BSD-500 was
developed to complement. The BSD-500 increases the effectiveness of
brachytherapy, a specialized form of radiation therapy.
The BSD-2000 does not currently have FDA approval except as an
investigational device; however, the phase III clinical trial that we will use
to apply for the FDA approval has been concluded and published in a major
journal. We project that we will obtain FDA approval for the BSD-2000 in 2006.
We are also seeking regulatory approval for the sale of the BSD-2000 in the
People's Republic of China. We anticipate Chinese regulatory approval during
2005. However, the decision regarding the granting of regulatory approvals,
together with their timing, is not in our control, and is the responsibility of
those respective regulatory authorities.
The list price of the BSD-2000 ranges between $350 thousand and $1.3
million, depending on the features of the system. The target for the BSD-2000 is
to sell companion BSD-2000 systems for the over 7,500 installed linear
accelerators used for radiation therapy.
Nearly all of our sales of cancer therapy systems over recent past
periods have been to cancer research institutions for use in conducting clinical
trials with our equipment. As a company, we are now in the early stages of
commercial selling of the BSD-500. Obtaining FDA approval for the BSD-2000 would
contribute to our sales efforts by providing the additional technology required
for the treatment of solid tumors located virtually anywhere in the body.
Our business model for cancer systems is based on systems sales, a
significant aftermarket revenue stream from service contracts and the sale of
replacement components associated with the therapy. We intend to use the revenue
from the sale of TherMatrx for commercializing our developed products, and for
expanding into new markets.
Our Cancer Treatment Systems
----------------------------
Despite the massive attention given to cancer prevention and treatment,
the American Cancer Society estimates that 1,368,030 new cancer cases will be
diagnosed and that 563,700 Americans will die from cancer during 2004 (up from
556,500 cancer deaths in 2003). 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.
3
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. Our therapy that produces heating of tissue (a condition
called "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.
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.
4
In the opening address at the April 21, 2001 annual meeting of the
North American Hyperthermic Society (sponsored by the Radiological 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.
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).
5
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
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.
6
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.
Sales, Marketing and Distribution
---------------------------------
Our target market includes clinics, hospitals and institutes in which
cancer is treated, whether in the Unites States or international markets.
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. We sold only one BSD-500i
through Nucletron. We have not felt that our relationship with Nucletron was
successful, and our sales agreement with Nucletron was terminated in March 2004.
In September 2004, we entered into an agreement with Dalian Orientech
Co. LTD to seek regulatory approval for the sale of the BSD-2000 in the People's
Republic of China, and thereafter to act as our exclusive distributor for the
sale of the BSD-2000 in that country. The agreement has a five-year term, after
which the agreement may be extended by mutual consent of the parties. Under the
current agreement, Dalian Orientech will purchase the BSD-2000 systems from us
and then resell them within the People's Republic of China. Dalian Orientech is
compensated for its efforts by retaining the difference between the price it
pays to purchase the products from us and the price it receives upon sale.
Dalian Orientech is a leading distributor of hyperthermia systems in the
People's Republic of China.
In October 2004, we entered into an agreement with Best Medical
International, Inc. to act as our exclusive sales agent for our BSD-500 systems
in the United States. The agreement has one-year term, prior to the conclusion
of which we will negotiate the terms of any future relationship. If Best Medical
meets certain sales milestones, it has a right of first refusal for a
non-exclusive distribution agreement in the United States for our BSD-500
systems. Best Medical is entitled to sales commissions on the amounts we receive
from its sales of our BSD-500 systems. Best Medical is a leading supplier of
products in the target market for the BSD-500. In this sales launch, our first
objective is to sell the BSD-500 to well known, progressive cancer treatment
centers that can act as spokesmen and reference sites for our systems. We
believe that these centers will be an important catalyst for broader, general
sales of the BSD-500.
7
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
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. We
generally do not provide our distributors with rights of return, price
protection, discounts, credits, or other special terms or sale incentives.
However, we did provide Medizin Technik with an extra applicator at no
additional charge as a sales incentive in connection with the sale of a BSD-2000
system in fiscal 2004. 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,
8
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.
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.
Even though a new medical device may have been approved for commercial
distribution, we may find limited demand for that product until reimbursement
approval is obtained from governmental and commercial third party payors of
health care. In addition, even after we receive reimbursement approval, or
coverage, of a product, medical reimbursement rates are unpredictable. Both
government and commercial third party payors of health care are seeking to limit
the growth of health care costs. If clinics, hospitals, and other health care
providers are not reimbursed adequately for our product, they may not purchase
our product. We cannot project the extent to which our business may be affected
by future legislative and regulatory developments, and private sector
initiatives, to reduce health care costs. We cannot assure that future health
care legislation or regulation will not have a material adverse effect on the
coverage of our products, our business, financial condition and results of
operations, or that reimbursement, existing or in the future, will be adequate
to ensure that customers continue to purchase our products.
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.
We retain an interest in the BPH market because of our right to
contingent payments from the sale of our ownership in TherMatrx based on future
sales of TherMatrx's product. 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. 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.
9
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.
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.
10
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
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.
11
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.
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. This license
required 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 terminated this patent license on September 24, 2004
because we did not believe that it had further application for use with our
systems.
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 a one-time only cash payment with no continuing
costs.
12
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.
Research and Development
------------------------
Research and development expenses for fiscal 2004 were $656,857
compared to $676,867 for fiscal 2003, a decrease of $20,010, or 2.95%. Research
and development expenses in fiscal 2004 related primarily to development of a
commercial version of the BSD-2000/3D/MR hyperthermia system, enhancements to
our BSD-500 systems and 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 16, 2004, we had 26 employees; 22 of whom were full time
employees. None of our employees are 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 report. 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.
13
Since our inception in 1978, our expenses have substantially exceeded
our revenue, resulting in continuing losses and an accumulated deficit of
$12,073,146 at August 31, 2004. In fiscal 2004, we recorded a net profit of
$8,412,961. Our net profit was primarily due to our sale of our ownership in
TherMatrx,of which we owned approximately 25% at closing, to AMS. The sale
included all of our TherMatrx shares. We received an initial cash payment, after
the withholding of escrow funds and the payment of other initial obligations, of
approximately $9 million in connection with the closing. In fiscal 2003 we had a
net loss of $570,285 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
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 past periods has been
derived from TherMatrx, revenue from this customer may decline to zero in future
periods.
During the year ended August 31, 2004, our sales to TherMatrx declined
to $99,502, a decrease of $1,355,441 from the year ended August 31, 2003. In
fiscal 2004, TherMatrx represented approximately 6% of our net sales compared to
approximately 57% of our net sales in fiscal 2003. In the past, we have
manufactured, assembled and tested TherMatrx's TMx-2000 system, and also
supplied equipment components and provided consulting services to TherMatrx.
With the sale of our ownership in TherMatrx to AMS, we believe product sales to
TherMatrx may decrease to zero in future fiscal years. TherMatrx is under no
contractual obligation to obtain from us products or manufacturing, assembling,
testing and other services. This projected 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.
We may not receive any contingent payments or significantly less in
contingent payment than we have projected from the sale of our ownership in
TherMatrx.
In connection with the sale of our ownership in TherMatrx to AMS, we
received an initial payment of approximately $9 million and the right to receive
contingent payments based on the future sales of TherMatrx's DOT systems over
the next 18 months. We may not receive any contingent payments. Any future
payments are not guaranteed and are subject to uncertainties, and we cannot be
sure that we will receive any contingent payments in addition to the initial
payment of approximately $9 million, which is the only amount guaranteed. Some
of the factors that could cause us not to receive contingent payments, or to
materially reduce contingent payments paid to us below our projections include,
without limitation, the inability of AMS to successfully market and sell the DOT
system at levels that we have assumed, the inability of AMS to pay the
contingent payment obligation, the acquisition of AMS by another company that
considers the DOT system to be a lower priority in its marketing efforts, the
inability of AMS to obtain products to support the demand for DOT sales, a
reported injury in which a patient claims harm from treatment by a DOT system,
product recalls that could harm the ability to sell DOT products, failure of
physicians to continue to endorse DOT products, or a reduction in the
reimbursement amount paid by Medicare, Medicaid, and private insurance payors
for DOT treatments.
14
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. We sold only one BSD-500i through Nucletron. We have not felt that our
relationship with Nucletron was successful, and our sales agreement with
Nucletron was terminated in March 2004.
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. The loss or ineffectiveness of Medizin-Technik as a distributor
and significant customer could result in lower revenue.
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.
15
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.
We believe our technology may have application for other medical
purposes. However, FDA or other regulatory approval for the use of our
technology for these applications would be required. We may not be able to get
these approvals, and if we do, obtaining these approvals would require
significant time and expense.
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.
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.
16
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.
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.
17
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.
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;
18
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.
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. In November 2002, we renewed our lease 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 us.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
19
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 2003 and
2004. 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, 2002.............. .79 .42
February 28, 2003.............. .70 .40
May 31, 2003................... .61 .45
August 31, 2003................ .96 .45
November 30, 2003.............. 2.00 .80
February 29, 2004.............. 1.65 1.18
May 31, 2004................... 1.69 1.15
August 31, 2004................ 2.25 1.30
As of November 16, 2004, there were approximately 584 holders of record
of our common stock. We have not paid any cash dividends on our common stock
since our inception.
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 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 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 report. All
information presented herein is based on our fiscal year ended August 31, 2004.
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
focused electromagnetic energy for use in a variety of medical therapies and
applications. Our objective is to commercialize our developed products and
further expand the application of our technology into new markets. We pioneered
the use of microwave thermal therapy for the treatment of the symptoms
associated with enlarged prostate, and are responsible for much of the
technology that has created a substantial medical industry using that therapy.
Our longest-term development has been the application of focused electromagnetic
energy for the treatment of cancer. In addition, although we have not entered
these markets, we believe that our technology has application for numerous other
medical purposes such as those described in the General section of this filing.
20
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 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 have estimated that our portion of the total payout from
this sale will be approximately $40 million. If TherMatrx sales exceed our
projections, the maximum payout that we could receive from the sale is $62.5
million. If TherMatrx sales fall under our projections, there is no guarantee of
any further payment beyond the initial payment, which is non-refundable.
Since the inception of our company we have engineered systems designed
to increase the effectiveness of cancer treatment through the use of focused
electromagnetic energy. From this development our current BSD-500 and BSD-2000
systems have emerged. We have also developed enhancements to our BSD-2000 system
including the BSD-2000/3D that is designed to allow three dimensional steering
of deep focused energy and heat to targeted tumors and tissue and the
BSD-2000/3D/MR that includes an interface for magnetic resonance imaging. These
systems are sold with supporting software and may also be sold with support
services.
Since inception, we have generated substantial operating losses and at
August 31, 2004, had an accumulated deficit of $12,073,146. We recorded net
profit for fiscal 2004 of $8,412,961. The primary reason for the net profit in
fiscal 2004 was the income generated from the sale of our ownership in
TherMatrx.
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 $1,494,311 and $1,956,270 for the
years ended August 31, 2004 and 2003, respectively. Service revenue was $99,837
and $277,912 for the years ended August 31, 2004 and 2003, respectively.
We derived $1,012,192, or 62%, of our revenue in fiscal 2004 from sales
to related parties. $912,690 of such related party revenue was for the sale of
two BSD-2000 systems 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. The remaining related party sale of $99,502
was for probes, applicators and thermotherapy systems sold to TherMatrx. Since
our ownership in TherMatrx has been sold they are no longer considered a related
party and we don't expect any more sales from TherMatrx.
21
In fiscal 2004, we derived $581,956, or 36%, of our revenue from sales
to unrelated parties. These revenues consisted of the sale of three BSD 500
systems for $471,725, billable labor of $18,053, service contracts of $72,437,
and sales of consumable devices used with our hyperthermia systems of $19,741.
Cost of sales for the year ended August 31, 2004, included raw material
and labor costs. Research and development expenses include expenditures for new
product development and development of enhancements to existing products.
Critical Accounting Policies and Estimates
------------------------------------------
The following is a discussion of our critical accounting policies and
estimates that management believes are material to an understanding of our
results of operations and which involve the exercise of judgment or estimates by
management.
Revenue Recognition. Revenue from the sale of cancer treatment systems
is recognized when a purchase order has been received, the system has been
shipped, the selling price is fixed or determinable, and collection is
reasonably assured. Most system sales are F.O.B. shipping point, therefore
shipment is deemed to have occurred when the product is delivered to the
transportation carrier. Most system sales do not include installation. If
installation is included as part of the contract, revenue is not recognized
until installation has occurred, or until any remaining installation obligation
is deemed to be perfunctory. Some sales of cancer treatment systems may include
training as part of the sale. In such cases, the portion of the revenue related
to the training, calculated based on the amount charged for training on a
stand-alone basis, is deferred and recognized when the training has been
provided. The sales of our cancer treatment systems do not require specific
customer acceptance provisions and do not include the right of return except in
cases where the product does not function as guaranteed by BSD. We provide a
reserve allowance for estimated returns. To date, returns have not been
significant.
Revenue from manufacturing services is recorded when an agreement with
the customer exists for such services, the services have been provided, and
collection is reasonably assured. Revenue from training services is recorded
when an agreement with the customer exists for such training, the training
services have been provided, and collection is reasonably assured. Revenue from
service support contracts is recognized on a straight-line basis over the term
of the contract, which approximates recognizing it as it is earned.
Our revenue recognition policy is the same for sales to both related
parties and non-related parties. We provide the same products and services under
the same terms for non-related parties as with related parties. Sales to
distributors are recognized in the same manner as sales to end-user customers.
Deferred revenue and customer deposits payable include amounts from service
contracts as well as cash received for the sales of products, which have not
been shipped.
Inventory Reserves. As of August 31, 2004, we had recorded a reserve
for potential inventory impairment of $80,000. During fiscal 2004, we reduced
our inventory reserve from $140,000 to $80,000. In addition to the reduction of
inventory reserve we also wrote off $154,814 in obsolete inventory. We
periodically review our inventory levels and usage, paying particular attention
to slower-moving items. If projected sales for fiscal 2005 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 no orders to be placed with us for TherMatrx systems, and 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.
22
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 August 31, 2004 was $0. Bad debt expense for the fiscal year ended August 31,
2004 was approximately $15,000. 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. 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, 2004 and 2003
--------------------------------------------------------------------------------
Revenue. Revenue for fiscal 2004 was $1,630,648 compared to $2,572,682
for fiscal 2003, a decrease of $942,034, or approximately 36.6%. The decrease in
total revenue was primarily due to a decrease in sales during fiscal 2004 to
TherMatrx of approximately $1,291,941 and a decrease in royalty revenue of
$302,000 partially offset by an increase in sales to Medizin-Technik of
$396,548. We expect no sales to TherMatrx in fiscal 2005. We also expect royalty
revenue to decline to $0 in fiscal 2005. Sales to Medizin-Technik may fluctuate
significantly depending on Medizin-Technik's anticipated sales and ability to
place orders in Europe. Our revenue can fluctuate significantly from period to
period because we have historically sold relatively few BSD-2000 and BSD-500
systems as these systems are expensive. Sales of 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 2003 to 2004. Product sales decreased to
$1,494,311 in fiscal 2004 from $1,956,270 in fiscal 2003, a decrease of
$461,959, or 24%.
Related Party Revenue. We derived $1,012,192, or 62% of our revenue in
fiscal 2004 from sales to related parties as compared to $1,907,585, or 74%, in
fiscal 2003. $99,502 of such related party revenue in fiscal 2004 was from the
sales of thermotherapy systems, component products and contract services to
TherMatrx. We also received a royalty payment of $36,500 paid to us by TherMatrx
that is included in other revenue. We believe that we provided less that 1% of
the inventory and related manufacturing services purchased by TherMatrx in
fiscal 2004 as compared to approximately 38% in fiscal 2003. This decline in
sales to TherMatrx in fiscal 2004 was due to increased use of other suppliers in
providing products and services. Because of the sale of our ownership in
TherMatrx in July 2004, TherMatrx is no longer considered a related party. The
remaining related party revenue of approximately $912,690 in fiscal 2004 was for
two BSD-2000 system and various component parts sold to Medizin-Technik. The
significant increase in sales to Medizin-Technik in fiscal 2004 was due to the
sale of two BSD-2000 systems compared to one in fiscal 2003. 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 fiscal 2004, we derived approximately
$581,956, or 36%, of our total revenue as compared to approximately $326,597, or
13%, in fiscal 2003 from non-related party sales. Our fiscal 2004 non-related
party revenue consisted of sales of three BSD-500 systems for approximately
$471,725. The balance of our non-related party revenue consisted of consumable
devices of $19,741, service contracts of $72,437, and billable labor of $18,053
23
Cost of Sales. Cost of sales for fiscal 2004 was $1,116,781 compared to
$1,227,377 for fiscal 2003, a decrease of $110,596 or approximately 9%. This
decrease resulted primarily from lower sales in fiscal 2004. Cost of sales to
related parties in fiscal 2004 decreased to $668,619 from $1,132,758 in fiscal
2003 primarily due to the decrease in related party sales and the change in
product mix sold to related parties from $1,907,585 of systems, component
products and services in fiscal 2003 to $1,012,192 of systems, component
products and services in fiscal 2004. During fiscal 2004, approximately
$491,768, or 88%, of the related party cost of sales were attributable to sales
to Medizin-Technik and approximately $67,318, or 12%, were attributable to
TherMatrx.
Gross Profit. Gross profit for the fiscal year ending August 31, 2004
was $477,367, or 30%, as compared to $1,006,805, or 45%, of total product sales
for the fiscal year ending August 31, 2003. The decline in gross profit margin
was primarily due to the cost of excess production employees resulting from the
decrease in sales. Also, we made an adjustment to inventory to reflect the lower
of cost or market, which resulted in an increase in cost of sales of
approximately $154,814. In addition, we had sales of higher margin hyperthermia
system products accompanied by production efficiencies obtained from a higher
volume of hyperthermia system sales in the period ending August 31, 2003.
Research and Development Expenses. Research and development expenses
for fiscal 2004 were $656,857 compared to $676,867 for fiscal 2003, a decrease
of $20,010, or 2.95%. Research and development expenses in fiscal 2004 related
primarily to development of a commercial version of the BSD-2000/3D/MR
hyperthermia system and enhancements to our BSD-500 systems.
Inventory Impairment Expense. As of August 31, 2004, we had recorded a
reserve for potential inventory impairment of $80,000. During fiscal 2004, we
reduced our inventory reserve from $140,000 to $80,000. In addition to the
reduction of inventory reserve we also wrote off $154,814 in obsolete inventory.
We periodically review our inventory levels and usage, paying particular
attention to slower-moving items. 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 2004 were $1,147,628 compared to $1,297,438
fiscal 2003, a decrease of $149,810, or approximately 12%. This decrease was
primarily due to decreases in bad debt and consulting expense of approximately
$342,492 in fiscal 2004 as compared to fiscal 2003. This decrease was partially
offset by increases in sales and marketing expenses of approximately $105,575
and increases in board compensation and legal fees of $36,986.
We recorded a bad debt expense of $300,394 in fiscal 2003 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.
24
Interest income. Interest income increased to $18,500 in fiscal 2004 as
compared to $2,838 in fiscal 2003 due to higher levels of investments resulting
from greater cash generated from the sale of TherMatrx.
Other Income. Other income for fiscal 2004 was $9,142,570 compared to
$58,715 in fiscal 2003. This increase resulted almost entirely from a gain
recognized on the sale of TherMatrx.
Net Profit/ Loss. In fiscal 2004 we had a net profit of $8,412,961 as
compared to a net loss in fiscal 2003 of $570,285. The net profit related to the
sale of our ownership in TherMatrx.
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
$12,073,146. We have historically financed our operations through cash from
operations, licensing of technological assets and issuance of common stock.
We generated $7,491,538 in cash from operating activities in fiscal
2004 compared to cash used of $227,298 in fiscal 2003. This was primarily a
result of our sale of our TherMatrx shares for approximately $9 million, offset
by an increase in the deferred tax asset of $829,000. In addition, accounts
receivable decreased by $129,849, and accounts payable decreased by $180,937.
Accrued expenses decreased by $190,555 primarily as a result of a decrease in
customer deposits as orders were shipped and the write-off of the accrued loss
in equity affiliate that was associated with the sale of our TherMatrx shares.
Our investing activities resulted in net cash used of $42,389 relating to the
purchase of certain property and equipment. Cash provided by financing
activities totaled $2,112,002 reflecting proceeds from the issuance of common
stock in connection with the exercise of outstanding stock options and the
private placement of 2,059,600 shares to investors at $1.10 per share in
November and December 2003. Total cash increased from $136,003 at August 31,
2003 to $9,697,154 at August 31, 2004, as a result of the sale of our TherMatrx
shares and the November and December 2003 private placement.
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, and the development of future products used in medical
therapy.
We 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
25
approximately $500,000 higher in fiscal 2005 than in the prior year to support
the commercial introduction of the BSD-500 systems. In addition, we anticipate
that we will incur expenses of approximately $200,000 related to governmental
and regulatory, including FDA, approvals during fiscal 2005 in excess of fiscal
2004. We are making these investments in sales and marketing and on government
and regulatory activities to increase our revenue from sales of our BSD-500
system and, upon receipt of FDA approval, from the sale of our BSD-2000 system
in the United States. These increased marketing and regulatory expenses are an
investment in generating offsetting revenue against the decline in TherMatrx
sales that we have projected, and to provide future revenue growth over the long
term. We also project that we will incur approximately $250,000 in additional
new development expenses associated with developments for the treatment of
non-cancerous diseases and medical conditions.
We believe any cash shortfall during fiscal 2005 that results from this
decrease in revenues and increase in expenses can be covered through the cash
raised in our November and December 2003 private placements and with the cash
from the sale of 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" 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 and Chinese
regulatory approvals relating to the BSD-2000 system;
o our technological developments to the BSD-500 and BSD-2000
systems;
o our ability to successfully develop our technology for new
applications and the expense of such developments;
o our development or acquisition of new technologies;
o our expectation that sales to TherMatrx may decline to zero in
future periods;
o the amount of expenses we will incur for the commercial
introduction of the BSD-500 system;
o the amount of expenses we will incur for governmental and
regulatory, including FDA, approvals;
o our expectation that related party revenue will continue to be a
significant portion of our total revenue;
o our belief that sales of BSD-500 and BSD-2000 systems will
increase through our future sales and marketing efforts;
o our belief that our current working capital and cash from
operations will be sufficient to fund our anticipated operations
for fiscal 2005
o our assumption that we will receive contingent payments, and the
amount of such payments, in connection with the sale of our
ownership in TherMatrx to AMS; and
o our anticipated use of proceeds from the sale of our ownership in
TherMatrx to AMS;
26
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 report. 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 7. FINANCIAL STATEMENTS
BSD MEDICAL CORPORATION
Financial Statements
August 31, 2004 and 2003
BSD MEDICAL CORPORATION
Index to Financial Statements
--------------------------------------------------------------------------------
Page
----
Report of Independent Registered Public Accounting Firm 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
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
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, 2004, and the related statements of operations, stockholders' equity,
and cash flows for the years ended August 31, 2004 and 2003. 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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits 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, 2004, and the results of its operations and its cash flows for the
years ended August 31, 2004 and 2003 in conformity with accounting principles
generally accepted in the United States of America.
/s/Tanner + Co.
Salt Lake City, Utah
October 7, 2004
F-1
BSD MEDICAL CORPORATION
Balance Sheet
August 31, 2004
--------------------------------------------------------------------------------
Assets
------
Current assets:
Cash and cash equivalents $ 9,697,154
Receivables, net 43,904
Related party receivables 215,400
Inventories, net 740,416
Deferred tax asset 829,000
Other current assets 51,066
--------------
Total current assets 11,576,940
Property and equipment, net 139,100
Patent, net of amortization of $6,921 25,007
--------------
$ 11,741,047
--------------
--------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 99,131
Accrued expenses 423,915
Deferred revenue 47,223
--------------
Total current liabilities 570,269
--------------
Deferred tax liability 51,000
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 19,945,982 shares and
outstanding 19,921,651 shares 19,946
Additional paid-in capital 23,201,020
Deferred compensation (27,808)
Accumulated deficit (12,073,146)
Treasury stock, at cost (234)
--------------
Total stockholders' equity 11,119,778
--------------
$ 11,741,047
--------------
--------------------------------------------------------------------------------
See accompanying notes to financial statements. F-2
BSD MEDICAL CORPORATION
Statement of Operations
Years Ended August 31,
--------------------------------------------------------------------------------
2004 2003
------------------------------------
Revenues:
Sales $ 581,956 $ 326,597
Sales to related parties, net 1,012,192 1,907,585
Revenue from royalties in arrears - 275,000
Other revenue - related party 36,500 63,500
------------------------------------
1,630,648 2,572,682
------------------------------------
Costs and expenses:
Cost of sales 448,162 94,619
Cost of sales to related parties 668,619 1,132,758
Research and development 656,857 676,867
Selling, general, and administrative 1,147,628 1,297,438
------------------------------------
2,921,266 3,201,682
------------------------------------
Operating loss (1,290,618) (629,000)
------------------------------------
Other income (expense):
Gain on sale of equity interest 9,111,211 -
Interest income 18,500 2,838
Interest expense (491) -
Other 31,359 55,877
------------------------------------
9,160,579 58,715
------------------------------------
Income (loss) before income taxes 7,869,961 (570,285)
Income tax benefit 543,000 -
------------------------------------
Net income (loss) $ 8,412,961 $ (570,285)
------------------------------------
Income (loss) per common share - basic $ 0.43 $ (0.03)
------------------------------------
Income (loss) per common share - diluted $ 0.41 $ (0.03)
------------------------------------
Weighted average shares - basic 19,397,000 17,805,000
------------------------------------
Weighted average shares - diluted 20,331,000 17,805,000
------------------------------------
--------------------------------------------------------------------------------
See accompanying notes to financial statements. F-3
BSD MEDICAL CORPORATION
Statement of Stockholders' Equity
Years Ended August 31, 2004 and 2003
---------------------------------------------------------------------------------------------------------------------------
Common Stock Additional Deferred Treasury Stock
------------------- Paid-in Compen- Accumulated ------------------
Shares Amount Capital sation Deficit Shares Amount Total
----------------------------------------------------------------------------------------------
Balance September 1, 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
Common stock issued for:
Cash 2,090,350 2,090 2,109,912 - - - - 2,112,002
Services 15,999 16 11,984 - - - - 12,000
Amortization of deferred
compensation - - - 7,858 - - - 7,858
Deferred compensation - - 8,250 (8,250) - - - -
Net income - - - - 8,412,961 - - 8,412,961
----------------------------------------------------------------------------------------------
Balance August 31, 2004 19,945,982 $ 19,946 $ 23,201,020 $ (27,808) $ (12,073,146) 24,331 $ (234) $11,119,778
----------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements F-4
BSD MEDICAL CORPORATION
Statement of Cash Flows
Years Ended August 31,
-------------------------------------------------------------------------------------------
2004 2003
------------------------------
Cash flows from operating activities:
Net income (loss) $ 8,412,961 $ (570,285)
Adjustments to reconcile net income (loss) to
net cash (used in) provided by operating activities:
(Recovery of) provision for doubtful accounts 14,569 284,393
Increase in inventory reserve and write off of
inventory 154,814 90,000
Depreciation and amortization 46,461 48,678
Recognition of deferred gain on sale of building - (15,275)
Amortization of deferred compensation 7,858 6,358
Stock compensation expense 12,000 24,000
Decrease (Increase) in:
Receivables 129,849 9,614
Inventories (92,757) (85,743)
Deferred tax asset (829,000) -
Other current assets (7,828) (24,901)
Increase (decrease) in:
Accounts payable (180,937) 217,447
Accrued expenses (190,555) (133,066)
Deferred revenue (36,897) (78,518)
Deferred tax liability 51,000 -
------------------------------
Net cash provided by (used in)
operating activities 7,491,538 (227,298)
------------------------------
Cash flows from investing activities-
purchase of property and equipment (42,389) (60,599)
------------------------------
Cash flows from financing activities-
proceeds from issuance of common stock 2,112,002 2,000
------------------------------
Increase (decrease) in cash and cash equivalents 9,561,151 (285,897)
Cash and cash equivalents, beginning of year 136,003 421,900
------------------------------
Cash and cash equivalents, end of year $ 9,697,154 $ 136,003
------------------------------
-------------------------------------------------------------------------------------------
See accompanying notes to financial statements F-5
BSD MEDICAL CORPORATION
Notes to Financial Statements
August 31, 2004 and 2003
--------------------------------------------------------------------------------
1. Organization Organization
and 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
held an approximate 30% interest in TherMatrx until July
15, 2004. On July 15, 2004, American Medical Systems
Holdings, Inc., or AMS, acquired TherMatrx, Inc. for $40
million in cash plus future payments contingent upon the
combined entity's future sales of TherMatrx's DOT
systems. The sale included all of the Company's
TherMatrx shares, which were reduced at closing to
approximately 25% of the total outstanding TherMatrx
shares because of the exercise of outstanding options to
acquire common stock of TherMatrx. The Company received
an initial cash payment, after the withholding of escrow
funds and the payment of other initial obligations, of
approximately $9 million in connection with the closing.
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.
--------------------------------------------------------------------------------
F-6
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
1. Organization Investment in Joint Venture
and The Company had an approximate 30% ownership in
Significant TherMatrx, a corporate joint venture that is engaged in
Accounting the manufacture and sale of medical devices. The
Policies investment was accounted for on the equity method of
Continued accounting. Because the Company's percent share of
accumulated losses in TherMatrx had exceeded its
original investment no asset was recorded on the balance
sheet. On July 15, 2004, American Medical Systems
Holdings, Inc., or AMS, acquired TherMatrx, Inc. for $40
million in cash plus future payments contingent upon the
combined entity's future sales of TherMatrx's DOT
systems. The sale included all of the Company's
TherMatrx shares, which were reduced at closing to
approximately 25% of the total outstanding TherMatrx
shares because of the exercise of outstanding options to
acquire common stock of TherMatrx. The Company received
an initial cash payment, after the withholding of escrow
funds and the payment of other initial obligations, of
approximately $9 million in connection with the closing.
Patents
Patents are carried at cost and are being amortized over
17 years.
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, 2004, the
accrued warranty reserve was approximately $6,900.
During the fiscal years ended August 31, 2004 and 2003,
total warranty expense was $28,148 and $11,502,
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.
--------------------------------------------------------------------------------
F-7
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
1. Organization Income (Loss) Per Common Share
and The computation of basic income (loss) per common share
Significant is based on the weighted average number of shares
Accounting outstanding during each year.
Policies
Continued 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 and warrants to
purchase 2,437,533 shares and 1,275,303 shares of common
stock at prices ranging from $.10 to $1.80 per share
were outstanding at August 31, 2004 and 2003,
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.
The shares used in the computation of the Company's
basic and diluted income (loss) per share are reconciled
as follows:
2004 2003
-------------------------------
Weighted average number of shares
outstanding - basic 19,397,000 17,805,000
Dilutive effect of stock options 934,000 -
-------------------------------
Weighted average number of shares
outstanding, assuming dilution 20,331,000 17,805,000
-------------------------------
--------------------------------------------------------------------------------
F-8
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
1. Organization Stock-Based Compensation
and The Company accounts for stock options granted to
Significant employees under the recognition and measurement
Accounting principles of APB Opinion No. 25, Accounting for Stock
Policies Issued to Employees, and related Interpretations, and
Continued 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,
-------------------------------
2004 2003
-------------------------------
Net income (loss) - as reported $ 8,412,961 $ (570,285)
Add: Stock-based employee compensation
expense included in reported net income,
net of related tax effects - -
Deduct: total stock based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (101,597) (123,770)
-------------------------------
Net income (loss) - pro forma $ 8,311,364 $ (694,055)
-------------------------------
Earnings per share:
Basic - as reported $ .43 $ (.03)
-------------------------------
Basic - pro forma $ .43 $ (.04)
-------------------------------
Diluted - as reported $ .41 $ (.03)
-------------------------------
Diluted - pro forma $ .41 $ (.04)
-------------------------------
--------------------------------------------------------------------------------
F-9
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
1. Organization The fair value of each option grant is estimated on the
and date of grant using the Black-Scholes option pricing
Significant model with the following assumptions:
Accounting
Policies
Continued 2004 2003
-------------------------------
Expected dividend yield $ - $ -
Expected stock price volatility 113% 122%
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, 2004 and 2003 were
$1.01 and $.57, 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 $1,494,311 and $1,956,270
for the years ended August 31, 2004 and 2003,
respectively. Service revenue was $99,837 and $277,912
for the years ended August 31, 2004 and 2003,
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 the Company's
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. The Company
provides a reserve allowance for estimated returns. To
date, returns have not been significant.
--------------------------------------------------------------------------------
F-10
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
1. Organization Revenue Recognition
and Continued
Significant Revenue from the sale of software license rights is
Accounting recognized when a valid purchase order has been
Policies received, the software license has been delivered to the
Continued customer, the selling price is fixed or determinable,
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.
--------------------------------------------------------------------------------
F-11
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
1. Organization Concentration of Credit Risk
and 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.
Reclassifications
Certain amounts in the prior year have been reclassified
to conform with the current year presentation.
--------------------------------------------------------------------------------
F-12
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
2. Detail of Details of certain balance sheet accounts as of August
Certain 31, 2004, are as follows:
Balance
Sheet
Accounts Receivables:
Trade receivables $ 259,304
Less allowance for doubtful accounts -
-----------------
$ 259,304
-----------------
Inventories:
Parts and supplies $ 351,019
Work-in-process 469,397
Reserve for obsolete inventory (80,000)
-----------------
$ 740,416
-----------------
Accrued expenses:
Accrued vacation $ 102,353
Accrued payroll and taxes 32,174
Income taxes payable 250,000
-----------------
Other accrued expenses 423,915
-----------------
$ 849,915
-----------------
3. Property Property and equipment consists of the following:
and
Equipment Equipment $ 706,621
Furniture and fixtures 297,741
-----------------
1,004,362
Less accumulated depreciation (865,262)
-----------------
$ 139,100
-----------------
4. Operating During the year ended August 31, 2003, the Company
Lease renewed its building 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-13
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
4. Operating Future minimum payments at August 31, 2004, are as
Lease follows:
Continued
Years Ending August 31, Amount
----------------------- -------------
2005 $ 82,320
2006 82,320
2007 82,320
2008 82,320
2009 -
-------------
$ 329,280
-------------
Annual rent expense on this operating lease for the
years ended August 31, 2004 and 2003 amounted to $83,735
and $67,000, respectively.
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.
6. Income The components of the income tax (expense) benefit for
Taxes the year ended August 31, 2004 is as follows:
Current:
Federal $ (130,000)
State (105,000)
-------------
(235,000)
-------------
Deferred:
Federal 778,000
-------------
$ 543,000
-------------
--------------------------------------------------------------------------------
F-14
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:
Continued
Years Ended August 31,
----------------------------------
2004 2003
----------------------------------
Income tax benefit (expense) at
statutory rate $ (2,935,000) $ 198,000
Change in estimate of use of net
operating loss carryforwards 990,000 -
Change in estimate of research
and development tax credits 347,000 -
Alternative minimum tax (73,000) -
Expiration of net operating loss
carryforwards - (19,000)
Other 9,000 -
Change in valuation allowance 2,205,000 (179,000)
----------------------------------
$ 543,000 $ -
----------------------------------
Deferred tax assets (liabilities) are comprised of the
following:
Net operating loss carryforward $ 174,000
Accrued expenses 35,000
Deferred revenue 16,000
Inventory reserve 27,000
Warranty reserve 3,000
Depreciation (42,000)
Deferred compensation expense (9,000)
Research and development tax credits 517,000
Alternative minimum tax credits 57,000
-------------
$ 778,000
-------------
--------------------------------------------------------------------------------
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 was revised to
provide an annual compensation of $20,000 to each
non-employee director. The annual compensation plan
calls for payment to be made twice a year with each
payment consisting of $5,000 cash and $5,000 in 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 is as follows:
Options and
Warrants
Continued Price Per
Options Warrants Share
-----------------------------------------
Outstanding at September 1, 2002 1,258,901 - $ .10 to 1.76
Granted 75,000 - .73
Exercised (58,598) .10 to .37
Forfeitures -
-----------------------------------------
Outstanding at August 31, 2003 1,275,303 .10 to 1.76
Granted 1,090,000 102,980 1.2 to 1.80
Exercised (30,750) - .10 to .45
Forfeitures - -
-----------------------------------------
Outstanding at August 31, 2004 2,334,553 102,980 $ .10 to 1.80
-----------------------------------------
The following table summarizes information about stock
options and warrants outstanding at August 31, 2004:
Options and Warrants Options and Warrants
Outstanding Outstanding
---------------------------------------------------------------
Weighted
Average
Remaining Weighted Weighted
Range of Contractual Average Average
Exercise Number Life Exercise Number Exercise
Prices Outstanding (Years) Price Exercisable Price
----------------------------------------------------------------------------
$ .10-.25 425,953 1.33 $ .13 425,953 $ .13
.37-1.11 843,600 6.00 .62 679,230 .60
1.20-1.80 1,167,980 8.80 1.28 278,295 1.51
----------------------------------------------------------------------------
$ .10-1.80 2,437,533 6.52 $ .85 1,383,478 $ .64
----------------------------------------------------------------------------
8. Foreign During the years ended August 31, 2004 and 2003, the
Customer Company had sales of $99,502 and $1,391,443 (including
and Major $63,500 in royalty revenues), respectively, to
Customer TherMatrx, a previously unconsolidated affiliate of
which it owned approximately 30%. This related party
relationship ended on July 15, 2004 when TherMatrx was
sold to AMS (see note 11). During the years ended August
31, 2004 and 2003, 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 $912,690 and $518,000 respectively.
--------------------------------------------------------------------------------
F-17
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
9. Related Party At August 31, 2004, accounts receivable includes
Transactions approximately $215,400, due from an entity controlled by
Not otherwise a significant stockholder and member of the Board of
disclosed Directors.
10. Supplemental Actual amounts paid for interest and income taxes are as
Cash Flow follows:
Information Years Ended
August 31,
-------------------------------
2004 2003
-------------------------------
Interest expense $ 491 $ -
-------------------------------
Income taxes $ - $ -
-------------------------------
11. Significant The Company had an approximate 30% interest in an
Unconsolidated unconsolidated affiliate (TherMatrx) at August 31, 2003.
Affiliate
On July 15, 2004, American Medical Systems Holdings,
Inc., or AMS, acquired TherMatrx, Inc. for $40 million
in cash plus future payments contingent upon the
combined entity's future sales of TherMatrx's DOT
systems. The sale included all of our TherMatrx shares,
which were reduced at closing to approximately 25% of
the total outstanding TherMatrx shares because of the
exercise of outstanding options to acquire common stock
of TherMatrx. The Company received an initial cash
payment, after the withholding of escrow funds and the
payment of other initial obligations, of approximately
$9 million in connection with the closing.
--------------------------------------------------------------------------------
F-18
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
11. Significant Summarized financial inform ficant unconsolidated
Unconsolidated affiliate of the Company, as of an ended September 30,
Affiliate 2003 (the affiliate's fiscal year r 1, through September
Continued 30) is as follows:
2003
-------------
Result for year:
Gross revenue $ 13,298,422
Gross profit $ 9,589,803
Net income (loss) $ 1,520,190
Year-end financial position
Current assets $ 6,313,746
Non-current assets $ 2,335,232
Current liabilities $ 1,913,453
Non-current liabilities $ 474,748
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. There were no Royalties accrued
as of August 31, 2004 and $1,000 was accrued at August
31, 2003. Royalty expense amounted to approximately
$5,000 for the years ended August 31, 2004 and 2003.
--------------------------------------------------------------------------------
F-19
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
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, 2004
and 2003 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.
14. Recent In January 2003, the FASB issued Interpretation No. 46,
Accounting "Consolidation of Variable Interest Ethics" (FIN No.
Pronounce- 46), which addresses consolidation by business
ments 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-20
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.
--------------------------------------------------------------------------------
F-21
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.
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.
ITEM 8B. OTHER INFORMATION
None.
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PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Information with respect to this item is set forth under "Election of
Directors" and "Directors and Executive Officers" appearing in the definitive
proxy statement to be delivered to stockholders in connection with the 2005
Annual Meeting of Stockholders (the "Proxy Statement"). Such information is
incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
Information with respect to this item is set forth under "Executive
Compensation" in the Proxy Statement. Such information is incorporated herein by
reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS.
Information with respect to this item is set forth under "Security
Ownership of Certain Beneficial Owners and Management" in the Proxy Statement.
Such information is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to this item is set forth under "Certain
Relationships and Related Transactions" in the Proxy Statement. Such information
is incorporated herein by reference.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are incorporated herein by reference as
indicated:
Exhibit 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 Bylaws. 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 Securities Purchase Agreement dated December 10, 2003 among BSD
Medical Corporation and the purchasers identified therein.
Incorporated by reference to Exhibit 4.2 of the BSD Medical
Corporation Form 10-KSB, filed December 1, 2003.
4.2 Amendment No. 1 to Securities Purchase Agreement dated December
10, 2003 among BSD Medical Corporation and the purchasers
identified therein. Incorporated by reference to Exhibit 99.1 of
the BSD Medical Corporation Form 8-K, filed December 22, 2003.
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4.3 Warrant to Purchase 42,980 Shares of Common Stock dated December
10, 2003 issued by BSD Medical Corporation to T.R. Winston &
Company, LLC. Incorporated by reference to Exhibit 99.2 of the BSD
Medical Corporation Form 8-K, filed December 22, 2003.
4.4 Warrant to Purchase 60,000 Shares of Common Stock dated December
10, 2003 issued by BSD Medical Corporation to The Runnel Family
Trust Dated 1/11/2000. Incorporated by reference to Exhibit 99.3
of the BSD Medical Corporation Form 8-K, filed December 22, 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-KSB, filed April 8, 1988.
10.3 BSD Medical Corporation 1998 Director Stock Plan. Incorporated by
reference to Exhibit A of the BSD Medical Corporation Schedule
14A, filed July 27, 1998.
10.4 BSD Medical Corporation 1998 Stock Incentive Plan. Incorporated by
reference to Exhibit B of the BSD Medical Corporation Schedule
14B, filed July 27, 1998.
10.5 Lease Agreement dated December 5, 1997, between BSD Medical
Corporation and Alcoh Development, Inc., Alan S. Cohen, Orlene H.
Cohen, and Reelman Investments, L.C. Incorporated by reference to
Exhibit 10.5 to BSD Medical Corporation's Registration Statement
on Form SB-2 filed January 27, 2004.
10.6 Lease Extension Agreement and Contract to Purchase dated November
1, 2002 between BSD Medical Corporation and Alcoh Development,
Inc., Alan S. Cohen, Orlene H. Cohen, and Reelman Investments,
L.C. Incorporated by reference to Exhibit 10.6 to BSD Medical
Corporation's Registration Statement on Form SB-2 filed January
27, 2004.
10.7 Employment Agreement dated August 10, 1999 between BSD Medical
Corporation and Hyrum A. Mead. Incorporated by reference to
Exhibit 10.7 to BSD Medical Corporation's Registration Statement
on Form SB-2 filed January 27, 2004.
10.8 Employment Agreement dated November 2, 1988 between BSD Medical
Corporation and Paul F. Turner. Incorporated by reference to
Exhibit 10.8 to BSD Medical Corporation's Registration Statement
on Form SB-2 filed January 27, 2004.
10.9 Agreement dated May 27, 1994 between BSD Medical Corporation and
Medizin Technik GmbH. Incorporated by reference to Exhibit 10.9 to
BSD Medical Corporation's Registration Statement on Form SB-2
filed January 27, 2004.
10.10 Agreement and Plan of Merger dated June 15, 2004 by and among
American Medical Systems, Inc., Leio Acquisition Corp., TherMatrx,
Inc., TherMatrx Investment Holdings, LLC and BSD Medical
Corporation. Incorporated by reference to Exhibit 10.11 to BSD
Medical Corporation's Amendment No. 2 to Registration Statement on
Form SB-2 filed July 15, 2004.
29
21 Subsidiary List. Incorporated by reference to Exhibit 21 of the
BSD Medical Corporation Form 10-K, 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.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information with respect to this item is set forth under "Principal
Accountant Fees and Services" in the Proxy Statement. Such information is
incorporated herein by reference.
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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: November 29, 2004 By: /s/ Hyrum A. Mead
--------------------------------------
Hyrum A. Mead
President and Member of the Board of
Directors
(principal executive officer)
Date: November 29, 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: November 29, 2004 By: /s/ Paul F. Turner
--------------------------------------
Paul F. Turner
Chairman of the Board, Senior Vice
President and Chief Technology
Officer
Date: November 29, 2004 By: /s/ Hyrum A. Mead
--------------------------------------
Hyrum A. Mead
President and Member of the Board of
Directors
(principal executive officer)
Date: November 29, 2004 By: /s/ Gerhard W. Sennewald
--------------------------------------
Dr. Gerhard W. Sennewald
Member of the Board of Directors
Date: November 29, 2004 By: /s/ J. Gordon Short
--------------------------------------
Dr. J. Gordon Short
Member of the Board of Directors
Date: November 29, 2004 By: /s/ Michael Nobel
--------------------------------------
Dr. Michael Nobel
Member of the Board of Directors
31