================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------
FORM 10-Q
(Mark One)
|X| Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended February 29, 2008
|_| Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ___________ to __________
Commission File No. 001-32526
------------------------------
BSD Medical Corporation
(Exact Name of Registrant as Specified in Its Charter)
Delaware 75-1590407
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2188 West 2200 South
Salt Lake City, Utah 84119
(Address of principal executive offices, including zip code)
(801) 972-5555
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the Registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer or a smaller reporting
company. See the definitions of "large accelerated filer," "accelerated filer"
and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer |_| Accelerated filer |X|
Non-accelerated filer |_| Smaller reporting company |_|
Indicate by check mark whether the Registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
As of April 9, 2008, there were 21,318,128 shares of the Registrant's
common stock, $0.001 par value per share, outstanding.
BSD MEDICAL CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED FEBRUARY 29, 2008
PART I - Financial Information
Item 1. Financial Statements
Condensed Balance Sheets............................................3
Condensed Statements of Operations..................................4
Condensed Statements of Cash Flows..................................5
Notes to Condensed Financial Statements.............................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................13
Item 3. Quantitative and Qualitative Disclosures About
Market Risk........................................................20
Item 4. Controls and Procedures............................................21
PART II - Other Information
Item 1A. Risk Factors......................................................21
Item 4. Results of Votes of Security Holders...............................22
Item 6. Exhibits...........................................................23
Signatures..................................................................24
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
BSD MEDICAL CORPORATION
Condensed Balance Sheets
(Unaudited)
February 29, August 31,
ASSETS 2008 2007
----------------------------------
Current assets:
Cash and cash equivalents $ 454,318 $ 416,540
Investments 15,091,597 19,090,118
Accounts receivable, net of
allowance for doubtful
accounts of $20,000 277,362 203,267
Related party trade accounts
receivable 861,983 488,200
Income tax receivable 2,430,022 1,759,995
Inventories, net 1,615,719 1,510,067
Deferred tax asset - 387,000
Other current assets 64,483 127,003
----------------------------------
Total current assets 20,795,484 23,982,190
Property and equipment, net 1,441,279 271,077
Patents, net 38,886 19,373
Deferred tax asset - 69,000
----------------------------------
$ 22,275,649 $ 24,341,640
==================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 346,286 $ 235,676
Accrued liabilities 570,485 633,090
Customer deposits 84,750 214,638
Deferred revenue - current
portion 20,670 26,115
----------------------------------
Total current liabilities 1,022,191 1,109,519
Deferred revenue - net of
current portion 38,334 48,333
----------------------------------
Total liabilities 1,060,525 1,157,852
----------------------------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par
value; 10,000,000 shares
authorized, no shares
issued and outstanding - -
Common stock; $.001 par
value, 40,000,000 shares
authorized, 21,328,561
and 21,297,446 shares issued 21,329 21,298
Additional paid-in capital 26,895,728 26,373,637
Treasury stock, 24,331 shares
at cost (234) (234)
Other comprehensive loss (1,828,774) (360,760)
Accumulated deficit (3,872,925) (2,850,153)
----------------------------------
Total stockholders' equity 21,215,124 23,183,788
----------------------------------
$ 22,275,649 $ 24,341,640
==================================
See accompanying notes to condensed financial statements
3
BSD MEDICAL CORPORATION
Condensed Statements of Operations
(Unaudited)
Three Months Ended Six Months Ended
February 29, February 28, February 29, February 28,
2008 2007 2008 2007
------------ ------------ ------------ -------------
Revenues:
Sales $ 640,539 $ 178,074 $ 1,120,242 $ 826,685
Sales to related
parties 835,113 482,583 1,743,138 498,627
------------ ------------ ------------ -------------
Total revenues 1,475,652 660,657 2,863,380 1,325,312
------------ ------------ ------------ -------------
Operating costs and
expenses:
Cost of sales 261,083 95,870 424,064 509,891
Cost of related
party sales 330,002 327,447 607,876 362,681
Research and
development 433,869 508,778 771,222 840,857
Selling, general
and administrative 1,434,118 1,331,259 2,828,065 2,887,700
------------ ------------ ------------ -------------
Total operating
costs and expenses 2,459,072 2,263,354 4,631,227 4,601,129
------------ ------------ ------------ -------------
Loss from operations (983,420) (1,602,697) (1,767,847) (3,275,817)
------------ ------------ ------------ -------------
Other income (expense):
Interest and
investment income 355,640 342,457 544,988 712,670
Other expense (47,057) (46,604) (110,913) (74,336)
------------ ------------ ------------ -------------
Total other income
(expense) 308,583 295,853 434,075 638,334
------------ ------------ ------------ -------------
Loss before income
taxes (674,837) (1,306,844) (1,333,772) (2,637,483)
Income tax benefit 268,000 594,059 311,000 1,063,027
------------ ------------ ------------ -------------
Net loss (406,837) (712,785) (1,022,772) (1,574,456)
Other comprehensive
income (loss) -
unrealized gain
(loss) on
investments,
net of income tax (1,099,414) 120,029 (1,468,014) 150,899
------------ ------------ ------------ -------------
Net comprehensive loss $ (1,506,251) $ (592,756) $ (2,490,786) $ (1,423,557)
============ ============ ============ =============
Loss per common share:
Basic $ (0.02) $ (0.03) $ (0.05) $ (0.07)
============ ============ ============ =============
Diluted $ (0.02) $ (0.03) $ (0.05) $ (0.07)
============ ============ ============ =============
Weighted average
number of shares
outstanding:
Basic 21,321,000 21,042,000 21,316,000 21,039,000
Diluted 21,321,000 21,042,000 21,316,000 21,039,000
See accompanying notes to condensed financial statements
4
BSD MEDICAL CORPORATION
Condensed Statements of Cash Flows
(Unaudited)
Six Months Ended
February 29, February 28,
2008 2007
--------------- ----------------
Cash flows from operating activities:
Net loss $ (1,022,772) $ (1,574,456)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 57,954 46,340
Stock-based compensation 365,095 438,944
Stock issued for services 30,000 -
Provision for doubtful accounts - 83,700
Loss on disposition of property and
equipment - 2,577
Decrease (increase) in:
Receivables (447,878) 239,557
Income tax receivable (555,000) (1,147,645)
Inventories (105,652) (12,914)
Deferred tax assets 244,000 (191,000)
Other current assets 62,520 (13,528)
Increase (decrease) in:
Accounts payable 110,610 (13,659)
Accrued liabilities (62,605) 124,963
Customer deposits (129,888) -
Deferred revenue (15,444) (155,529)
Income taxes payable - (1,500,000)
--------------- ----------------
Net cash used in operating activities (1,469,060) (3,672,650)
--------------- ----------------
Cash flows from investing activities:
Sale of investments 2,742,507 2,340,840
Purchase of property and equipment (1,226,703) (48,044)
Increase in patents (20,966) -
--------------- ----------------
Net cash provided by investing activities 1,494,838 2,292,796
--------------- ----------------
Cash flows from financing activities:
Proceeds from the sale of common stock 12,000 5,250
--------------- ----------------
Net increase (decrease) in cash and cash
equivalents 37,778 (1,374,604)
Cash and cash equivalents, beginning
of period 416,540 2,179,094
--------------- ----------------
Cash and cash equivalents, end of period $ 454,318 $ 804,490
=============== ================
See accompanying notes to condensed financial statements
5
BSD MEDICAL CORPORATION
Notes to Condensed Financial Statements
(Unaudited)
Note 1. Basis of Presentation
The accompanying unaudited condensed balance sheets of BSD Medical
Corporation (the "Company") as of February 29, 2008 and August 31, 2007, the
related unaudited condensed statements of operations for the three months and
six months ended February 29, 2008 and February 28, 2007, and the related
unaudited condensed statements of cash flows for the six months ended February
29, 2008 and February 28, 2007 have been prepared in accordance with U.S.
generally accepted accounting principles for interim financial reporting and
pursuant to the rules and regulations of the Securities and Exchange Commission
(the "SEC"). The condensed financial statements do not include all of the
information and footnotes required by U.S. generally accepted accounting
principles for complete financial statements. These condensed financial
statements should be read in conjunction with the notes thereto, and the
financial statements and notes thereto included in our annual report on Form
10-K for the year ended August 31, 2007.
All adjustments (consisting only of normal recurring adjustments)
necessary for the fair presentation of our financial position as of February 29,
2008 and August 31, 2007, our results of operations for the three months and six
months ended February 29, 2008 and February 28, 2007, and our cash flows for the
six months ended February 29, 2008 and February 28, 2007 have been included. The
results of operations for the three months and six months ended February 29,
2008 may not be indicative of the results for the year ending August 31, 2008.
Note 2. Recent Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation ("FIN") 48, Accounting for Uncertainty in Income Taxes. FIN
48 clarifies the accounting for uncertainty in income taxes recognized in
financial statements in accordance with Statement of Financial Accounting
Standards (SFAS) No. 109, Accounting for Income Taxes. This Interpretation
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. We adopted this Interpretation on September 1, 2007,
with no material impact on our financial statements.
In March 2008, the FASB issued SFAS No. 161, Disclosures about
Derivative Instruments and Hedging Activities. This statement changes the
disclosure requirements for derivative instruments and hedging activities.
Entities are required to provide enhanced disclosures about (a) how and why an
entity uses derivative instruments, (b) how derivative instruments and related
hedged items are accounted for under SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, and its related interpretations, and (c) how
derivative instruments and related hedged items affect an entity's financial
position, financial performance, and cash flows. This statement is effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008, or our fiscal year beginning September 1, 2009, with early
application encouraged. This statement encourages, but does not require,
comparative disclosures for earlier periods at initial adoption. We currently
are unable to determine what impact the future application of this pronouncement
may have on our financial statements.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business
Combinations. This statement replaces SFAS No. 141, Business Combinations and
applies to all transactions or other events in which an entity (the acquirer)
obtains control of one or more businesses (the acquiree), including those
6
sometimes referred to as "true mergers" or "mergers of equals" and combinations
achieved without the transfer of consideration. This statement establishes
principles and requirements for how the acquirer: a) recognizes and measures in
its financial statements the identifiable assets acquired, the liabilities
assumed, and any noncontrolling interest in the acquiree; b) recognizes and
measures the goodwill acquired in the business combination or a gain from a
bargain purchase; and c) determines what information to disclose to enable users
of the financials statements to evaluate the nature and financial effects of the
business combination. This statement will be effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15,
2008, or our fiscal year beginning September 1, 2009. Earlier adoption is
prohibited. We currently are unable to determine what impact the future
application of this pronouncement may have on our financial statements.
In December 2007, the FASB issued SFAS 160, Noncontrolling Interests in
Consolidated Financial Statements. This statement applies to all entities that
prepare consolidated financial statements, except not-for-profit organizations,
and amends Accounting Research Bulletin ("ARB") 51 to establish accounting and
reporting standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. It also amends certain of ARB 51's
consolidation procedures for consistency with the requirements of SFAS No. 141
(revised 2007). This statement will be effective for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15, 2008, or
our fiscal year beginning September 1, 2009. Earlier adoption is prohibited. We
currently are unable to determine what impact the future application of this
pronouncement may have on our financial statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option
for Financial Assets and Financial Liabilities - Including an Amendment of FASB
Statement No. 115. This statement permits entities to choose to measure many
financial instruments and certain other items at fair value. Most of the
provisions of SFAS No. 159 apply only to entities that elect the fair value
option. However, the amendment to SFAS No. 115 Accounting for Certain
Investments in Debt and Equity Securities applies to all entities with
available-for-sale and trading securities. SFAS No. 159 is effective as of the
beginning of an entity's first fiscal year that begins after November 15, 2007,
or our fiscal year beginning September 1, 2008. Early adoption is permitted as
of the beginning of a fiscal year that begins on or before November 15, 2007,
provided the entity also elects to apply the provision of SFAS No. 157, Fair
Value Measurements. We have not elected early adoption of this statement, and do
not expect the adoption of this statement will have a material impact on our
financial statements.
In September 2006, the FASB issued SFAS Statement No. 158, Employers'
Accounting for Defined Benefit Pension and Other Postretirement Plans. This new
standard will require employers to fully recognize the obligations associated
with single-employer defined benefit pension, retiree healthcare and other
postretirement plans in their financial statements. We adopted SFAS No. 158 on
September 1, 2007, with no material impact on our financial statements since we
currently do not sponsor a defined benefit pension or postretirement plan within
the scope of the standard.
In September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements. SFAS No. 157 defines fair value, establishes a framework for
measuring fair value, and requires enhanced disclosures about fair value
measurements. SFAS No. 157 requires companies to disclose the fair value of
their financial instruments according to a fair value hierarchy as defined in
the standard. Additionally, companies are required to provide enhanced
disclosure regarding financial instruments in one of the categories, including a
reconciliation of the beginning and ending balances separately for each major
category of assets and liabilities. In February 2008, the FASB issued FASB Staff
Position (FSP) No. FAS 157-2, which delays by one year the effective date of
SFAS No. 157 for certain types of non-financial assets and non-financial
liabilities. As a result, SFAS No. 157 will be effective for financial
statements issued for fiscal years beginning after November 15, 2007, or our
fiscal year beginning September 1, 2008, for financial assets and liabilities
7
carried at fair value on a recurring basis, and on September 1, 2009, for
non-recurring non-financial assets and liabilities that are recognized or
disclosed at fair value. We are currently unable to determine the impact on our
financial statements of the application of SFAS No. 157 on September 1, 2008,
for financial assets and liabilities carried at fair value on a recurring basis.
Similarly, we are currently unable to determine the impact on our financial
statements of the application of SFAS No. 157 on September 1, 2009, for
non-recurring non-financial assets and liabilities that are recognized or
disclosed at fair value.
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing
of Financial Assets to simplify accounting for separately recognized servicing
assets and servicing liabilities. SFAS No. 156 amends SFAS No. 140, Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities. Additionally, SFAS No. 156 applies to all separately recognized
servicing assets and liabilities acquired or issued after the beginning of an
entity's fiscal year that begins after September 15, 2006, although early
adoption is permitted. We adopted SFAS No. 156 on September 1, 2007, with no
material impact on our financial statements.
In February 2006, the FASB issued SFAS No. 155, Accounting for Certain
Hybrid Instruments, which amends SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, and SFAS No. 140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No.
155 allows financial instruments that have embedded derivatives to be accounted
for as a whole (eliminating the need to bifurcate the derivative from its host)
if the holder elects to account for the whole instrument on a fair value basis.
SFAS No. 155 also clarifies and amends certain other provisions of SFAS No. 133
and SFAS No. 140. This statement is effective for all financial instruments
acquired or issued in financial years beginning after September 15, 2006. We
adopted SFAS No. 156 on September 1, 2007, with no material impact on our
financial statements.
On December 21, 2006, the FASB issued FASB Staff Position ("FSP")
Emerging Issues Task Force ("EITF") 00-19-2, Accounting for Registration Payment
Arrangements, which requires an issuer to account for a contingent obligation to
transfer consideration under a registration payment arrangement in accordance
with FASB Statement No. 5, Accounting for Contingencies and FASB Interpretation
14, Reasonable Estimation of the Amount of Loss. Registration payment
arrangements are frequently entered into in connection with issuance of
unregistered financial instruments, such as equity shares or warrants. A
registration payment arrangement contingently obligates the issuer to make
future payments or otherwise transfer consideration to another party if the
issuer fails to file a registration statement with the SEC for the resale of
specified financial instruments or fails to have the registration statement
declared effective within a specific period. The FSP requires issuers to make
certain disclosures for each registration payment arrangement or group of
similar arrangements. The FSP is effective immediately for registration payment
arrangements and financial instruments entered into or modified after the FSP's
issuance date. For previously issued registration payment arrangements and
financial instruments subject to those arrangements, the FSP is effective for
financial statements issued for fiscal years beginning after December 15, 2006.
We adopted this standard on September 1, 2007, with no material impact on our
financial statements.
EITF No. 07-3, Accounting for Nonrefundable Advance Payments for Goods
or Services Received for Use in Future Research and Development Activities, was
issued in June 2007. The EITF reached a consensus that nonrefundable payments
for goods and services that will be used or rendered for future research and
development activities should be deferred and capitalized. Such amounts should
be recognized as an expense as the related goods are delivered and the related
services are performed. Entities should continue to evaluate whether they expect
the goods to be delivered or services to be rendered. If the entity does not
expect the goods to be delivered or services to be rendered, the capitalized
advance payment should be charged to expense. This pronouncement is effective
for financial statements issued for fiscal years beginning after December 15,
2007, our fiscal year beginning September 1, 2008, and interim periods within
those fiscal years. Earlier application is not permitted. Entities are required
to report the effects of applying this pronouncement prospectively for new
contracts entered into on or after the effective date of this pronouncement. We
currently are unable to determine what impact the future application of this
pronouncement may have on our financial statements.
8
Note 3. Net Income (Loss) Per Common Share
The computation of basic earnings per common share is based on the
weighted average number of shares outstanding during the period. The computation
of diluted earnings per common share is based on the weighted average number of
shares outstanding during the period plus the weighted average common stock
equivalents which would arise from the exercise of stock options outstanding
using the treasury stock method and the average market price per share during
the period. When common stock equivalents are anti-dilutive, they are not
included. During the three months and six months ended February 29, 2008,
994,887 and 1,052,147 common stock equivalents related to stock options were not
included in the computation due to their anti-dilutive effect, respectively,
because of the Company's net loss. Similarly, during the three months and six
months ended February 28, 2007, 1,531,960 and 1,247,563 common stock equivalents
related to stock options were not included in the computation due to their
anti-dilutive effect.
The shares used in the computation of the Company's basic and diluted
earnings per share are reconciled as follows:
Three Months Ended Six Months Ended
February 29, February 28, February 29, February 28,
2008 2007 2008 2007
------------ ------------ ------------ -------------
Weighted average number
of shares outstanding
- basic 21,321,000 21,042,000 21,316,000 21,039,000
Dilutive effect of
stock options - - - -
------------ ------------ ------------ -------------
Weighted average number
of shares outstanding
- diluted 21,321,000 21,042,000 21,316,000 21,039,000
============ ============ ============ =============
Note 4. Inventories
Inventories consist of the following:
February 29, August 31,
2008 2007
--------------- ----------------
Parts and supplies $ 936,907 $ 835,498
Work-in-process 665,006 610,846
Finished goods 53,806 103,723
Reserve for obsolete inventory (40,000) (40,000)
--------------- ----------------
Inventories, net $ 1,615,719 $ 1,510,067
=============== ================
9
Note 5. Property and Equipment
Property and equipment consist of the following:
February 29, August 31,
2008 2007
--------------- ----------------
Equipment $ 988,865 $ 962,162
Furniture and fixtures 298,576 298,576
Leasehold improvements 17,420 17,420
Building 956,000 -
Land 244,000 -
--------------- ----------------
2,504,861 1,278,158
Less accumulated depreciation (1,063,582) (1,007,081)
--------------- ----------------
Property and equipment, net $ 1,441,279 $ 271,077
=============== ================
When the lease on the Company's office, production and research
facilities expired in November 2007, the Company exercised its option to
purchase the building and land for a total purchase price of $1,200,000.
Note 6. Related Party Transactions
During the three months ended February 29, 2008 and February 28, 2007,
we had sales of $835,113 and $482,583, respectively, to an entity controlled by
a significant stockholder and member of the Board of Directors. These related
party transactions represent approximately 57% and 73% of total sales for each
respective three-month period.
During the six months ended February 29, 2008 and February 28, 2007, we
had sales of $1,743,138 and $498,627, respectively, to this entity. These
related party transactions represent approximately 61% and 38% of total sales
for each respective six-month period.
At February 29, 2008 and August 31, 2007, receivables included $861,983
and $488,200, respectively, from this entity.
Note 7. Stock-Based Compensation
We have a stock-based employee plan and a director option plan which
are described more fully in Note 11 in our 2007 Annual Report on Form 10-K. As
of February 29, 2008, we had approximately 1,520,000 shares of common stock
reserved for future issuance under the stock option plans.
The Company accounts for stock-based compensation in accordance with
SFAS No. 123(R), Share Based Payments. Under the fair value recognition
provisions of this statement, stock-based compensation cost is measured at the
grant date based on the value of the award granted using the Black-Scholes
option pricing model, and recognized over the period in which the award vests.
The stock-based compensation expense for the three-month and six-month periods
ended February 29, 2008 has been allocated to the various categories of
operating costs and expenses in a manner similar to the allocation of payroll
expense as follows:
10
Three Months Six Months
Ended Ended
February 29, February 29,
2008 2008
--------------- ----------------
Cost of sales $ 21,148 $ 42,296
Research and development 35,125 60,620
Selling, general and administrative 150,192 262,179
--------------- ----------------
Total $ 206,465 $ 365,095
=============== ================
Stock-based compensation expense for the three-month and six-month
periods ended February 28, 2007 of $204,734 and $408,943, respectively, has been
included in selling, general and administrative expenses.
During the six months ended February 29, 2008, we granted 367,000
options to our directors and employees, 285,000 options with one fifth vesting
each year for the next five years, and 82,000 options with one third vesting
each year for the next three years. These grants account for $98,820 of the
total stock-based compensation expense for the six months ended February 29,
2008.
Unrecognized stock-based compensation expense expected to be recognized
over the estimated weighted-average amortization period of 2.39 years is
approximately $2,466,000 at February 29, 2008.
Our weighted-average assumptions used in the Black-Scholes valuation
model for equity awards with time-based vesting provisions granted during the
six months ended February 29, 2008 are shown below:
Expected volatility 64.17%
Expected dividends 0%
Expected term 6.25 Years
Risk-free interest rate 3.95%
The expected volatility rate was estimated based on the historical
volatility of our common stock. The expected term was estimated based on
historical experience of stock option exercise and forfeiture. The risk-free
interest rate is the rate provided by the U.S. Treasury for Daily Treasury Yield
Curve Rates commonly referred to as "Constant Maturity Treasury" rate in effect
at the time of grant with a remaining term equal to the expected option term.
A summary of the time-based stock option awards as of February 29,
2008, and changes during the six months then ended, is as follows:
11
Weighted-
Weighted- Average
Average Remaining Aggregate
Exercise Contract Term Intrinsic
Shares Price (Years) Value
---------- ---------- ------------- --------------
Outstanding at
August 31, 2007 1,795,853 $ 2.31
Granted 367,000 5.58
Exercised (32,508) 1.25
Forfeited or expired - -
---------- ----------
Outstanding at
February 29, 2008 2,130,345 $ 2.89 6.84
========== ========== =============
Exercisable at
February 29, 2008 1,387,029 $ 1.72 5.66 $ 5,171,249
========== ========== ============ =============
The weighted-average grant-date fair value of stock options granted
during the six months ended February 29, 2008 was $3.51.
Note 8. Supplemental Cash Flow Information
The Company paid no amounts for interest during the six months ended
February 29, 2008 and February 28, 2007. The Company paid no amounts for income
taxes during the six months ended February 29, 2008, and paid $1,799,000 for
income taxes during the six months ended February 28, 2007.
During the six months ended February 29, 2008, the Company had the
following non-cash financing and investing activities:
o Recorded an increase in additional paid-in capital of $115,027 and
an increase in income tax receivable of $115,027 related to the
tax benefit from the exercise of stock options.
o Increased other comprehensive loss by $1,468,014, decreased
investments by $1,256,014 and decreased short-term deferred tax
asset by $212,000.
o Increased common stock and decreased additional paid-in capital by
$17.
During the six months ended February 28, 2007, the Company had the
following non-cash financing and investing activities:
o Recorded an increase in additional paid-in capital of $14,297 and
a decrease to income taxes payable of $14,297 related to the tax
benefit from the exercise of stock options.
o Increased other comprehensive income and increased investments by
$150,899.
o Transferred deferred compensation of $247,700 to additional
paid-in capital.
o Decreased income taxes payable and decreased income tax receivable
by $39,946.
o Increased common stock and decreased additional paid-in capital by
$10.
12
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
This Management's Discussion and Analysis of Financial Condition and
Results of Operations and other parts of this report contain forward-looking
statements that involve risks and uncertainties. Forward-looking statements can
also be identified by words such as "anticipates," "expects," "believes,"
"plans," "predicts," and similar terms. Forward-looking statements are not
guarantees of future performance and our actual results may differ significantly
from the results discussed in the forward-looking statements. Factors that might
cause such differences include, but are not limited to those discussed in the
subsection entitled "Forward-Looking Statements" below. The following discussion
should be read in conjunction with our financial statements and notes thereto
included in this report. We assume no obligation to revise or update any
forward-looking statements for any reason, except as required by law.
General
-------
BSD Medical Corporation develops, manufactures, markets and services
medical systems that deliver precision-focused radio frequency (RF) or 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. Our
product line for cancer therapy has been created to offer hospitals and clinics
a complete solution for thermal treatment of cancer as provided through
microwave/RF systems.
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 created a new medical industry using that
therapy. In accordance with our strategic plan, we subsequently sold our
interest in TherMatrx, Inc., the company established to commercialize our
technology for treating enlarged prostate symptoms, to provide funding that we
can utilize for commercializing our systems used in the treatment of cancer and
in pursuing other business objectives.
In spite of the advances in cancer treatment technology, according to
the American Cancer Society over 40% of cancer patients continue to die from the
disease in the United States. Commercialization of our systems used to treat
cancer, including the BSD-2000 and BSD-500 families of systems and the new
MicroThermX 100 microwave thermal ablation system, is our most immediate
business objective. Our BSD-2000 and BSD-500 cancer treatment systems are used
to treat cancer with heat while boosting the effectiveness of radiation and
chemotherapy through a number of biological mechanisms. Our MicroThermX 100
system is used to treat cancers with heat alone. Current and targeted cancer
treatment sites for our systems include cancers of the prostate, breast, head,
neck, bladder, cervix, colon/rectum, esophagus, liver, brain, bone, stomach and
lung, and general pelvic and abdominal tumors. Our cancer treatment systems have
been used to treat thousands of patients throughout the world, and have been
recognized, 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 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 and the estimated 2,500 brachytherapy systems
installed, as well as with chemotherapy treatments. The MicroThermX 100 system
is used to treat cancers that can be destroyed with heat alone.
13
Based on our management team's knowledge of the market, we believe that
the fully saturated potential market for these developed cancer therapy 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. We estimate our financial model in the higher production environment of
established commercial sales could achieve a 60% gross margin on systems and an
80% gross margin on service agreements and disposable applicators used with our
MicroThermX 100 system, although there is no assurance that these results will
be obtained.
We have received United States Food and Drug Administration, or FDA,
approval to market our commercial version of the BSD-500, and in March 2006, we
completed a submission for FDA approval to sell the BSD-2000 in the United
States. In August 2007, we successfully concluded a pre-approval and quality
system inspection by the FDA. On December 31, 2007, we received a letter from
the FDA denying our application for pre-market approval of the BSD 2000 and
providing guidance regarding amendments needed to make the BSD-2000 submission
approvable. We are in the process of providing additional information for the
BSD-2000 pre-market approval submission, in response to the FDA's request. We
are currently preparing our FDA submission for the MicroThermX 100 system. We
have designed our cancer therapy systems such that together they are capable of
providing treatment for most solid tumors located virtually anywhere in the
body.
Our common stock trades on the American Stock Exchange (AMEX) under the
symbol "BSM."
Critical Accounting Policies and Estimates
------------------------------------------
The following is a discussion of our critical accounting policies and
estimates that management believes are material to an understanding of our
results of operations and which involve the exercise of judgment or estimates by
management.
Revenue Recognition. Revenue from the sale of cancer treatment systems
is recognized when a purchase order has been received, the system has been
shipped, the selling price is fixed or determinable, and collection is
reasonably assured. Most system sales are F.O.B. shipping point; therefore,
shipment is deemed to have occurred when the product is delivered to the
transportation carrier. Most system sales do not include installation. If
installation is included as part of the contract, revenue is not recognized
until installation has occurred, or until any remaining installation obligation
is deemed to be perfunctory. Some sales of cancer treatment systems may include
training as part of the sale. In such cases, the portion of the revenue related
to the training, calculated based on the amount charged for training on a
stand-alone basis, is deferred and recognized when the training has been
provided. The sales of our cancer treatment systems do not require specific
customer acceptance provisions and do not include the right of return, except in
cases where the product does not function as warranted by us. We provide a
reserve allowance for estimated returns. To date, returns have not been
significant.
Revenue from manufacturing services is recorded when an agreement with
the customer exists for such services, the services have been provided, and
collection is reasonably assured. Revenue from training services is recorded
when an agreement with the customer exists for such training, the training
services have been provided, and collection is reasonably assured. Revenue from
service support contracts is recognized on a straight-line basis over the term
of the contract.
Our revenue recognition policy is the same for sales to both related
parties and non-related parties. We provide the same products and services under
the same terms to non-related parties as to 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.
14
Inventory Reserves. We periodically review our inventory levels and
usage, paying particular attention to slower-moving items. If projected sales
for fiscal 2008 do not materialize or if our hyperthermia systems do not receive
increased market acceptance, we may be required to increase the reserve for
inventory impairment 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
installation. 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. As of February 29, 2008 and August 31, 2007 we had a
$20,000 balance in this account. 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.
Stock-based Compensation. We account for stock-based compensation in
accordance with SFAS No. 123(R), which requires us to measure the compensation
cost of stock options and other stock-based awards to employees and directors at
fair value at the grant date and recognize compensation expense over the
requisite service period for awards expected to vest. We recorded compensation
expense for stock options issued to directors and employees of $206,465 and
$365,095 during the three months and six months ended February 29, 2008,
respectively, and $204,734 and $408,943 for the three months and six months
ended February 28, 2007, respectively. The fair value of stock options is
computed using the Black-Scholes valuation model, which model utilizes inputs
that are subject to change over time, including the volatility of the market
price of our common stock, risk free interest rates, requisite service periods
and assumptions made by us regarding the assumed life and vesting of stock
options and stock-based awards. As new options or stock-based awards are
granted, additional non-cash compensation expense will be recorded by us.
Income Taxes. We account for income taxes using the asset and liability
method. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
We maintain valuation allowances where it is more likely than not that
all or a portion of a deferred tax asset will not be realized. Changes in
valuation allowances are included in our income tax provision in the period of
change. In determining whether a valuation allowance is warranted, we evaluate
factors such as prior earnings history, expected future earnings and our ability
to carry-back reversing items within two years to offset income taxes previously
paid.
To the extent that we have the ability to carry-back current period
taxable losses within two years to offset income taxes previously paid, we
record an income tax receivable and a current income tax benefit.
15
Results of Operations
---------------------
Three Months Ended February 29, 2008 Compared to the Three Months Ended February
28, 2007
Revenues. Total revenues for the three months ended February 29, 2008
were $1,475,652, compared to $660,657 for the three months ended February 28,
2007, an increase of $814,995, or approximately 123%. The increase in total
revenues was due to an increase in the volume of sales to both non-related
parties and related parties, as further discussed below. Our revenues can
fluctuate significantly from period to period because our sales, to date, have
been based upon a relatively small number of systems, the sales price of each
being substantial enough to greatly impact revenue levels in the periods in
which they occur. Sales of a few systems can cause a large change in our revenue
from period to period.
Related Party Sales. We had $835,113, or approximately 57%, of our
revenues in the three months ended February 29, 2008 from sales to related
parties as compared to $482,583 or approximately 73%, in the three months ended
February 28, 2007. Related party sales for all periods presented were to
Medizin-Technik GmbH. Dr. Gerhard Sennewald, one of our stockholders and
directors, is also a stockholder, executive officer and director of
Medizin-Technik. These sales for the three months ended February 29, 2008
consisted of product sales of $803,200, probes of $10,725 and other revenues of
$21,188. These sales for the three months ended February 28, 2007 consisted of
product sales of $368,875, probes of $17,100 and other revenues of $96,608.
Sales to Medizin-Technik may fluctuate significantly from period to period
because our sales, to date, have been based upon a relatively small number of
systems, the sales price of each being substantial enough to greatly impact
revenue levels in the periods in which they occur. Sales of a few systems can
cause a large change in our revenue from period to period.
Non-Related Party Sales. In the three months ended February 29, 2008,
we had $640,539 or approximately 43% of our revenues from sales to unrelated
parties, as compared to $178,074, or approximately 27%, for the three months
ended February 28, 2007. These sales for the three months ended February 29,
2008 consisted of product sales of $620,700, service contracts of $9,495, probes
of $600 and other revenues of $9,744. By comparison, non-related party sales for
the three months ended February 28, 2007 consisted of product sales of $149,800,
consulting services of $9,720, service contracts of $6,743, probes of $9,200 and
other revenues of $2,611.
Gross Profit. Gross profit for the three months ended February 29, 2008
was $884,567 or 60% of total product sales as compared to $237,340 or 36%, of
total product sales for the three months ended February 28, 2007. As sales
volumes increase, we will more fully absorb our fixed overhead costs, thus
increasing our gross profit percentage. The gross margin percentage will also
fluctuate from period to period depending on the mix of revenues reported for
the period.
Research and Development Expenses. Research and development expenses
were $433,869 for the three months ended February 29, 2008, as compared to
$508,778, for the three months ended February 28, 2007, a decrease of $74,909,
or approximately 15%.
Selling General and Administrative Expenses. Selling, general and
administrative expenses increased to $1,434,118 in the three months ended
February 29, 2008, from $1,331,259 for the three months ended February 28, 2007,
an increase of $102,859 or approximately 8%. This increase was primarily due to
an increase in professional fees, partially offset by a reduction in
compensation expense related to the issuance of stock options charged to
selling, general and administrative expenses in the current year.
16
Interest and Investment Income. Interest and investment income
increased to $355,640 for the three months ended February 29, 2008 as compared
to $342,457 for the three months ended February 28, 2007 due to a higher rate of
return recognized on investments in the current quarter, partially offset by
lower levels of cash and investments in the current quarter. At February 29,
2008, however, we had an unrealized loss on investments of $1,828,774 reported
as other comprehensive loss.
Income Tax Benefit. We reported an income tax benefit of $268,000 for
the three months ended February 29, 2008, which represents an increase to our
income tax receivable resulting from our ability to carry-back our taxable loss
in the current period to offset income taxes previously paid. For the three
months ended February 28, 2007, we reported an income tax benefit of $594,059,
which was comprised of a current income tax benefit of $504,059 and a deferred
income tax benefit of $90,000.
Net Loss. During the three months ended February 29, 2008, we had a net
loss of $406,837, as compared to a net loss of $712,785 in the three months
ended February 28, 2007. Our net loss in the second quarter of the current
fiscal year decreased $305,948 compared to the net loss in the second quarter of
the prior year, primarily due to the increase in total revenues, partially
offset by an increase in our total operating costs and expenses in the current
year.
Six Months Ended February 29, 2008 Compared to the Six Months Ended February 28,
2007
Revenues. Total revenues for the six months ended February 29, 2008
were $2,863,380, compared to $1,325,312, for the six months ended February 28,
2007, an increase of $1,538,068, or approximately 116%. The increase in total
revenues was due to an increase in the volume of sales to both non-related
parties and related parties, as further discussed below.
Related Party Sales. We had $1,743,138, or approximately 61%, of our
revenues in the six months ended February 29, 2008 from sales to related parties
as compared to $498,627, or approximately 38%, in the six months ended February
28, 2007. Related party sales for all periods presented were to Medizin-Technik.
These sales for the six months ended February 29, 2008 consisted of product
sales of $1,682,712, probes of $19,425 and other revenues of $41,001. These
sales for the six months ended February 28, 2007 consisted of product sales of
$368,875, probes of $25,380 and other revenues of $104,372.
Non-Related Party Sales. In the six months ended February 29, 2008, we
had $1,120,242 or approximately 39% of our revenues from sales to unrelated
parties, as compared to $826,685, or approximately 62%, for the six months ended
February 28, 2007. These sales for the six months ended February 29, 2008
consisted of product sales of $1,055,700, service contracts of $24,866, probes
of $14,447 and other revenues of $25,229. By comparison, non-related party sales
for the six months ended February 28, 2007 consisted of product sales of
$736,412, consulting services of $40,863, service contracts of $18,028, probes
of $19,922 and other revenue of $11,460.
Gross Profit. Gross profit for the six months ended February 29, 2008
was $1,831,440 or 64% of total product sales as compared to $452,740 or 34%, of
total product sales for the six months ended February 28, 2007. As sales volumes
increase, we will more fully absorb our fixed overhead costs, thus increasing
our gross profit percentage. The gross margin percentage will also fluctuate
from period to period depending on the mix of revenues reported for the period.
Research and Development Expenses. Research and development expenses
were $771,222 for the six months ended February 29, 2008, as compared to
$840,857, for the six months ended February 28, 2007, a decrease of $69,635, or
approximately 8%.
Selling General and Administrative Expenses. Selling, general and
administrative expenses decreased to $2,828,065 in the six months ended February
29, 2008, from $2,887,700 for the six months ended February 28, 2007, a decrease
17
of $59,635, or approximately 2%. This decrease was primarily due to a reduction
in compensation expense related to the issuance of stock options charged to
selling, general and administrative expenses in the current year, partially
offset by an increase in professional fees.
Interest and Investment Income. Interest and investment income
decreased to $544,988 for the six months ended February 29, 2008 as compared to
$712,670 for the six months ended February 28, 2007 due primarily to lower
levels of cash and investments in the current year. At February 29, 2008,
however, we had an unrealized loss on investments of $1,828,774 reported as
other comprehensive loss.
Income Tax Benefit. For the six months ended February 29, 2008, we
reported an income tax benefit of $311,000, which was comprised of a current
income tax benefit of $479,000, partially offset by a deferred income tax
provision of $168,000. The current income tax benefit of $479,000 represents an
increase to our income tax receivable resulting from our ability to carry-back
our taxable loss in the current period to offset income taxes previously paid.
The deferred income tax provision of $168,000 resulted primarily from our
recording a 100% valuation allowance against our deferred tax assets as of
February 29, 2008. In recording the valuation allowance, we were unable to
conclude that it is more likely than not that our deferred tax assets will be
realized. In reaching this determination, we evaluated factors such as prior
earnings history, expected future earnings and our ability to carry-back
reversing items within two years to offset income taxes paid. For the six months
ended February 28, 2007, we reported an income tax benefit of $1,063,027, which
was comprised of a current income tax benefit of $872,027 and a deferred income
tax benefit of $191,000.
Net Loss. During the six months ended February 29, 2008, we had a net
loss of $1,022,772, as compared to a net loss of $1,574,456 in the six months
ended February 28, 2007. Our net loss in the first six months of the current
fiscal year decreased $551,684 compared to the net loss in the first six months
of the prior year, primarily due to the increase in total revenues, partially
offset by an increase in our total operating costs and expenses in the current
year.
Liquidity and Capital Resources
-------------------------------
Since inception through February 29, 2008, we have generated an
accumulated deficit of $3,872,925. We have historically financed our operations
through research grants, licensing of technological assets, issuance of common
stock and the sale of investments in spin-off operations. As of February 29,
2008, we had cash, cash equivalents and investments totaling $15,545,915 as
compared to cash, cash equivalents and investments totaling $19,506,658 as of
August 31, 2007. The recorded value of our investments at February 29, 2008 has
been reduced by an unrealized loss of $1,828,774.
During the six months ended February 29, 2008, we used $1,469,060 of
cash in operating activities, primarily as a result of our net loss of
$1,022,772, increase in receivables of $447,878, increase in income tax
receivable of $555,000, increase in inventories of $105,652, and decrease in
customer deposits of $129,888, partially offset by a decrease in deferred tax
assets of $244,000 and an increase in accounts payable of $110,610. By
comparison, net cash used in operating activities was $3,672,650 during the six
months ended February 28, 2007.
Net cash provided by investing activities for the six months ended
February 29, 2008 was $1,494,838, resulting from the sale of investments of
$2,742,507, partially offset by the purchase of property and equipment of
$1,226,703 and an increase in patents of $20,966. For the six months ended
February 28, 2007, net cash provided by investing activities was $2,292,796,
resulting from the sale of investments of $2,340,840, partially offset by the
purchase of property and equipment of $48,044.
Net cash provided by financing activities consisted of proceeds from
the sale of common stock through the exercise of stock options of $12,000 in the
six months ended February 29, 2008 and $5,250 for the six months ended February
28, 2007.
18
We expect to incur additional expenses related to the commercial
introduction of our systems, due to additional participation at trade shows,
expenditures on publicity, additional travel, increased sales salaries and
commissions and other related expenses. In addition, we anticipate that we will
incur increased expenses related to seeking governmental and regulatory
approvals for our products and continued expenses related to corporate
governance and compliance with the Sarbanes-Oxley Act of 2002, during fiscal
2008.
We believe we can cover any cash requirements with cost cutting or
available cash. If we cannot cover any such cash shortfall with cost cutting or
available cash, we would need to obtain additional financing. We cannot be
certain that any financing will be available when needed or will be available on
terms acceptable to us. If we raise equity capital our stockholders will be
diluted. Insufficient funds may require us to delay, scale back or eliminate
some or all of our programs designed to facilitate the commercial introduction
of our systems or entry into new markets.
As of February 29, 2008, we have no significant commitments for the
purchase of property and equipment.
We believe that our current cash and cash equivalents, investments, and
expected cash provided from operating activities will be sufficient to fund our
operations for the next twelve months.
FORWARD-LOOKING STATEMENTS
With the exception of historical facts, the statements contained in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" are forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995, which reflect our current expectations
and beliefs regarding our future results of operations, performance and
achievements. These statements are subject to risks and uncertainties and are
based upon assumptions and beliefs that may or may not materialize. These
forward-looking statements include, but are not limited to, statements
concerning:
o our belief about the market opportunities for our products;
o our anticipated financial performance and business plan;
o our expectations regarding the commercialization of the BSD-2000,
BSD 500 and MicroThermX 100 systems;
o our expectations to further expand our developments to treat other
diseases and medical conditions;
o our expectations that in a higher production environment of
established commercial sales we could achieve a 60% gross margin
on system sales and an 80% gross margin on service agreements and
disposable applicators used with our MicroThermX 100 system;
o our belief concerning the market potential for developed cancer
therapy systems;
o our expectations related to the after-market opportunity for
service agreements;
o our expectations related to the replacement cycle for our systems;
19
o our expectations that we will incur increased expenses related to
seeking governmental and regulatory approvals for our products;
o our expectations and efforts regarding FDA approvals relating to
the BSD-2000 and MicroThermX 100 systems;
o our belief that our technology has application for additional
approaches to treating cancer and for other medical purposes;
o our expectations related to the amount of expenses we will incur
for the commercial introduction of our systems;
o our expectation that we will incur continued expenses related to
our corporate governance and compliance with the Sarbanes-Oxley
Act of 2002;
o our expectation that our selling, general and administrative
expenses will continue at the same or increased levels at least in
the short term;
o our belief that we can cover any cash shortfall with cost cutting
or available cash; and
o our belief that our current working capital, investments and cash
from operations will be sufficient to finance our operations
through working capital and capital resources needs for the next
twelve months.
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 Items entitled "Risk
Factors" included in our Annual Report on Form 10-K for the year ended August
31, 2007 and in this Form 10-Q, and our other filings with the Securities and
Exchange Commission. We also wish to advise readers not to place any undue
reliance on the forward-looking statements contained in this report, which
reflect our beliefs and expectations only as of the date of this report. We
assume no obligation to update or revise these forward-looking statements to
reflect new events or circumstances or any changes in our beliefs or
expectations, other than as required by law.
Item 3. Quantitative and Qualitative Disclosure About Market Risk.
A significant portion of the Company's cash equivalents and short-term
investments bear variable interest rates that are adjusted to market conditions.
Changes in market rates will affect interest earned and potentially the market
value of the principal of these instruments. The Company does not utilize
derivative instruments to offset the exposure to interest rate changes.
Significant changes in interest rates may have a material impact on the
Company's investment income, but not on the Company's consolidated results of
operations.
The Company does have significant sales to foreign customers and is
therefore subject to the effects that changes in foreign currency exchange rates
may have on demand for its products and services. The Company does not utilize
derivative instruments to offset the exposure to changes in foreign currency
exchange rates. To minimize foreign exchange risk, the Company's export sales
are transacted in United States dollars.
20
Item 4. Controls and Procedures.
Evaluation of disclosure controls and procedures.
As of the end of the period covered by this report, we conducted an
evaluation, under the supervision and with the participation of our management
including our principal executive officer and principal financial officer, of
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 on this evaluation, the
principal executive officer and principal financial officer concluded that our
disclosure controls and procedures were effective in ensuring that information
required to be disclosed by us in the reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in applicable rules and forms and that such information is
accumulated and communicated to our management, including our principal
executive officer and principal financial officer, in a manner that allows
timely decisions regarding required disclosure.
Changes in internal controls over financial reporting.
There was no change in our internal control over financial reporting
during our most recently completed fiscal quarter that has materially affected,
or is reasonably likely to materially affect, our internal control over
financial reporting.
PART II - OTHER INFORMATION
Item 1A. Risk Factors.
In addition to the other information set forth in this report, you
should carefully consider the factors discussed in Item 1A - "Risk Factors" in
our annual report on Form 10-K for the year ended August 31, 2007, which could
materially affect our business, financial condition or future results of
operations. The information presented below updates those risk factors and
should be read in conjunction with the risk factors and information disclosed in
that Form 10-K. The risks discussed in our annual report on Form 10-K, as
updated in this report, are not the only risks facing us. Additional risks and
uncertainties not currently known to us or that we currently deem to be
immaterial also may materially adversely affect our business, financial
condition and/or results of operations.
We have not yet received pre-market approval for our BSD-2000 and MicroThermx
100 systems, which is necessary for us to commercially market these systems in
the U.S.
We have not yet received pre-market approval for our BSD-2000 and
MicroThermx 100 systems. Obtaining these pre-market approvals from the FDA is
necessary for us to commercially market these systems in the United States.
Obtaining approvals is a lengthy and expensive process. On December 31, 2007, we
received a letter from the FDA denying our application for pre-market approval
of the BSD 2000 and providing guidance regarding amendments needed to make the
BSD-2000 submission approvable. We may not be able to obtain these approvals on
a timely basis, if at all, and such failure could harm our business prospects
substantially. Further, even if we are able to obtain the approvals we seek from
the FDA, the approvals granted might include significant limitations on the
indicated uses for which the products may be marketed, which restrictions could
negatively impact our business.
21
Item 4. Results of Votes of Security Holders.
The annual meeting of shareholders of the Company was held on February
1, 2008. The shareholders voted, either in person or by proxy, on the following
proposals. The directors listed below were elected, and all other proposals
submitted to a vote of the shareholders were approved, with the results of the
shareholder vote as follows:
1 The following six directors were elected to hold office until the
next annual meeting or until their successors are duly elected and
qualified:
Votes
Votes For Withheld Total Voted
----------- ---------- ------------
Paul F. Turner 17,107,993 1,446,815 18,554,808
Hyrum A. Mead 17,117,993 1,436,815 18,554,808
Gerhard W. Sennewald 17,107,943 1,446,865 18,554,808
Steven G. Stewart 17,184,635 1,370,173 18,554,808
Michael Nobel 17,184,735 1,370,073 18,554,808
Douglas P. Boyd 17,184,735 1,370,073 18,554,808
2. To approve an amendment and restatement of the Company's Amended
and Restated 1998 Directors Stock Plan to increase the number of
shares of common stock reserved for issuance under the plan from
1,000,000 to 1,500,000:
For 11,402,489
Against 1,740,119
Abstain or broker non-vote 5,412,200
3. To approve an amendment and restatement of the Company's Amended
and Restated 1998 Stock Incentive Plan to increase the number of
shares of common stock reserved for issuance under the plan from
2,677,300 to 3,427,300:
For 11,437,845
Against 1,699,413
Abstain or broker non-vote 5,417,550
4. To approve an amendment and restatement of the Company's Amended
and Restated 1998 Stock Incentive Plan to increase the number of
shares that may be awarded to each participant:
For 11,491,345
Against 1,648,763
Abstain or broker non-vote 5,414,700
5. To approve an amendment and restatement of the Company's Amended
and Restated 1998 Stock Incentive Plan to extend the termination
date of the plan from February 9, 2008 to ten years from the date
the plan is adopted by the Board of Directors, or the date the
plan is approved by the shareholders, whichever is earlier,
subject to earlier termination by the Board of Directors:
For 11,603,042
Against 1,520,066
Abstain or broker non-vote 5,431,700
22
6. To ratify the selection of Tanner LC as the Company's independent
registered public accountants for the fiscal year ending August
31, 2008:
For 17,163,021
Against 1,356,441
Abstain 35,346
7. To transact such other business as may properly come before the
Annual Meeting or any adjournment or postponement thereof:
For 16,920,614
Against 1,558,687
Abstain 75,507
Item 5. Other Information,
On February 1, 2008, the stockholders of the Company approved
amendments to the Company's Amended and Restated 1998 Directors Stock Plan and
Amended and Restated 1998 Stock Incentive Plan. A copy of each plan is filed as
Exhibits 10.1 and 10.2 to this Form 10-Q, and incorporated by reference herein.
Please also see Item 4 above and the Company's definitive proxy statement filed
on January 3, 2008 for a description of these amendments.
Item 6. Exhibits.
The following exhibits are filed as part of this report:
Exhibit No. Description of Exhibit
----------- ----------------------
10.1 Second Amended and Restated 1998 Directors Stock Plan
incorporated by reference to Appendix A of the Company's
definitive proxy statement filed on January 3, 2008 (File
No. 001-32526)
10.2 Second Amended and Restated 1998 Stock Incentive Plan
incorporated by reference to Appendix B (File No.
001-32526)
31.1 Certification of Principal Executive Officer Required
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Principal Accounting Officer Required
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Principal Executive Officer Required
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Principal Accounting Officer Required
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
23
SIGNATURES
Pursuant to the requirements 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: April 9, 2008 /s/ Hyrum A. Mead
--------------------------------------------
Hyrum A. Mead
President (Principal Executive Officer)
Date: April 9, 2008 /s/ Dennis P. Gauger
--------------------------------------------
Dennis P. Gauger
Chief Financial Officer (Principal
Accounting Officer)
24
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