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, 2005
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:
Title of each class Name of each exchange on which registered
Common Stock, $0.001 par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Issuer's revenues for its most recent fiscal year: $2,021,104
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 11, 2005 was
$61,015,570.
As of November 28, 2005 there were 20,543,963 shares of the issuer's common
stock, par value $0.001, outstanding.
Documents Incorporated by Reference: None
Transitional Small Business Disclosure Format: Yes [ ] No [X]
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
Overview
--------
We develop, manufacture, market and service systems that deliver
precision-focused radio frequency (RF) and microwave energy into diseased sites
of the body, heating them to specified temperatures as required by a variety of
medical therapies. Our business objectives are to commercialize our products
developed for the treatment of cancer and to further expand our developments to
treat other diseases and medical conditions.
While our primary developments to date have been cancer treatment
systems, we also pioneered the use of microwave thermal therapy for the
treatment of symptoms associated with enlarged prostate, and we are responsible
for much of the technology that has successfully created a substantial new
medical industry using that therapy. In accordance with our strategic plan,
during our fiscal year ended August 31, 2004, we sold our interest in TherMatrx,
Inc., the company established to commercialize our technology to treat enlarged
prostate symptoms, to provide what we projected to be a $30-40 million payout in
funding that we can utilize for commercializing our systems used in the
treatment of cancer and in achieving other business objectives.
In spite of the advances in cancer treatment technology, over 40% of
cancer patients continue to die from the disease in the United States, and
cancer has now surpassed heart disease as the number one killer from all causes
of death in the United States. Commercialization of our systems used to treat
cancer (the BSD-2000 and BSD-500 families of products) is our most immediate
business objective. Our cancer therapy systems are used in combination with
existing cancer treatments to kill cancer with heat while boosting the
effectiveness of radiation and chemotherapy through a number of biological
mechanisms. Current and targeted cancer treatment sites for our systems include
cancers of the prostate, breast, chestwall, head, neck, bladder, cervix,
colon/rectum, esophagus, liver, pancreas, brain, bone, stomach and lung
including soft tissue sarcoma, melanoma, carcinoma, and basal cell carcinoma.
Our systems have received much notoriety, including the 2005 Frost & Sullivan
"Technology Innovation of the Year Award" for cancer therapy devices.
Our BSD-2000 systems are used to non-invasively treat cancers located
deeper in the body, and are designed to be companions to the estimated 7,500
linear accelerators used to treat cancer through radiation globally and in
combination with chemotherapy treatments. Our BSD-500 systems treat cancers on
or near the body surface and those that can be approached through body orifices
such as the throat, the rectum, etc., or through interstitial treatment in
combination with interstitial radiation (brachytherapy). BSD-500 systems can be
used as companions to our BSD-2000 systems, to the estimated 2,500 brachytherapy
systems installed and with chemotherapy treatments.
As our business model for these developed cancer therapy systems, we
believe that the fully saturated potential market for these two families of
systems is in excess of $5 billion. We also project an after-market opportunity
based on service agreements that equates to approximately 15% of the purchase
price of our systems per year. We believe that the replacement cycle for our
systems, based on advances in software, hardware and other components, will
average 5-7 years. Our financial model in the higher production environment of
established commercial sales is to achieve a 60% gross margin on system sales
and an 80% gross margin on service agreements.
We have received FDA approval to market our commercial version of the
BSD-500 and are in the late stages of submission for FDA approval to sell the
BSD-2000 in the United States. While FDA approvals and associated restrictions
1
are entirely subject to the disposition of the FDA, we anticipate a response
from the FDA on our submission for the BSD-2000 during calendar 2006. We have
designed our cancer treatment systems such that together they are capable of
providing complementary therapy for treatment of most solid tumors located
virtually anywhere in the body.
Although we have not entered these markets, we also believe that our
technology has application for additional approaches to treating cancer and for
a number of 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
to treating special medical problems such as sleep apnea, and for certain
cosmetic uses. Our mission is to mine the full spectrum of medical uses for our
special competence in precision-focused RF/microwave systems, and to broadly
apply the utilization of our technology to treat cancer and benign diseases and
conditions.
Our common stock formerly traded on the over-the-counter market on the
OTC Bulletin Board. On June 9, 2005 our common stock began trading on the
American Stock Exchange ("AMEX") under the symbol "BSM."
The Sale of TherMatrx
---------------------
One of our important contributions to the advancement of medical
therapy has been our work 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 development
of BPH therapy as a spin-off business with the intent of providing funding for
our primary business objectives. As a result, we introduced the opportunity to
investment groups and, 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.
In July 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. 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. 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 to all former TherMatrx shareholders 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.
As of August 31, 2005 the Company had received a total of $15,526,532 in
2
payments from the TherMatrx transaction. However, any future payments are not
guaranteed and are subject to uncertainties. 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.
Our Contributions to Cancer Therapy
-----------------------------------
Despite the massive attention given to cancer prevention and treatment,
the American Cancer Society estimates that 1,372,910 new cancer cases will be
diagnosed and that 570,280 Americans will die from cancer during 2005 (up from
563,700 cancer deaths in 2004). Now outpacing even heart disease, cancer has
become the leading cause of death in the United States. Cancer develops when
abnormal cells in a part of the body begin to grow out of control and spread to
other parts of the body.
The primary cancer therapies currently used include:
o Radiation therapy, which is treatment with high-energy rays to
kill or shrink cancer cells. The radiation may come from outside
of the body (external radiation) or from radioactive materials
placed directly in a tumor (internal or implant radiation,
sometimes called brachytherapy).
o Chemotherapy, which is treatment with drugs to destroy cancer
cells.
o Surgery, which is the resection, or removal, of a tumor or organ
of the body.
Because cancer remains a significant cause of death, these three cancer
therapies are still grossly inadequate, and an enormous need for better
treatment is obvious. We have engineered systems designed to increase the
effectiveness of these cancer treatments through the use of precision-focused
RF/microwave energy to selectively heat cancer, creating "hyperthermia" in
cancerous tumors. 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.
Hyperthermia therapy has been shown to substantially improve the
results from cancer treatments for a variety of tumors. Completed randomized
clinical trials in which the effectiveness of radiation therapy combined with
hyperthermia therapy was compared with the results of radiation therapy alone in
cancer treatment produced the following results: 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.
3
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 when combined with standard treatment
modalities. 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.
Hyperthermia has other therapeutic uses. It can be used to shrink
tumors prior to surgery, potentially making resection easier or even possible
for unresectable tumors. 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 the founding of the Company, 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 hyperthermia therapy.
We have developed various technologies for heating cancerous tumors,
depending on their location in the body. Through our developments, 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 those used to treat prostate cancer or head and neck cancer)
can be treated with tiny, inserted antennae that we have developed to deliver
focused microwave 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
4
antennae that focuses RF 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 colorized to depict gradation of temperature levels (tomography).
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 system.
The BSD-500 has received FDA approval. In addition, the system has gone
through an extensive revision, and has obtained two major FDA supplements to
this approval that have been necessary to allow its commercial introduction.
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. The application for the PMA for the BSD-2000 is under preparation but
not yet submitted, and after the submission is filed, we do not expect a
response from the FDA until at least the latter part of calendar 2006. The
decision regarding the granting of regulatory approvals, together with their
timing and restrictions, is not in our control, and is the responsibility of
those respective regulatory authorities. We sought and obtained regulatory
approval for the sale of the BSD-2000 in the People's Republic of China during
2005. We have also obtained the CE Mark for the BSD-2000 required for export to
some European countries.
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
marketing the new commercial version of the BSD-500. Obtaining FDA approval for
the BSD-2000 would greatly contribute to our sales efforts by providing the
additional technology required for the treatment of solid tumors located
virtually anywhere in the body.
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,
5
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).
We have received FDA approval through FDA supplements for
implementation of a new operating system and other commercial upgrades, allowing
us to commercially introduce this new family of four systems. Our primary 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.
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 RF
energy to cancerous tumors, including those located deep within the body. These
systems include a computer and software that control the delivery of RF energy
to the tumor, a microwave energy generator, an amplifier that boosts the power,
and a special applicator that delivers the RF 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 a cylindrical antennae. The
basic BSD-2000 has eight antennae enabling this electronic steering of energy
within the patient's body. The BSD-2000/3D has 24 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 FDA pre-market approval 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 and have obtained
regulatory approval for the sale of the BSD-2000 in the People's Republic of
China. We are engaged in the extensive 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.
The application for the PMA for the BSD-2000 is under preparation but not yet
submitted, and after the submission is filed, we do not expect a response from
the FDA until at least the latter part of calendar 2006.
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 Erasmus University Medical Center (Rotterdam,
6
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 Medical
School of Erlangen (all of Germany), University Medical School of Verona Medical
Center (Italy), Graz University Medical School (Austria) and Kantonsspital Aarau
(Switzerland).
BSD-2000/3D. Through research funded by the National Cancer Institute
in the United States and supportive efforts by other domestic and international
research institutions, we enhanced the BSD-2000 to create the new BSD-2000/3D.
The BSD-2000/3D adds three-dimensional steering of deep focused energy, as
opposed to the two-dimensional steering of energy available in the BSD-2000,
delivering even more precise heating the tumor. As part of our international
collaborative research efforts, sophisticated treatment planning software for
the BSD-2000/3D has also been developed.
As previously noted, we have not yet submitted to the FDA a pre-market
approval application for the BSD-2000/3D. However, we have obtained the CE Mark
necessary to export the BSD-2000/3D to certain European countries and other
countries requiring CE Mark certification.
BSD-2000/3D/MR. As a further enhancement of the BSD-2000/3D, we have
added to it the option of concurrent magnetic resonance imaging, or MRI, used
for monitoring the delivery of deep hyperthermia therapy. Using sophisticated
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 September 2004 we entered into an agreement with Dalian Orientech
Co. LTD to assist us in obtaining regulatory approval for the sale of the
BSD-2000 in the People's Republic of China, and thereafter to act as our
distributor for the sale of the BSD-2000 in that country. We subsequently
obtained Chinese regulatory approval during 2005, allowing the distributor to
begin to market in that country. Dalian Orientech is the dominant distributor of
hyperthermia systems in the People's Republic of China.
In November 2004, we entered into an agreement with Best Medical
International, Inc. to become our sales agent for the BSD-500 in the United
States. Best Medical is a supplier of products for cancer treatment therapies
using targeted radiation sources, and has supported us particularly through lead
generation and access to trade show presentations.
In April 2005 we engaged Schwartz Communications as a public relations
agency. Schwartz has helped build distinctive prominence for significant medical
advances including the MammoSite Radiation Therapy System for breast cancer
7
(Cytyc Surgical Products, formerly Proxima Therapeutics, Inc), the ThinPrep(R)
System (Cytyc Corporation), the HeartStart OnSite Defibrillator (Philips), the
Vagus Nerve Stimulation System for refractory epilepsy (Cyberonics) and many
other achievements and innovators in the medical device, biopharmaceutical and
high technology sectors.
Anticipating an expanding need for present and future sales and
marketing, especially with the potential FDA approval for the BSD-2000, we hired
Brian Ferrand as Vice President of Sales in September 2005, and have increased
our direct sales and marketing organization to six people. The primary mission
of this group is to provide sales and pre-market preparation for our systems.
Medizin Technik GMBH is our exclusive distributor of hyperthermia
systems in Germany, Austria and Switzerland and to certain medical institutions
in Belgium and the Netherlands. Medizin Technik GMBH 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 GMBH. If Medizin Technik GMBH identifies a
potential customer, it will negotiate the price of a hyperthermia system with
us, purchase the system, and resell the system to the customer on terms it
negotiates with the customer. Our distributorship agreement with Medizin Technik
GMBH 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 GMBH.
Our sales and marketing strategy involves three main components:
o promoting acceptance by the scientific community and
cancer-treating healthcare professionals of hyperthermia 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 information through television, radio and other media
outlets. We post information about our products on our web site,
www.BSDMedical.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 and are sponsors of the
Society of Thermal Medicine and the American Society of Therapeutic Radiation
and Oncology (ASTRO) in the United States.
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 payors, 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.
Medical reimbursement rates are unpredictable, and we cannot project
the extent to which our business may be affected by future legislative and
regulatory developments. There can be no assurance that future health care
legislation or regulation will not have a material adverse effect on our
business, financial condition and results of operations, or that reimbursement,
existing or in the future, will be adequate for all customers.
Competition
-----------
Competition in the medical products industry is intense. We believe
that established product lines and cancer therapies, FDA approvals, know-how and
reputation in the industry are key competitive factors. Currently, only a few
companies besides us have received FDA approval to manufacture and sell
hyperthermia therapy systems within the United States, including U.S.
Labthermics and Celsion Corporation. Celsion has been principally involved with
clinical trials related to thermotherapy, hyperthermia and related fields,
however Celsion has announced the transformation of its company from a medial
device company to a biopharmaceutical, solely focused on the development of
drugs for the treatment of cancer. Labthermics produces ultrasound-based
systems, which compete with our microwave hyperthermia systems, however
Labthermics is not currently active in the sale of products in our industry.
Clini-Therm Corp. had also received FDA approval for marketing microwave
hyperthermia systems and BSD purchased these rights. 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.
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.
9
Production
----------
We manufacture and test our systems and products at our facilities in
Salt Lake City, Utah. Our manufacturing facility is ISO 9001-1994 certified and
follows FDA quality systems regulations. Some equipment components we purchase
from suppliers are customized to our specifications. Key factors in our
manufacturing process are assembly and testing. We purchase component parts and
other materials from a variety of suppliers. We do not depend on a single
supplier for any item, and believe we can acquire materials and parts from
multiple sources on a timely basis.
Product Liability Exposure
--------------------------
The manufacturing and marketing of medical devices involves an inherent
risk of product liability. Because our products are intended to be used in
hospitals on patients who may be physiologically unstable and severely ill, we
are exposed to potential product liability claims. We presently carry product
liability insurance with coverage limits of $1 million. However, we cannot
assure you that our product liability insurance will provide adequate coverage
against potential claims that might be made against us. No product liability
claims are presently pending against us; however, we cannot assume that product
liability claims will not be filed in the future or that such claims will not
exceed our coverage limits.
Government Regulation
---------------------
The medical devices that we have developed and are developing are
subject to extensive and rigorous regulation by numerous governmental
authorities, principally by the United States Food and Drug Administration, or
FDA, and comparable foreign agencies. Pursuant to the Federal Food, Drug and
Cosmetic Act, as amended, the FDA regulates and must approve the clinical
testing, manufacture, labeling, distribution, and promotion of medical devices
in the United States.
Most of our hyperthermia treatment systems, including the BSD-500 and
the BSD-2000 and related products, have required or require pre-market approval
from the FDA instead of the simpler 510(k) approval, and we anticipate that our
future systems will similarly require pre-market approval. Pre-market approval
requires that we demonstrate that the medical device is safe and effective. To
do this, we conduct either laboratory and/or clinical testing. The FDA will
grant approval of the product if it determines there is reasonable assurance
that the medical device is safe and effective. FDA approval must be obtained
before commercial distribution of the product. We intend to continue to make
improvements in and to our existing products. Significant product changes must
be submitted to the FDA under investigational device exemptions, or IDEs, or
pre-market approval supplements. As described in the Section entitled "Our
Products and Services" above, we have obtained a PMA for our BSD-500 systems and
IDE status for our BSD-2000 system.
Foreign countries in which our products are or may be sold have
regulatory requirements that can vary widely from country to country. Sales into
the European Union, or EU, require compliance with the Medical Devices
Directive, or MDD, and require us to obtain the necessary certifications to have
a CE Mark affixed to our products. We have obtained necessary ISO certification
of our quality, development, and manufacturing processes, and we have
successfully completed the CE Mark testing and Annex II audit. This allows us to
certify our own products and to affix the CE Mark label on them. However, we
must maintain compliance with all current and future directives and requirements
to maintain ISO certification and to continue to affix the CE Mark, and there
can be no assurance that we will continue to maintain compliance with regulatory
requirements imposed on us.
10
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 the FDA were to assert that we are not in
compliance with applicable laws or regulations, or that any of our medical
devices are ineffective or pose an unreasonable risk to patient health, the FDA
could seize our medical devices, ban such medical devices, or order a recall,
repair, replacement or refund of such devices, and require us to notify health
care professionals and others that the devices present unreasonable risk of
substantial harm to the public. The FDA may also impose operating restrictions,
restrain certain violations of law, and assess civil or criminal penalties
against us. The FDA can also recommend prosecution to the Department of Justice.
Certain regulations are subject to administrative interpretation and we cannot
assure that future interpretations made by the FDA or other regulatory bodies,
with possible retroactive effect, will not adversely affect us.
International sales of medical devices are subject to FDA export
requirements. We have obtained export approvals for all countries into which we
have delivered products. This includes countries in Western Europe and much of
Eastern Europe and many Asian countries.
International sales are subject to the regulatory and safety
requirements of the country into which the sale occurs. There can be no
assurance that all of the necessary approvals will be granted on a timely basis
or at all. Delays in receipt of or failure to receive such approvals would have
a material adverse effect on our financial condition and results of operations.
In addition to FDA regulations, certain U.S. health care laws apply
when a claim for reimbursement for one of our medical devices is submitted to
Medicare, Medicaid, or other federal health care programs. For instance, federal
law prohibits the filing of false or improper claims for federal payments. In
addition, federal law prohibits the payment of anything of value for the purpose
of inducing referrals of business reimbursable under a federal health care
program. Other federal laws prohibit physicians from making referrals for
certain services and items payable under certain federal programs if the
physician has a financial relationship with the entity providing the service or
item.
All of these laws are subject to evolving interpretations. If the
federal government were to conclude that we are not in compliance with any of
these health care laws, we could be subject to substantial criminal and civil
penalties, and could be excluded from participation as a supplier to
beneficiaries in federal health care programs.
The Federal Communications Commission, or FCC, regulates the
frequencies of microwave and radio frequency emissions from medical and other
types of equipment to prevent interference with commercial and governmental
communications networks. The BSD-500 fixed frequency systems and applicators
emit 915 MHz for U.S. and some European installations and 433.92 MHz for some
11
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 five patents
in the United States and eight patents outside the United States. Five
additional patents were assigned to TherMatrx, for which we obtained a license,
and one patent license was obtained by us from the National Institutes of
Health. A European patent for the BSD-2000/3D system has been issued and a new
microwave interstitial and brachytherapy patent 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.
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, plus $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 and our enhancements to such systems involve incorporating some of the
Clini-Therm rights we acquired into such systems. This involved only a one-time
cash payment with no continuing costs.
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 2005 were $859,614
compared to $656,857 for fiscal 2004, an increase of $202,757, or 31%. Research
and development expenses in fiscal 2005 related primarily to development of a
commercial version of the BSD-2000 and the BSD-2000/3D 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.
12
Company History
---------------
We were originally incorporated under the laws of the State of Utah on
March 17, 1978. In July 1986, we reincorporated in Delaware.
Employees
---------
As of November 8, 2005, we had 33 employees; 31 of whom were full time
employees. None of our employees is covered by a collective bargaining
agreement. We consider our relations with our employees to be satisfactory. We
depend upon a limited number of key management, manufacturing, and technical
personnel. Our future success will depend in part on our ability to retain these
highly qualified employees.
Risks Related to Our Business
-----------------------------
Our future operating results are highly uncertain. Before deciding to
invest in us or to maintain or increase your investment, you should carefully
consider the risks described below, in addition to the other information
contained in this annual 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 operating losses and such losses may
continue in the future.
Since our inception in 1978, our expenses have substantially exceeded
our revenue, resulting in continuing losses and an accumulated deficit of
$8,751,454 at August 31, 2005. In fiscal 2005, we recorded a net profit of
$3,321,692. Our net profit was primarily due to the sale of our position in
TherMatrx, of which we owned approximately 25% at closing, to American Medical
Systems Holdings, Inc., or AMS, 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. 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. 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 payors 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.
13
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. 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.
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. Our other distribution
relationships are relatively new and unproven. We entered into agreement in
September 2004 with Dalian Orientech, 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 of the BSD-2000 in that country. Dalian Orientech has
sold three BSD-2000 systems and has an outstanding order with us for a fourth
BSD-2000 system. We entered into an agreement in October 2004 with Best Medical
International, Inc. to act as a sales agent for the BSD-500 systems in the
United States.
We are subject to government regulations that can delay our ability to
sell our products and cause us to incur substantial expenses.
Our research and development efforts, pre-clinical tests and clinical
trials, and the manufacturing, marketing, distribution and labeling of our
products are subject to extensive regulation by the FDA and comparable
international agencies. The process of obtaining FDA and other required
regulatory approvals is lengthy and expensive and our financial resources are
limited.
We 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
14
approvals we seek from the FDA, the approvals granted might 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 or 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.
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.
15
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.
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
16
stock, investors may face difficulties in selling shares at attractive prices
when they want to. The average daily trading volume for our stock has varied
significantly from week to week and from month to month, and the trading volume
often varies widely from day to day. The following factors could impact the
market for our stock and cause further volatility in our stock price:
o announcements of new technological innovations;
o FDA and other regulatory developments;
o changes in third-party reimbursements;
o developments concerning proprietary rights;
o third parties receiving FDA approval for competing products; and
o market conditions generally for medical and technology stocks.
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.
We may incur significant expenses as a result of being listed on AMEX,
which may negatively impact our financial performance.
We may incur significant legal, accounting and other expenses as a
result of being listed on AMEX. The Sarbanes-Oxley Act of 2002, as well as
related rules implemented by the SEC and AMEX, have required changes in
corporate governance practices of public companies. We expect that compliance
with these laws, rules and regulations, including compliance with Section 404 of
the Sarbanes-Oxley Act of 2002 as discussed in the following risk factor, may
substantially increase our expenses, including our legal and accounting costs,
and make some activities more time-consuming and costly. As a result, there may
be a substantial increase in legal, accounting and certain other expenses in the
future, which would negatively impact our financial performance and could have a
material adverse effect on our results of operations and financial condition.
Our internal controls over financial reporting may not be considered
effective, which could result in a loss of investor confidence in our financial
reports and in turn have an adverse effect on our stock price.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, beginning
with our annual report for the year ending August 31, 2006, we will be required
to furnish a report by our management on our internal controls over financial
reporting. Such report will contain, among other matters, an assessment of the
effectiveness of our internal controls over financial reporting as of the end of
the year, including a statement as to whether or not our internal controls over
financial reporting are effective. This assessment must include disclosure of
any material weaknesses in our internal controls over financial reporting
identified by management. The report will also contain a statement that our
17
independent registered public accounting firm has issued an attestation report
on management's assessment of internal controls. If we are unable to assert that
our internal controls are effective as of August 31, 2006 (or if our independent
registered public accounting firm is unable to attest that our management's
report is fairly stated or they are unable to express an opinion on our
management's evaluation or on the effectiveness of our internal controls),
investors could lose confidence in the accuracy and completeness of our
financial reports, which in turn could cause our stock price to decline.
ITEM 2. DESCRIPTION OF PROPERTY.
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.
18
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
On July 9, 2005, the American Stock Exchange approved us for listing
and our shares began trading on that day under the symbol "BSM." The following
table sets forth the high and low bid transactions, as provided by the OTC
Bulletin Board and, the high and low sale prices, as provided by AMEX, for the
quarters in fiscal year 2004 and 2005. The amounts reflect inter-dealer prices,
without retail mark-up, markdown or commission, and may not represent actual
transactions.
Bid/Sale
----------------------------
Quarter Ended: High Low
-----------------------------------------------------------------
November 30, 2003................ $2.00 $0.80
February 29, 2004................ 1.65 1.18
May 31, 2004..................... 1.69 1.15
August 31, 2004.................. 2.25 1.30
November 30, 2004................ 1.85 1.25
February 28, 2005................ 2.70 1.70
May 31, 2005..................... 3.00 2.15
August 31, 2005.................. 6.63 2.20
As of September 21, 2005, there were approximately 560 holders of
record of our common stock. We have not paid any cash dividends on our common
stock since our inception.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other parts of this report contain forward-looking
statements that involve risks and uncertainties. Forward-looking statements can
also be identified by words such as "anticipates," "expects," "believes,"
"plans," "predicts," and similar terms. Forward-looking statements are not
guarantees of future performance and our actual results may differ significantly
from the results discussed in the forward-looking statements. Factors that might
cause such differences include, but are not limited to, those discussed in the
subsections entitled "Forward-Looking Statements 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, 2005.
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 our developments 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
19
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.
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, Inc., which was
independently managed.
On July 15, 2004, TherMatrx, Inc. was sold to AMS. Our portion of total
proceeds from this sale will be approximately 25%. By the close of our fiscal
year for 2005 we had received approximately $15.5 million from the sale of
TherMatrx. Following the close of our 2005 fiscal year, we received an
additional quarterly contingency payment of approximately $5.9 million, bringing
total receipts from the sale to approximately $21.4 million. We are entitled to
two additional quarterly contingency payments from an earn-out based on the sale
of TherMatrx products by AMS. While additional contingency payments are subject
to the level of sales of TherMatrx products and are not guaranteed, we project
that with the completion of the two final quarterly payments, our total payout
from the sale of TherMatrx will be consistent with our initial projection as
announced at the time of the sale of TherMatrx, i.e., between $30-40 million.
The difference between the funds already received and the total payout will be
due for payment to us during our fiscal year 2006.
As our longest-term development 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, 2005, had an accumulated deficit of $8,751,454. We recorded
net-profit for fiscal 2005 of $3,321,692 as compared to a profit of $8,412,961
in fiscal 2004. The primary reason for the net profits in fiscal 2005 and 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 $1,844,320 and $1,494,311 for the
years ended August 31, 2005 and 2004, respectively. Service revenue was $176,784
and $99,837 for the years ended August 31, 2005 and 2004, respectively.
We derived $987,472, or 49%, of our revenue in fiscal 2005 from sales
to related parties. All of the related party revenue was for the sale of
BSD-2000 and BSD-500 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.
20
In fiscal 2005, we derived $1,033,632, or 51%, of our total revenue as
compared to approximately $581,956, or 36%, in fiscal 2004 from non-related
party sales. Our fiscal 2005 non-related party revenue consisted of sales of
BSD-500 and BSD-2000 systems for $840,733. The balance of our non-related party
revenue consisted of consumable devices of $34,196, service contracts of
$52,478, billable labor of $10,233 and consulting revenue of $95,992.
Cost of sales for the year ended August 31, 2005, included raw material
and labor costs. Research and development expenses include expenditures for new
product development and development of enhancements to existing products.
Recent Developments
-------------------
Following the close of our 2005 fiscal year, we received an additional
quarterly contingency payment of approximately $5.9 million, bringing total
receipts from the sale to approximately $21.4 million from the sale of
TherMatrx.
Anticipating an expanding need for present and future sales and
marketing, especially with the potential FDA approval for the BSD-2000, we hired
Brian Ferrand as Vice President of Sales in September 2005, and have increased
our direct sales and marketing organization to six people. The primary mission
of this group is to provide sales and pre-market preparation for our systems.
In November 2005 we reported that the Centers for Medicare and Medicaid
Services (CMS) has announced an approximate 37% increase in the reimbursement
rate for all of the CMS codes applicable to the use of BSD cancer treatment
systems for hospital outpatient procedures, which constitute the majority usage
for BSD's cancer systems. CMS reimbursement rates generally set the standard for
the payment schedules used by commercial insurance carriers as well. The new
reimbursement rates become effective January 1, 2006.
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 us. We provide a
reserve allowance for estimated returns. To date, returns have not been
significant.
Revenue from manufacturing services is recorded when an agreement with
the customer exists for such services, the services have been provided, and
collection is reasonably assured. Revenue from training services is recorded
when an agreement with the customer exists for such training, the training
services have been provided, and collection is reasonably assured. Revenue from
21
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, 2005, 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. There were
no changes to the reserve during fiscal 2005. We periodically review our
inventory levels and usage, paying particular attention to slower-moving items.
If projected sales for fiscal 2006 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.
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 maintain allowances for doubtful
accounts for estimated losses resulting from the inability of our customers to
make required payments. This allowance is a significant estimate and is
regularly evaluated by us for adequacy by taking into consideration factors such
as past experience, credit quality of the customer base, age of the receivable
balances, both individually and in the aggregate, and current economic
conditions that may affect a customer's ability to pay. If the financial
condition of our customers were to deteriorate, resulting in an impairment of
their ability to make payments, additional allowances may be required.
Results of Operations: Comparison of Fiscal Years ended August 31, 2005 and 2004
--------------------------------------------------------------------------------
Revenue. Total revenue for fiscal 2005 was $2,021,104 compared to
$1,630,648 for fiscal 2004, an increase of $390,456, or approximately 24%. The
increase in total revenue was primarily due to an increase in sales of our
BSD-2000 during fiscal 2005. Product sales increased to $1,844,320 in fiscal
2005 from $1,494,311 in fiscal 2004, an increase of $350,010, or 23%. Service
revenue increased to $176,784 in fiscal 2005 as compared to $136,338 in fiscal
2004 primarily due to an increase in consulting revenue. Our revenue can
fluctuate significantly from period to period because our sales, to date, have
been based upon a relatively small number of systems, the sales price of each
being substantial enough to greatly impact revenue levels in the periods in
which they occur. Sales of very few systems can cause a large change in the
revenue from period to period.
Related Party Revenue. We derived $987,472, or 49%, of our total
revenue in fiscal 2005 from sales to related parties as compared to $1,012,192,
or 62%, in fiscal 2004. $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 in fiscal 2004. Sales to
TherMatrx were $0 in fiscal 2005. Since the sale of our position in TherMatrx we
no longer considered a related party. On July 15, 2004, TherMatrx, Inc. was sold
to AMS. Our portion of total proceeds from this sale will be approximately 25%.
By the close of our fiscal year for 2005 we had received approximately $15.5
million from the sale of TherMatrx.
22
Non-related Party Revenue. In fiscal 2005, we derived $1,033,632, or
51%, of our total revenue as compared to approximately $581,956, or 36%, in
fiscal 2004 from non-related party sales. Our fiscal 2005 non-related party
revenue consisted of sales of BSD-500 and BSD-2000 systems for $840,733. The
balance of our non-related party revenue consisted of consumable devices of
$34,196, service contracts of $52,478, billable labor of $10,233 and consulting
revenue of $95,992.
Cost of Sales. Cost of sales for fiscal 2005 was $1,320,110 compared to
$1,116,781 for fiscal 2004, an increase of $203,329 or approximately 18%. This
increase resulted primarily from higher sales in fiscal 2005. Cost of sales to
related parties in fiscal 2005 decreased to $644,980 from $668,619 in fiscal
2004 primarily due to the decrease in related party sales. During fiscal 2005
all of the related party costs were attributable to sales to Medizin-Technik and
in fiscal 2004 approximately $491,768, or 88%, of the related party cost of
sales were attributable to sales to Medizin-Technik. Approximately $67,318, or
12%, were attributable to TherMatrx in fiscal 2004.
Gross Profit. Gross profit for the fiscal year ending August 31, 2005
was $700,994, or 35%, as compared to $477,367, or 30%, of total product sales
for the fiscal year ending August 31, 2004. The increase in gross profit margin
was primarily due to production efficiencies obtained from a higher volume of
hyperthermia system sales in the period ending August 31, 2005.
Research and Development Expenses. Research and development expenses
for fiscal 2005 were $859,614 as compared to $656,857 for fiscal 2004, an
increase of $202,757, or 31%. Research and development expenses in fiscal 2005
related primarily to development of a commercial version of the BSD-2000 and
BSD-2000/3D hyperthermia system and enhancements to our BSD-500 systems.
Inventory Impairment Expense. There were no changes to the inventory
reserve as of August 31, 2005. 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.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for fiscal 2005 were $2,135,076 as compared to
$1,147,628 in fiscal 2004, an increase of $987,448, or approximately 86%. This
increase was primarily due to increases in sales and marketing expense, higher
consulting expense associated with FDA submissions and public relations, fees
associated with being listed on AMEX and overall higher payroll and employee
benefits in fiscal 2005 as compared to fiscal 2004.
Interest income. Interest income increased to $362,462 in fiscal 2005
as compared to $18,500 in fiscal 2004, due to higher levels of investments
resulting from greater cash generated from the sale of TherMatrx.
Other Income. Other income for fiscal 2005 was $6,555,926, compared to
$9,142,570 in fiscal 2004. This income resulted almost entirely from a gain
recognized on the sale of TherMatrx in fiscal 2004 and 2005.
Net Profit/ Loss. In fiscal 2005 we had a net profit of $3,321,692 as
compared to a net profit in fiscal 2004 of $8,412,961. The net profit related
mainly to the sale of our interest in TherMatrx, offset by an operating loss of
$2,293,696.
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 contingent payments related to the sale of our TherMatrx shares,
market acceptance of our hyperthermia systems, changes in the medical capital
23
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
$8,751,454. We have historically financed our operations through cash from
operations, licensing of technological assets and issuance of common stock.
We used $2,723,482 cash in operating activities in fiscal 2005 compared
to cash used of $1,483,907 in fiscal 2004. This was primarily a result of losses
generated from our operations in fiscal 2005 and 2004. The sale of our
investment in TherMatrx is considered an investing activity, therefore the gains
related to the sale offset net income in calculating cash used in operating
activities. During fiscal 2005 the operating loss was partially offset by a
decrease in the deferred tax assets of $725,000. In addition, in fiscal 2005
accounts receivable increased by $286,876, accounts payable increased by
$13,682, income taxes payable increased by $513,704, and accrued expenses
decreased by $175,539 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 stock. Our investing
activities in fiscal 2005 resulted in net cash used of $6,140,303 relating to
the purchase of investments of $12,581,584, the purchase of certain property and
equipment of $110,856, offset by the proceeds from the sale of our investment in
TherMatrx of $6,551,087. During fiscal 2004 cash provided by investing
activities was $8,933,056 relating to the proceeds from the sale of our
investment in TherMatrx. Total cash decreased from $9,697,154 at August 31, 2004
to $908,674 at August 31, 2005 as a result of payments received from the sale of
our TherMatrx shares and our investment of such funds in marketable securities.
On November 28, 2003, we completed the sale of an aggregate of
1,820,000 shares of our common stock to investors for cash consideration of
$1.10 per share, or gross proceeds of $2,002,000. On December 10, 2003, we
issued an additional 239,600 shares to investors at a price per share of $1.10
for gross proceeds of $263,560. The net proceeds from the transactions, after
paying a commission to our placement agent, T.R. Winston & Company, LLC, and
legal and other expenses related to the transaction, were approximately
$2,079,000.
On July 15, 2004, TherMatrx, Inc. was sold to AMS. Our portion of total
proceeds from this sale will be approximately 25%. By the close of our fiscal
year for 2005 we had received approximately $15.5 million from the sale of
TherMatrx. Following the close of our 2005 fiscal year, we received an
additional quarterly contingency payment of approximately $5.9 million, bringing
total receipts from the sale to approximately $21.4 million. We are entitled to
two additional quarterly contingency payments from an earn-out based on the sale
of TherMatrx products by AMS. While additional contingency payments are subject
to the level of sales of TherMatrx products and are not guaranteed, we project
that with the completion of the two final quarterly payments, our total payout
from the sale of TherMatrx will be consistent with our initial projection as
announced at the time of the sale of TherMatrx, i.e., between $30-40 million.
The difference between the funds already received and the total payout will be
due for payment to us during our fiscal year 2006. Further details on the
TherMatrx transaction will be provided hereafter in this filing.
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 salaries and
24
commissions and other related expenses, we project that our sales and marketing
expenses will be approximately $1,500,000 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 $100,000
related to governmental and regulatory, including FDA, approvals during fiscal
2006 in excess of fiscal 2005. 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 believe any cash shortfall during fiscal 2006 that results from this
decrease in revenues and increase in expenses can be covered through the cash
from the sale of our position in TherMatrx.
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 "Description of Business" are forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995, which reflect our current expectations and beliefs regarding our future
results of operations, performance and achievements. These statements are
subject to risks and uncertainties and are based upon assumptions and beliefs
that may or may not materialize. These forward-looking statements include, but
are not limited to, statements concerning:
o our anticipated financial performance and business plan;
o our expectations regarding the commercial introduction of the
BSD-500 system;
o our expectations and efforts regarding receipt of FDA approvals
relating to the BSD-2000 system;
o our technological developments to the BSD-500 and BSD-2000
systems;
o our ability to successfully develop our technology for new
applications and the expense of such developments;
o our development or acquisition of new technologies;
o the amount of expenses we will incur for the commercial
introduction of 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 2006;
o our assumption that we will receive contingent payments, and the
amount of such payments, in connection with the sale of our
ownership in TherMatrx to AMS; and
o our anticipated use of proceeds from the sale of our ownership in
TherMatrx to AMS.
We wish to caution readers that the forward-looking statements and our
operating results are subject to various risks and uncertainties that could
cause our actual results and outcomes to differ materially from those discussed
or anticipated, including the factors set forth in the section entitled "Risk
Factors" included elsewhere in this report. We also wish to advise readers not
to place any undue reliance on the forward-looking statements contained in this
25
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
As of August 31, 2005 and for the Years Ended August 31, 2005 and 2004
Together with Report of Independent Registered Public Accounting Firm
26
BSD MEDICAL CORPORATION
Index to Financial Statements
--------------------------------------------------------------------------------
Page
----
Report of Independent Registered Public Accounting Firm F-1
Balance Sheet F-2
Statements of Income F-3
Statements of Stockholders' Equity F-4
Statements 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 accompanying balance sheet of BSD Medical Corporation (the
Company) as of August 31, 2005, and the related statements of income,
stockholders' equity, and cash flows for the years ended August 31, 2005 and
2004. 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, 2005, and the results of its operations and its cash flows for the
years ended August 31, 2005 and 2004 in conformity with accounting principles
generally accepted in the United States of America.
/s/ TANNER LC
Salt Lake City, Utah
October 18, 2005
F-1
BSD MEDICAL CORPORATION
Balance Sheet
August 31, 2005
--------------------------------------------------------------------------------
Assets
------
Current assets:
Cash and cash equivalents $ 908,674
Investments 12,618,523
Receivables, net of allowance for
doubtful accounts of $42,500 267,550
Related party receivables 236,130
Inventories, net 1,134,353
Deferred tax asset 104,000
Other current assets 132,741
---------------
Total current assets 15,401,971
Property and equipment, net 174,843
Patent, net of amortization of $6,921 23,129
---------------
$ 15,599,943
---------------
--------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 112,813
Accrued expenses 248,376
Income taxes payable 240,759
Deferred revenue 7,328
---------------
Total current liabilities 609,276
---------------
Deferred tax liability 13,000
---------------
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 20,365,070 shares and
outstanding 20,340,739 shares 20,365
Additional paid-in capital 23,706,101
Deferred compensation (34,050)
Treasury stock, at cost (234)
Other comprehensive income 36,939
Accumulated deficit (8,751,454)
---------------
Total stockholders' equity 14,977,667
---------------
$ 15,599,943
---------------
--------------------------------------------------------------------------------
See accompanying notes to financial statements. F-2
BSD MEDICAL CORPORATION
Statements of Income
Years Ended August 31,
--------------------------------------------------------------------------------
2005 2004
---------------------------------------
Revenues:
Sales $ 1,033,632 $ 581,956
Sales to related parties, net 987,472 1,012,192
Other revenue - related party - 36,500
---------------------------------------
2,021,104 1,630,648
---------------------------------------
Costs and expenses:
Cost of sales 675,130 448,162
Cost of sales to related parties 644,980 668,619
Research and development 859,614 656,857
Selling, general, and administrative 2,135,076 1,147,628
---------------------------------------
4,314,800 2,921,266
---------------------------------------
Operating loss (2,293,696) (1,290,618)
---------------------------------------
Other income (expense):
Gain on sale of equity interest 6,551,087 9,111,211
Interest income 362,462 18,500
Interest expense - (491)
Other 4,839 31,359
---------------------------------------
6,918,388 9,160,579
---------------------------------------
Income before income taxes 4,624,692 7,869,961
Income tax (provision) benefit (1,303,000) 543,000
---------------------------------------
Net income $ 3,321,692 $ 8,412,961
---------------------------------------
Income per common share - basic $ 0.16 $ 0.43
---------------------------------------
Income per common share - diluted $ 0.15 $ 0.41
---------------------------------------
Weighted average shares - basic 20,198,000 19,397,000
---------------------------------------
Weighted average shares - diluted 21,453,000 20,331,000
---------------------------------------
--------------------------------------------------------------------------------
See accompanying notes to financial statements. F-3
BSD MEDICAL CORPORATION
Statements of Stockholders' Equity
Years Ended August 31, 2005 and 2004
-----------------------------------------------------------------------------------------------------------------------------------
Additional Deferred Other Com-
Common Stock Paid-in Compen- prehensive Accumulated Treasury Stock
Shares Amount Capital sation Income Deficit Shares Amount Total
--------------------------------------------------------------------------------------------------------
Balance, September 1,
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
Common stock issued for:
Cash 391,188 391 74,914 - - - - - 75,305
Services 27,900 28 44,972 - - - - - 45,000
Stock options issued for
services - - 96,500 - - - - - 96,500
Income tax benefit from
exercise of stock options - - 272,945 - - - - - 272,945
Amortization of deferred
compensation - - - 9,508 - - - - 9,508
Increase in other
comprehensive income - - - - 36,939 - - - 36,939
Deferred compensation - - 15,750 (15,750) - - - - -
Net income - - - - - 3,321,692 - - 3,321,692
--------------------------------------------------------------------------------------------------------
Balance, August 31, 2005 20,365,070 $ 20,365 $ 23,706,101 $ (34,050) $ 36,939 $ (8,751,454) 24,331 $ (234) $ 14,977,667
--------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements F-4
BSD MEDICAL CORPORATION
Statements of Cash Flows
Years Ended August 31,
--------------------------------------------------------------------------------
2005 2004
-------------------------------
Cash flows from operating activities:
Net income $ 3,321,692 $ 8,412,961
Adjustments to reconcile net income to
net cash (used in) provided by operating
activities:
Provision for doubtful accounts 42,500 14,569
Increase in inventory reserve and
write off of inventory - 154,814
Depreciation and amortization 76,991 46,461
Gain on sale of investment in TherMatrx (6,551,087) (8,975,445)
Gain on sale of property (1,050) -
Amortization of deferred compensation 9,508 7,858
Stock compensation expense 141,500 12,000
Decrease (Increase) in:
Receivables (286,876) 129,849
Inventories (393,937) (92,757)
Deferred tax asset 725,000 (829,000)
Other current assets (81,675) (7,828)
Increase (decrease) in:
Accounts payable 13,682 (180,937)
Income tax payable 513,704 -
Accrued expenses (175,539) (190,555)
Deferred revenue (39,895) (36,897)
Deferred tax liability (38,000) 51,000
-------------------------------
Net cash used in
operating activities (2,723,482) (1,483,907)
-------------------------------
Cash flows from investing activities:
Proceeds from sale of investment in
TherMatrx 6,551,087 8,975,445
Purchase of investments (12,581,584) -
Proceeds from sale of property 1,050 -
Purchase of property and equipment (110,856) (42,389)
-------------------------------
Net cash (used in) provided by
investing activities (6,140,303) 8,933,056
-------------------------------
Cash flows from financing activities-
proceeds from issuance of common stock 75,305 2,112,002
-------------------------------
Increase (decrease) in cash and
cash equivalents (8,788,480) 9,561,151
Cash and cash equivalents, beginning
of year 9,697,154 136,003
-------------------------------
Cash and cash equivalents, end of year $ 908,674 $ 9,697,154
-------------------------------
--------------------------------------------------------------------------------
See accompanying notes to financial statements. F-5
BSD MEDICAL CORPORATION
Notes to Financial Statements
--------------------------------------------------------------------------------
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.
As of August 31, 2005, the Company had received a total
of $15,526,532 in payments from the TherMatrx
transaction.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and
investments with original maturities to the Company of
three months or less.
Investments
Investments with scheduled maturities greater than three
months, but not greater than one year, are recorded as
short-term investments. Management classified these
investments at August 31, 2005 as available-for-sale.
The short-term investments are recorded at fair value,
with net unrealized gains or losses reported in
stockholders' equity. Realized gains and losses are
included in the consolidated statements of income.
--------------------------------------------------------------------------------
F-6
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
1. Organization Trade Accounts Receivable
and Trade accounts receivable are carried at original
Significant invoice amount less an estimate made for doubtful
Accounting receivables based on a review of all outstanding amounts
Policies on a monthly basis. Management estimates an allowance
Continued for doubtful accounts by identifying troubled accounts
and by using historical experience applied to an aging
of accounts. Trade accounts receivable are written off
when deemed uncollectible. Recoveries of trade
receivables previously written off are recorded when
received. Interest is not charged on trade receivables
that are outstanding beyond their due date.
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-7
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.
As of August 31, 2005, the Company had received a total
of $15,526,532 in payments from the TherMatrx
transaction. The amounts received of $6,551,087 and
$8,975,445 during the fiscal years ended August 31, 2005
and 2004, respectively, were recorded as a "gain on sale
of equity interest" in the Statements of Income.
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, 2005, the
accrued warranty reserve was approximately $16,000.
During the fiscal years ended August 31, 2005 and 2004,
total warranty expense was $21,662 and $28,148,
respectively.
--------------------------------------------------------------------------------
F-8
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
1. Organization Income Taxes
and The Company accounts for income taxes using the asset
Significant and liability method. Under the asset and liability
Accounting method, deferred tax assets and liabilities are
Policies recognized for the future tax consequences attributable
Continued 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.
Income Per Common Share
The computation of basic earnings per common share is
based on the weighted average number of shares
outstanding during each year.
The computation of diluted earnings per common share is
based on the weighted average number of shares
outstanding during the year, plus the common stock
equivalents that would arise from the exercise of stock
options and warrants outstanding, using the treasury
stock method and the average market price per share
during the year. Common stock equivalents are not
included in the diluted loss per share calculation when
their effect is anti-dilutive. Options and warrants to
purchase 2,225,914 shares and 2,437,533 shares of common
stock at prices ranging from $.10 to $2.54 per share
were outstanding at August 31, 2005 and 2004,
respectively.
The shares used in the computation of the Company's
basic and diluted earnings per share are reconciled as
follows:
2005 2004
-------------------------------
Weighted average number of shares
outstanding - basic 20,198,000 19,397,000
Dilutive effect of stock options 1,255,000 934,000
-------------------------------
Weighted average number of shares
outstanding, assuming dilution 21,453,000 20,331,000
-------------------------------
--------------------------------------------------------------------------------
F-9
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
1. Organization Stock-Based Compensation
of 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,
-------------------------------
2005 2004
-------------------------------
Net income - as reported $ 3,321,692 $ 8,412,961
Add: Stock-based employee compensation
expense included in reported net income, net
of related tax effects 9,508 7,858
Deduct: total stock based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (504,839) (101,597)
-------------------------------
Net income - pro forma $ 2,826,361 $ 8,319,222
=============== ==============
Earnings per share:
Basic - as reported $ .16 $ .43
=============== ==============
Basic - pro forma $ .14 $ .43
=============== ==============
Diluted - as reported $ .15 $ .41
=============== ==============
Diluted - pro forma $ .13 $ .41
=============== ==============
--------------------------------------------------------------------------------
F-10
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
1. Organization The fair value of each option grant is estimated on the
of date of grant using the Black-Scholes option pricing
Significant model with the following assumptions:
Accounting
Policies
Continued 2005 2004
-------------------------------
Expected dividend yield $ - $ -
Expected stock price volatility 71% - 83% 113%
Risk-free interest rate 3.3% - 4.1% 4.3%
Expected life of options 5 years 5 years
The weighted average fair values of options granted
during the years ended August 31, 2005 and 2004 were
$1.97 and $1.01, 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 $1,844,320 and $1,494,311
for the years ended August 31, 2005 and 2004,
respectively. Service revenue was $176,784 and $99,837
for the years ended August 31, 2005 and 2004,
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-11
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
1. Organization Revenue Recognition - Continued
of Revenue from the sale of software license rights is
Significant recognized when a valid purchase order has been
Accounting received, the software license has been delivered to the
Policies customer, the selling price is fixed or determinable,
Continued and collection is reasonably assured. Delivery is deemed
to have occurred if diskettes have been shipped, or if
the software has been delivered electronically by email.
To date, the sale of software license rights has not
been material.
Revenue from manufacturing services is recorded when an
agreement with the customer exists for such services,
the services have been provided, and collection is
reasonably assured.
Revenue from training services is recorded when an
agreement with the customer exists for such training,
the training services have been provided, and collection
is reasonably assured.
Revenue from service support contracts is recognized on
a straight-line basis over the term of the contract,
which approximates recognizing it as it is earned.
The Company's revenue recognition policy is the same for
sales to both related parties and non-related parties.
The Company provides the same products and services
under the same terms for non-related parties as with
related parties.
Sales to distributors are recognized in the same manner
as sales to end-user customers.
Deferred revenue and customer deposits payable include
amounts from service contracts as well as cash received
for the sales of products, which have not been shipped.
--------------------------------------------------------------------------------
F-12
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
1. Organization Concentration of Credit Risk
of Financial instruments that potentially subject the
Significant Company to concentration of credit risk consists
Accounting primarily of trade receivables. In the normal course of
Policies business, the Company provides credit terms to its
Continued customers. Accordingly, the Company performs ongoing
credit evaluations of its customers and maintains
allowances for possible losses.
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-13
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
2. Detail of Details of certain balance sheet accounts as of August
Certain 31, 2005, are as follows:
Balance
Sheet Receivables:
Accounts Trade receivables - non-related party $ 254,292
Trade receivables - related party 236,130
Other receivables 4,366
Accrued interest receivable 51,392
Less allowance for doubtful accounts (42,500)
--------------
$ 503,680
--------------
Inventories:
Parts and supplies $ 633,121
Work-in-process 581,232
Reserve for obsolete inventory (80,000)
--------------
$ 1,134,353
--------------
Accrued expenses:
Accrued vacation $ 129,627
Warranty reserve 15,876
Other accrued expenses 102,873
--------------
$ 248,376
--------------
3. Investments Investments consist of mutual funds as of August 31,
2005. All investments at August 31, 2005 had scheduled
maturities within one year and were considered
available-for-sale securities. As of August 31, 2005,
Investments had a cost of $12,581,584, a fair value of
$12,618,523, and unrealized gains of $36,939. No
realized gains or losses on investments were recorded in
the year ended August 31, 2005.
--------------------------------------------------------------------------------
F-14
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
4. Property Property and equipment consists of the following:
and
Equipment Equipment $ 801,301
Furniture and fixtures 298,597
--------------
1,099,898
Less accumulated depreciation (925,055)
--------------
$ 174,843
--------------
5. 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.
Future minimum payments at August 31, 2005, are as
follows:
Years Ending August 31, Amount
----------------------- --------------
2006 $ 82,320
2007 82,320
2008 82,320
--------------
$ 246,960
--------------
Annual rent expense on this operating lease for the
years ended August 31, 2005 and 2004 amounted to $86,400
and $83,735, respectively.
6. Deferred The Company has entered into certain service contracts
Revenue for which it has received payment in advance. The
Company is recognizing these service revenues over the
life of the service agreements.
As of August 31, 2005, the Company had $7,328 of
deferred revenue.
--------------------------------------------------------------------------------
F-15
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
7. Income The components of the income tax (provision) benefit are
Taxes as follows:
Years Ended August 31,
2005 2004
-------------------------------
Current:
Federal $ (452,000) $ (130,000)
State (164,000) (105,000)
-------------------------------
(616,000) (235,000)
-------------------------------
Deferred:
Federal (687,000) 778,000
-------------------------------
$ (1,303,000) $ 543,000
-------------------------------
The income tax (provision) benefit differs from the
amount computed at federal statutory rates as follows:
Years Ended August 31,
2005 2004
-------------------------------
Income tax benefit
(expense) at
statutory rate $ (1,711,000) $ (2,935,000)
Change in estimate
of use of net
operating loss
carryforwards 284,000 990,000
Research and
development tax
credits 76,000 347,000
Other 48,000 (64,000)
Change in valuation
allowance - 2,205,000
-------------------------------
$ (1,303,000) $ 543,000
-------------------------------
Deferred tax assets (liabilities) are comprised of the
following at August 31, 2005:
Accruals and reserves $ 100,000
Deferred revenue 3,000
Depreciation 1,000
Deferred compensation expense (13,000)
--------------
$ 91,000
--------------
--------------------------------------------------------------------------------
F-16
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
8. 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-17
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
8. Stock A schedule of the options and warrants is as follows:
Options and
Warrants
Continued Price Per
Options Warrants Share
-----------------------------------------
Outstanding at September 1, 2003 1,275,303 - $ .10 to 1.76
Granted 1,090,000 102,980 1.20 to1.80
Exercised (30,750) - .10 to .45
Forfeitures - -
-----------------------------------------
Outstanding at August 31, 2004 2,334,553 102,980 .10 to 2.54
Granted 225,000 - 1.2 to 2.54
Exercised (401,619) - .10 to .66
Forfeitures (30,750) - .10
-----------------------------------------
Outstanding at August 31, 2005 2,122,934 102,980 $ .10 to 2.54
-----------------------------------------
The following table summarizes information about stock
options and warrants outstanding at August 31, 2005:
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-.25 100,000 1.05 $ .17 100,000 $ .17
.37-.81 689,600 5.05 .58 620,848 .57
1.11-2.54 1,436,314 7.95 1.40 693,039 1.34
--------------------------------------------------------------------------
$ .10-2.54 2,225,914 6.74 $ 1.09 1,413,887 $ .92
--------------------------------------------------------------------------
9. Foreign During the years ended August 31, 2005 and 2004, the
Customer Company had sales of $0 and $99,502, respectively, to
and Major TherMatrx, a previously unconsolidated affiliate of
Customer which it owned approximately 30%. This related party
relationship ended on July 15, 2004 when TherMatrx was
sold to AMS (see note 12). During the years ended August
31, 2005 and 2004, the Company had sales to European
entities controlled by a significant stockholder and
member of the Board of Directors of the Company of
$987,472 and $912,690, respectively.
--------------------------------------------------------------------------------
F-18
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
10. Related Party At August 31, 2005, accounts receivable includes
Transactions $236,130, due from an entity controlled by a significant
Not otherwise stockholder and member of the Board of Directors.
disclosed
11. Supplemental Actual amounts paid for interest and income taxes are as
Cash Flow follows:
Information Years Ended
August 31,
2005 2004
-------------------------------
Interest expense $ - $ 491
-------------------------------
Income taxes $ 351,354 $ -
-------------------------------
During the year ended August 31, 2005, the Company:
o Had other comprehensive income of $36,939.
o Recorded deferred compensation of $15,750.
o Recorded an increase in additional paid in capital
of $272,945 and a corresponding decrease to income
taxes payable related to the tax benefit from the
exercise of stock options.
During the year ended August 31, 2004, the Company:
o Recorded deferred compensation of $8,250.
12. Significant On July 15, 2004, American Medical Systems Holdings,
Unconsolidated Inc., or AMS, acquired TherMatrx, Inc. for $40 million
Affiliate 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. As of August
31, 2005 the Company had received a total of $15,526,532
in payments from the TherMatrx transaction.
--------------------------------------------------------------------------------
F-19
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
13. 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, 2005 and August 31, 2004. Royalty
expense amounted to approximately $5,000 for the years
ended August 31, 2005 and 2004.
14. 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, 2005
and 2004 does not differ materially from the aggregate
carrying values of its financial instruments recorded in
the accompanying balance sheet. The estimated fair value
amounts have been determined by the Company using
available market information and appropriate valuation
methodologies. Considerable judgment is necessarily
required in interpreting market data to develop the
estimates of fair value, and, accordingly, the estimates
are not necessarily indicative of the amounts that the
Company could realize in a current market exchange.
--------------------------------------------------------------------------------
F-20
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
15. Recent In December 2004, the Financial Accounting Standards
Accounting Board ("FASB") issued Financial Accounting Standard
Pronounce- ("SFAS") No. 123(R), Share-Based Payment, an amendment
ments of FASB Statements No. 123 and 95. SFAS No. 123(R)
replaces SFAS No. 123, Accounting for Stock-Based
Compensation, and supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees. This statement
requires companies to recognize the fair value of stock
options and other stock-based compensation to employees
prospectively beginning with fiscal periods beginning
after December 15, 2005. This means that the Company
will be required to implement SFAS No. 123(R) no later
than the quarter beginning September 1, 2006. The
Company currently measures stock-based compensation in
accordance with APB Opinion No. 25 as discussed above.
The Company anticipates adopting the modified
prospective method of SFAS No. 123(R) on September 1,
2006. The impact on the Company's financial condition or
results of operations will depend on the number and
terms of stock options outstanding on the date of
change, as well as future options that may be granted.
However, the Company believes the adoption of SFAS No.
123(R) may have a material effect on the Company's
financial position and results of operations.
--------------------------------------------------------------------------------
F-21
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
15. Recent The FASB has issued Statement No. 154, Accounting
Accounting Changes and Error Corrections. This new standard
Pronounce- replaces APB Opinion No. 20, Accounting Changes, and
Ments FASB Statement No. 3, Reporting Accounting Changes in
Continued Interim Financial Statements. Among other changes, SFAS
No. 154 requires that a voluntary change in accounting
principle be applied retrospectively with all prior
period financial statements presented on the new
accounting principle, unless it is impracticable to do
so. SFAS No. 154 also provides that (1) a change in
method of depreciating or amortizing a long-lived
nonfinancial asset be accounted for as a change in
estimate (prospectively) that was effected by a change
in accounting principle, and (2) correction of errors in
previously issued financial statements should be termed
a "restatement." The new standard is effective for
accounting changes and correction of errors made in
fiscal years beginning after December 15, 2005. Early
adoption of this standard is permitted for accounting
changes and correction of errors made in fiscal years
beginning after June 1, 2005. The Company anticipates
adopting SFAS No. 154 on September 1, 2006, and does not
believe the adoption of this new accounting
pronouncement will result in a material impact on the
Company's financial position or results of operations.
--------------------------------------------------------------------------------
F-22
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 not effective and adequately designed to
ensure that information required to be disclosed by us in the reports we file or
submit under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in applicable rules and forms. In connection
with the completion of its audit of, and the issuance of its report on, our
financial statements for the year ended August 31, 2005, Tanner LC identified
deficiencies that existed in the design or operation of our internal control
over financial reporting. The deficiencies related to the preparation and
appropriate presentation of the statement of cash flows, the provision for
income taxes and related income tax footnote disclosures, and the appropriate
accounting for stock options issued for services. These deficiencies were
detected in the audit process and have been appropriately recorded and disclosed
in this Form 10-KSB. We are in the process of improving our internal control
over financial reporting and accounting for stock-based compensation and income
taxes and related disclosures in an effort to remediate these deficiencies
through improved supervision and training of our accounting staff. These
deficiencies have been disclosed to our Audit Committee and to our auditors.
Additional effort is needed to fully remedy these deficiencies and we are
continuing our efforts to improve and strengthen our control processes and
procedures. Our management, audit committee, and directors will continue to work
with our auditors and other outside advisors to ensure that our controls and
procedures are adequate and effective.
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.
27
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
Composition of the Board
------------------------
Our Board of Directors currently consists of six directors. Directors
are elected at each annual meeting of stockholders to serve until the next
annual meeting of stockholders or until their successors are duly elected and
qualified. There are no family relationships among any of the our directors,
officers or key employees.
Name Position(s) with the Company Age Director Since
---- ---------------------------- --- --------------
Paul F. Turner Chairman of the Board, Senior VP 58 1994
and Chief Technology Officer
Hyrum A. Mead President and CEO, Director 58 1999
Gerhard W. Sennewald Director 69 1994
J. Gordon Short Director 74 1994
Michael Nobel Director 65 1997
Douglas P. Boyd Director 64 2005
Paul F. Turner, MSEE, has served as the Senior Vice President and Chief
Technology Officer of BSD since August 1999. From October 1995 to August 1999,
Mr. Turner also served as the Acting President of BSD. From 1986 to October
1995, Mr. Turner served in various capacities with BSD, including Staff
Scientist, Senior Scientist, Vice President of Research, and Senior Vice
President of Research. Mr. Turner has led the design of microwave treatment
systems for tumors, including the development of external phased array antenna
technology to focus radiated microwave energy deep into the central area of the
body to treat deep tumors. He has also integrated this technology with magnetic
resonance imaging to non-invasively monitor treatments within the patient's
body.
Hyrum A. Mead, MBA, has served as President and Chief Executive Officer
of BSD since August 1999. Previously, he served five years as Vice President of
Business Development at ZERO Enclosures, a leading manufacturer in the
telecommunications, computer and aerospace enclosures industry and seven years
as President of Electro Controls, a manufacturer of computer controlled power
systems. Mr. Mead began his career in marketing with IBM where he was involved
with the introduction of many new products.
Gerhard W. Sennewald, Ph.D., has served as the President and Chief
Executive Officer of Medizin-Technik GmbH of Munich, Germany, a firm which is
engaged in the business of distributing hyperthermia equipment and diagnostic
imaging equipment and services, from April 1985 to the present. In connection
with his service to Medizin-Technik GmbH, Dr. Sennewald has been BSD's key
European representative and distributor for 17 years.
J. Gordon Short, M.D., served as President of Brevis Corporation, a
privately-held medical products company that specializes in consumable specialty
supplies and in hand hygiene products from 1978 to 2000, and has served as its 2
Chairman of the Board from 1978 to the present. From 1978 to 1982, Dr. Short
served BSD as a Medical Director. In that capacity, he participated in the
initial development and establishment of certain of BSD's products. He also
previously served on BSD's Medical Advisory Board.
28
Michael Nobel, Ph.D., has served as the Executive Chairman of the MRAB
Group, a privately-held company that provides diagnostic imaging services, from
1991 to the present. From 1995 to the present, Dr. Nobel has served as the
Chairman of the Board of the Nobel Family Society. From 1995 to the present, he
also has served as Chairman of the American Non-Violence Project Inc., and has
served as a consultant to Unesco in Paris and the United Nations Social Affairs
Division in Geneva. Dr. Nobel participated in the introduction of magnetic
resonance imaging as European Vice President for Fonar Corp.
Douglas P. Boyd Ph.D., currently serves as Chairman of the Board of XLR
Medical, Inc., as CEO of TeleSecurity Sciences, Inc., as Managing Director of
Imaging Technology Ventures, Inc., and sits on the Board of Directors of Imaging
Technology Group, Inc., TechniScan, Inc. and Health Address, Inc. He is
internationally known as an expert in radiology and computed tomography ("CT")
imaging systems, and has pioneered the development of fan-beam CT scanners,
Xenon detector arrays and EBT scanners. Dr. Boyd has been awarded 13 U.S.
patents. He is an Adjunct Professor of Radiology at the University of
California, San Francisco, has published more than 100 scientific papers and is
a frequent speaker at universities and symposiums.
Affirmative Determinations Regarding Director Independence
----------------------------------------------------------
The Board of Directors has determined each of the following directors
to be an "independent director" as such term is defined in Section 121A of the
Rules of the American Stock Exchange:
o J. Gordon Short
o Douglas P. Boyd
o Michael Nobel
In this annual report, these three directors are referred to
individually as an "Independent Director" and collectively as the "Independent
Directors."
Meetings and Committees of the Board of Directors
-------------------------------------------------
During fiscal year 2005, our Board of Directors met four times and no
director attended fewer than 75% of meetings of the Board or any of the Board
committees of which a director was a member.
The Board of Directors has formed the following committees:
The Audit Committee. The Audit Committee, which held three meetings
during fiscal year 2005, is responsible for reviewing and monitoring our
financial statements and internal accounting procedures, recommending the
selection of independent auditors by the Board, evaluating the scope of the
annual audit, reviewing audit results, consulting with management and our
independent auditor prior to presentation of financial statements to
stockholders and, as appropriate, initiating inquiries into aspects of our
internal accounting controls and financial affairs. The Board of Directors
adopted a written audit committee charter on February 25, 2005.
The members of the Audit Committee are Messrs. Sennewald, Short and
Nobel. The Audit Committee currently does not have an audit committee financial
expert, but we are actively seeking one. All members of the Audit Committee are
Independent Directors, except Mr. Sennewald.
The Nominating Committee. We do not have a standing nominating
committee. Each director participates in decisions relating to nominations for
directors. The Board of Directors believes that, considering the size of the
company and the Board of Directors, nominating decisions can be easily made on a
29
case-by-case basis and there is no need for the added formality of a nominating
committee. Based on criteria established by the AMEX relating to director
independence, Messrs. Short, Boyd and Nobel are our only Independent Directors.
The Board of Directors does not have an express policy with regard to
the consideration of any director candidates since the Board believes that it
can adequately evaluate nominees on a case-by-case basis. The Board has not
previously received any recommendations for director candidates from
stockholders, and has not adopted a formal process for considering director
candidates who may be recommended by stockholders. However, our policy is to
give due consideration to any and all such candidates, and in evaluating
director nominees, the Board considers the appropriate size of the Board, the
needs of the company, the skills and experience of its directors, and a
candidate's familiarity with our industry. We do not pay fees to any third
parties to assist it in identifying potential nominees.
Although we do not have a formal policy regarding attendance by
directors at the our annual meeting, we encourage directors to attend. The Board
will give consideration during the upcoming year to establishing a formal policy
so as to maximize attendance by directors, taking into account the directors'
schedules and the timing requirements of applicable law. At our last annual
meeting, held January 14, 2005, all directors were in attendance.
The Compensation Committee. We have a standing compensation committee
consisting of Messrs. Sennewald, Short and Nobel, who are all Independent
Directors. The Compensation Committee met once during the 2005 fiscal year. Its
functions are: (i) to review, and make recommendations to the Board of Directors
regarding the salaries, bonuses and other compensation of our executive
officers; and (ii) to review and administer any stock option plan, stock
purchase plan, stock award plan and employee benefit plan or arrangement
established by the Board of Directors for the benefit of the executive officers,
employees and the independent directors of the Company.
Communications with Directors
-----------------------------
We have not adopted a formal process for stockholder communications
with the Board. Nevertheless, we have tried to ensure that the views of
stockholders are heard by the Board or individual directors, as applicable, and
that appropriate responses are provided to stockholders in a timely manner. We
believe our responsiveness to stockholder communications to the Board has been
good.
Executive Officers
------------------
The following table presents information as of August 31, 2005
regarding the current executive officers of the Company:
Name Age Position
---- --- --------
Paul F. Turner 58 Chairman of the Board, Senior VP and Chief
Technology Officer
Hyrum A. Mead 58 President and CEO
Information on the business background of Paul F. Turner and Hyrum A.
Mead is set forth above under the caption "Composition of the Board."
Section 16(a) Beneficial Ownership Reporting and Compliance
-----------------------------------------------------------
Section 16(a) of the Securities Act of 1934 requires our directors,
executive officers, and any persons who own more than 10% of a registered class
of our equity securities, to file reports of ownership and changes in ownership
30
with the Securities and Exchange Commission. SEC regulation requires executive
officers, directors and greater than 10% stockholders to furnish us with copies
of all Section 16(a) forms they file. Based solely on our review of the copies
of such forms received by us, or written representations from certain reporting
persons, we believe that during the fiscal year ended August 31, 2005 our
executive officers, directors, and greater than 10% stockholders complied with
all applicable filing requirements.
Significant Employees
---------------------
In addition to the officers and directors identified above, the Company
expects the following individuals to make significant contributions to the
Company's business during fiscal 2005:
Dixie Toolson Sells has served as Vice President of Regulatory Affairs
of BSD since December 1994. Ms. Sells served as Administrative Director of BSD
from 1978 to 1984, as Director of Regulatory Affairs from 1984 to September
1987, and as Vice President of Regulatory Affairs from September 1987 to October
1993. She served as Director of Regulatory Affairs from October 1993 to December
1994. She served as Corporate Secretary from 1994 to 2002. Ms. Sells also serves
on the Board of Directors of the Intermountain Biomedical Association.
Ray Lauritzen served as Field Service Manager of BSD from 1982 to
January 1988 and has served as Vice President of Field Service Operations from
January 1988 to the present.
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth certain information regarding all
compensation earned by Paul Turner, our Senior Vice President and Chief
Technology Officer, and Hyrum Mead, our President, for services rendered to us
during fiscal 2005, 2004 and 2003.
SUMMARY COMPENSATION TABLE
Long-Term Compensation
----------------------------- -------------
Awards Payouts
Annual ----------------------------- -------------
Compensation(1) Securities
--------------------------- Restricted Underlying LTIP All Other
Year Salary Bonus Stock awards Options Payouts Compensation
------- ----------- ----------- ------------- --------------- ------------- --------------
Hyrum A. Mead, 2005 $165,000 $500 -- --
President and CEO 2004 148,325 400 400,000 (1)
2003 125,000 400
Paul Turner, 2005 $155,000 $500 $ $
Senior Vice President, 2004 149,990 400 300,000 -- --
Chief Technology Officer 2003 145,000 400
_________________________
(1) There were no stock options granted to Messrs. Turner or Mead in fiscal
2005. There were stock options granted to Messrs. Turner of 300,000 and
Mead of 400,000 during fiscal 2004 for BSD Medical Common Stock.
In fiscal 2005, Mr. Turner exercised 180,953 stock options and Mr. Mead
exercised 25,000 stock options. No stock options were exercised during fiscal
year 2004 by Messrs. Turner or Mead.
Compensation of Directors
-------------------------
Director compensation is determined pursuant to the 1998 Director Stock
Plan ("Director Stock Plan"). The Director Stock Plan currently provides each
31
non-employee director with an annual cash retainer of $20,000 (the "Annual
Retainer") and an option to acquire 25,000 shares of the Company's common stock
at an exercise price equal to eighty-five percent (85%) of the fair market value
of the common stock as of the date of the grant (the "Option"). Of the Annual
Retainer, a cash payment of $10,000 is made in arrears to each non-employee
director, payable in equal installments of $5,000 each on March 1 and September
1 of each year in which each non-employee director continues to serve as a
member of the Board. The portion of the Annual Retainer not paid in cash is paid
in the form of common stock (the "Common Stock Payments"). The total number of
shares of common stock included in each Common Stock Payment will be determined
by dividing the amount of the Annual Retainer that is to be paid in common stock
by the fair market value of a share of common stock. The fair market value of
the common stock is determined by the Board. The Common Stock Payments are paid
on March 1 and September 1 of each year. The Company has reimbursed directors
for out-of-pocket expenses incurred in attending Board meetings. Paul F. Turner
and Hyrum A. Mead are the only members of the Board of Directors who are
employed by the Company. Messrs. Turner and Mead do not receive separate
compensation for services performed as directors.
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 2005 AND YEAR-END OPTION VALUES
Number of Shares
Underlying Value of Unexercised
Unexercised Options at In-the-Money Options at
August 31, 2005 August 31, 2005
--------------------------- ----------------------------
Shares Acquired Value
on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
----------------- ----------- ------------ -------------- ------------- --------------
Paul F. Turner, Sr. 180,953 $398,097 100,000 200,000 $ 539,000 $1,078,000
VP and Chief
Technology Officer
Hyrum A. Mead, 25,000 $ 55,750 428,333 266,667 $2,308,714 $1,437,336
President and CEO
______________________________________
Employment Contracts
--------------------
We entered into an employment agreement with Mr. Mead dated August 10,
1999. This agreement provides that Mr. Mead shall receive an annual base salary
of $125,000, which shall be reviewed annually by the Board of Directors. The
agreement provides that if Mr. Mead is involuntarily terminated, Mr. Mead will
receive severance compensation for a period of six months, including an
extension of all benefits and perquisites. The severance amount shall include
six months of salary at the highest rate paid to Mr. Mead prior to termination
and an additional amount equal to all bonuses received by Mr. Mead during the
12-month period preceding termination (excluding any signing bonus received
during such period). The agreement also requires us to vest any options granted
to Mr. Mead for the purchase of our common stock, allowing a 90-day period for
Mr. Mead to exercise those options. Mr. Mead's agreement includes a
non-competition covenant prohibiting him from competing with us for one year
following his termination.
We entered into an employment agreement with Mr. Turner dated November
2, 1988. The agreement provides that Mr. Turner's salary will be based upon a
reasonable mutual agreement. The agreement provides that if Mr. Turner's
employment is involuntarily terminated, he will receive severance pay for a
one-year period, which pay includes an extension of all of his rights,
privileges and benefits as an employee (including medical insurance). The
one-year severance pay shall be equal to Mr. Turner's regular salary for the
12-month period immediately prior to the termination. The agreement also
requires us to pay Mr. Turner for any accrued, unused vacation at the time of
32
termination. We are also obligated to pay Mr. Turner $1,000 (or the equivalent
value in stock options) for each newly issued patent obtained by us as a result
of Mr. Turner's efforts (Mr. Turner receives only $500 if multiple inventors are
involved). Mr. Turner's agreement includes a non-competition covenant
prohibiting him from competing with us for one year following his termination.
We may continue the non-competition period for up to four additional years by
notifying Mr. Turner in writing and by continuing the severance payments for the
additional years during which the non-competition period is extended.
Code of Ethics
--------------
We have adopted a Code of Ethics that applies to all employees,
including our principal executive officers. Our Code of Ethics is available on
our website (www.BSDMedical.com) on our investor information webpage. We intend
to post amendments to or waivers from our Code of Ethics (to the extent
applicable to our chief executive officer, principal financial officer or
principal accounting officer) on our website.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The following table sets forth, as of November 16, 2005, the beneficial
ownership of our outstanding common stock by:
o each person (including any group) known to us to own more than 5%
of any class of our common stock,
o each of our executive officers,
o each of our directors, and
o all executive officers and directors as a group.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission, and generally includes voting or investment
power with respect to securities. For purposes of calculating the percentages
shown in the table, each person listed is deemed to beneficially own any shares
issuable on the exercise of vested options and warrants held by that person that
are exercisable within 60 days after November 10, 2005. Except as indicated by
footnote, the persons named in the table have sole voting and investment power
with respect to all shares of common stock shown beneficially owned by them. The
inclusion of any shares as beneficially owned does not constitute an admission
of beneficial ownership of those shares. The percentage calculation of
beneficial ownership is based on 20,543,963 shares of common stock outstanding
as of November 10, 2005. Except as otherwise noted, the address of each person
listed on the following table is 2188 West 2200 South, Salt Lake City, Utah
84119.
Number of Shares Percent of
Name of Person or Group Beneficially Owned Class
---------------------------------------- ---------------------- ------------
Dr. Gerhard W. Sennewald (1) 6,874,948 33.34%
Paul F. Turner (2) 1,992,195 9.65%
Hyrum A. Mead (3) 529,920 2.50%
Dr. J. Gordon Short (4) 246,067 1.19%
Dr. Michael Nobel (5) 216,067 1.04%
[Douglas P. Boyd] 1,250 *
John E. Langdon (6) 1,295,010 6.30%
All Executive Officers and Directors 9,860,447 48.00%
as a Group (6 persons) (7)
33
* Less than 1%.
(1) Includes 75,000 shares subject to options. Does not include 500,000
shares held by Dr. Sennewald's spouse, for which he disclaims
beneficial ownership.
(2) Includes 100,000 shares subject to options.
(3) Includes 428,333 shares subject to options.
(4) Includes 125,000 shares subject to options.
(5) Includes 125,000 shares subject to options.
(6) Includes 351,862 shares owned directly by Mr. Langdon. The remaining
shares are held in trusts for which Mr. Langdon is Trustee. Does not
include 50,000 shares held by Mr. Langdon's spouse, for which he
disclaims beneficial ownership. Mr. Langdon's address is: 2501 Parkview
Drive, Suite 500, Fort Worth, TX 76102.
(7) Includes 853,333 shares subject to options.
EQUITY COMPENSATION PLAN INFORMATION
We have two equity compensation plans, our 1998 Employee Stock Option
Plan and our 1998 Director Stock Plan, both of which were approved by our
stockholders. Shown below on an aggregate basis is a summary of equity
compensation plan information with respect to our equity compensation plans as
of August 31, 2005:
Number of securities remaining
Number of securities available for future issuance
to be issued upon Weighted-average under equity compensation plans
exercise of exercise price of (excluding securities reflected in
Plan Category outstanding options outstanding options column 1)
------------- ------------------- ------------------- ----------------------------------
Equity compensation plans
approved by security
holders(1) 2,225,919 $1.09 1,077,814(2)
Equity compensation plans
not approved by
security holders --- --- ---
----------------------- --------------------- ------------------------------------
Total 2,225,919 $1.09 1,077,814
======================= ===================== ====================================
(1) Consists of the Company's 1987 Stock Option Plan, 1998 Stock Incentive
Plan and 1998 Director Stock Plan. No further options will be issued
under the 1987 Stock Option Plan.
(2) Consists of 322,700 shares under the 1998 Stock Incentive Plan and
378,875 shares under 1998 Director Stock Plan available for future
issuance, other than upon exercise of an option, warrant or right.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
TherMatrx, Inc. We manufactured, assembled and tested for TherMatrx,
Inc. its TMx-2000 thermotherapy system and supplied TherMatrx with equipment
components used for its TMx-2000 system in fiscal 2003 and 2004. We had also
provided regulatory compliance and other consulting services to TherMatrx. In
fiscal 2004, the Company had sales to TherMatrx of $99,502. In fiscal 2003, the
Company had sales to TherMatrx of $1,391,433 and received royalty payment of
$63,500 from TherMatrx. The Company was a stockholder of TherMatrx, as were each
of our executive officers and directors individually, at the time TherMatrx was
34
sold to AMS in July 2004. At the time of the sale, our executive officers and
directors owned the following number of shares of TherMatrx common stock: Hyrum
Mead, 45,000; Paul Turner, 45,000; Gerhard Sennewald, 30,000; J. Gordon Short,
10,000; Michael Nobel, 10,000. Our executive officers and directors owned less
than 10% of the equity interest in TherMatrx.
Medizin-Technik GmbH. We supply equipment components to Medizin-Technik
GmbH located in Munich, Germany, which is a significant distributor of our
products in Europe. Medizin-Technik purchases equipment, which it installs, and
components to service our hyperthermia therapy systems that it sells to its
customers in Europe. We had revenue of approximately $981,336 in fiscal 2005
from the sale of systems and various component parts sold to Medizin-Technik.
During fiscal 2004, we had sales of approximately $912,690 to Medizin-Technik.
Dr. Gerhard W. Sennewald, one of our directors and significant stockholders, is
the President and Chief Executive Officer of Medizin-Technik and its sole
stockholder.
ITEM 13. EXHIBITS.
The following exhibits are incorporated herein by reference as
indicated:
Exhibit
Number Description
------- -----------
3.1 Amended and Restated Certificate of Incorporation. Incorporated by
reference to Exhibit 3.1 of the BSD Medical Corporation Form 10-KSB
filed December 1, 2003.
3.2 By-Laws. Incorporated by reference to Exhibit 3.2 of the BSD Medical
Corporation Registration Statement on Form S-1, filed October 16, 1986.
4.1 Specimen Common Stock Certificate. Incorporated by reference to Exhibit
4 of the BSD Medical Corporation Registration Statement on Form S-1,
filed October 16, 1986.
4.2 Emerson Securities Purchase Agreement. Incorporated by reference to
Exhibit 4.1 of the BSD Medical Corporation Form 10-KSB filed December
1, 2003.
10.1 Transfer of Trade Secrets Agreement dated December 7, 1979, among BSD
Medical Corporation, Vitek, Incorporated and Ronald R. Bowman.
Incorporated by reference to Exhibit 10.6 of the BSD Medical
Corporation Registration Statement on Form S-1, filed October 16, 1986.
10.2 Second Addendum to Exclusive Transfer of Trade Secrets Agreement dated
April 2, 1987. Incorporated by reference to Exhibit 10 of the BSD
Medical Corporation Form 10-K, filed April 8, 1988.
10.3 License Agreement between BSD Medical Corporation and EDAP Technomed,
Inc., dated July 3, 1996. Incorporated by reference to Exhibit 10 of
Form 8-K, filed August 7, 1996.
10.4 Stock Purchase Agreement dated October 31, 1997, by and among
TherMatrx, Inc., BSD Medical Corporation, Oracle Strategic Partners,
L.P., and Charles Manker. Incorporated by reference to Exhibit 10.6 of
the BSD Medical Corporation Form 10-KSB filed December 10, 1998.
10.5 BSD Medical Corporation 1998 Director Stock Plan. Incorporated by
reference to Exhibit A of the BSD Medical Corporation Schedule 14A,
filed July 27, 1998.
35
10.6 BSD Medical Corporation 1998 Stock Incentive Plan. Incorporated by
reference to Exhibit B of the BSD Medical Corporation Schedule 14B,
filed July 27, 1998.
10.7 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.
10.8 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.
10.9 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.
10.10 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.
10.11 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.
10.12 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.
21 Subsidiary List. Incorporated by reference to Exhibit 21 of the BSD
Medical Corporation Form 10-KSB filed December 1, 2003.
31.1 Certification of Chief Executive Officer of BSD pursuant to Rule
13a-14.
31.2 Certification of Chief Financial Officer of BSD pursuant to Rule
13a-14.
32.1 Certification of Chief Executive Officer attached pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes Oxley
Act of 2002.
32.2 Certification of the Chief Financial Officer of BSD pursuant to 18
U.S.C. ss.1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
36
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The following table presents fees for professional services rendered by
Tanner LC for the audit of our annual financial statements for the fiscal years
ending August 31, 2005 and August 31, 2004 and fees billed for other services
rendered by Tanner LC during those periods.
Fiscal 2005 Fiscal 2004
-------------------- ----------------------
Audit Fees(1) $52,619 $26,890
Audit-Related Fees(2) 5,902 15,281
Tax Fees(3) 23,075 11,563
All Other Fees(4) 1,560 5,527
-------------------- ----------------------
Total $83,156 $59,261
==================== ======================
_________________________
(1) Audit Fees consist of fees billed for the annual audits and quarterly
reviews.
(2) Audit-Related Fees consist of fees billed for various SEC filings and
accounting research.
(3) Tax Fees consist of fees billed for tax consultation and assistance in
the preparation of tax returns.
(4) All Other Fees consist of fees for edgarization of SEC filings and
miscellaneous fees.
Pre-Approval Policies
---------------------
The Audit Committee pre-approved all audit, audit-related and non-audit
services performed by our independent registered public accounting firm and
subsequently reviewed the actual fees and expenses paid to Tanner LC. The Audit
Committee has determined that the fees paid to Tanner LC for non-audit services
are compatible with maintaining Tanner LC's independence as our independent
registered public accounting firm.
37
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, 2005 By: /s/ Hyrum A. Mead
----------------------
Hyrum A. Mead
President, CEO and Member
of the Board of Directors
(principal executive
officer)
Date: November 29, 2005 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, 2005 By: /s/ Paul F. Turner
----------------------
Paul F. Turner
Chairman of the Board,
Senior Vice President and
Chief Technology Officer
Date: November 29, 2005 By: /s/ Hyrum A. Mead
--------------------
Hyrum A. Mead
President, CEO and Member of the
Board of Directors (principal
executive officer)
Date: November 29, 2005 By: /s/ Gerhard W. Sennewald
--------------------------
Dr. Gerhard W. Sennewald
Member of the Board of Directors
Date: November 29, 2005 By: /s/ J. Gordon Short
Dr. J. Gordon Short
Member of the Board of Directors
Date: November 29, 2005 By: /s/ Michael Nobel
--------------------
Dr. Michael Nobel
Member of the Board of Directors
Date: November 29, 2005 By: /s/ Douglas P. Boyd
----------------------
Dr. Douglas P. Boyd
Member of the Board of Directors
38