UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
|X| ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Fiscal Year Ended August 31, 2006
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 0-10783
BSD MEDICAL CORPORATION
(Name of Small Business Issuer 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, UT 84119
(Address of Principal Executive Offices) (Zip Code)
(801) 972-5555
(Issuer's Telephone Number)
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 is not required to file reports pursuant to Section 13
or Section 15(d) of the Exchange Act. [ ]
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act 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 in this form, 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]
State the issuer's revenues for its most recent fiscal year: $2,898,402.
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was sold, or the average bid and asked price of such common equity, as of a
specified date within the past 60 days. (See definition of affiliate in Rule
12b-2 of the Exchange Act.): $58,488,953 as of November 20, 2006.
State the number of shares outstanding of each of issuers classes of common
equity, as of the latest practicable date: 21,040,186 shares of common stock,
par value $0.001, as of November 20, 2006.
Documents Incorporated by Reference: None.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
-----------------------
Overview
--------
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 has successfully created a substantial 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 to treat enlarged prostate symptoms, to provide
substantial 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, including the BSD-2000 and BSD-500 families of systems and the new
MicroThermX 100 microwave thermal ablation system announced this year, 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 including general pelvic and abdominal tumors. Our
cancer treatment systems have been used to treat thousands of patients
throughout the world, and 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 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.
3
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. Our financial model in the higher production environment of established
commercial sales is to achieve a 60% gross margin on systems and an 80% gross
margin on service agreements and disposable applicators used with our
MicroThermX 100 system.
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. We anticipate submitting our MicroThermX 100 system for FDA approval
during our fiscal 2007 year. 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.
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, menorrhagra (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 develop 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.
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 pioneering 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 subsequently on October 31, 1997 entered into an agreement
with investors Oracle Strategic Partners, L. P. and Charles Manker. Together we
established a new company, TherMatrx, Inc. TherMatrx received capital from these
investors to conduct clinical trials, and after obtaining FDA approval in July
2001, the funding to commercialize the development. We were compensated for
providing manufacturing, regulatory and engineering support to assure the
success of the new company.
4
On July 15, 2004, TherMatrx, Inc. was sold to American Medical Systems
Holdings, Inc. (AMS). Our part of the total proceeds from this sale was
approximately 25%. A portion of the payout from the sale was based on
contingency payments. By the close of fiscal 2006, we had concluded the receipt
of contingency payments from the TherMatrx sale; the payout to us, including
contingency payments, being approximately $33.5 million.
Our Contributions to Cancer Therapy
-----------------------------------
Despite the massive attention given to cancer prevention and treatment,
the American Cancer Society estimates that 1,399,790 new cancer cases will be
diagnosed and that 564,830 Americans will die from cancer during 2006. 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.
Our cancer treatment systems have been developed to both kill cancer
directly with heat and to increase the effectiveness of the primary cancer
treatment used with it. 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.
Some cancers, such as certain cancers of the liver, prostate, bone
metastases and even lung cancer can be killed using heat alone. For these
treatments we have developed the MicroThermX 100 thermal ablation system that is
used to kill cancerous tumors at high temperatures as a stand-alone therapy. The
treatment of many cancers is generally prescribed with one or more of the
primary cancer therapies noted above. 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
5
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.
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 degrees C and 45 degrees C (104 degrees F to 113 degrees F). 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.
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
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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 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
antennae that focus radio frequency 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, or MRI, so that the treatment in progress can be observed, and
temperatures can be monitored through images colorized to depict gradation of
temperature levels (thermography).
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 three dimensional, or 3D, steering of
electromagnetic energy, as well as the ability to be integrated with MRI.
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. Formal submission for FDA approval of the BSD-2000 was made in March
2006. We sought and obtained regulatory approval for the sale of the BSD-2000 in
the People's Republic of China during 2005.
The MicroThermX 100 thermal ablation system was announced in 2006 and
does not yet have FDA approval. Submission for FDA approval is expected during
2007, with a potential for obtaining a general FDA approval for the MicroThermX
100 during 2007.
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.
7
Our Products and Services
-------------------------
We have developed the technology and products required to approach
thermal ablation and hyperthermia cancer therapy through three different
techniques, which collectively allow cancer to be treated virtually anywhere in
the body:
o Thermal ablation destroys cancer at high temperatures through
focused microwave energy.
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.
MicroThermX 100. Our MicroThermX 100 has been developed to treat
cancerous tissue percutaneously, laparoscopically or surgically. The MicroThermX
100 utilizes precision-guided microwave energy to ablate cancerous tissue. The
MicroThermX 100 includes a computer driven control system, temperature sensors
and a disposable applicator. The system is currently being prepared for FDA
510(k) clearance. The advanced features and capabilities of the MicroThermX 100,
were made possible by our years of research, design and development in the
discipline of thermal medicine technology, supported by leading research centers
throughout the world (see reference to these in the section for the BSD-2000).
Disposable applicators for the MicroThermX 100 are used to treat
different types of tumors, and are especially designed according to the method
by which they will be used in treatment, whether by surgeons or interventional
radiologists.
BSD-500 Systems. Our BSD-500 systems are used to deliver either
superficial or interstitial hyperthermia therapy or both. There are four
configurations of the BSD-500. The BSD-500i-4 and BSD-500i-8 provide
interstitial hyperthermia treatment using four or eight channel generators,
respectively. Each channel can control three interstitial applicators. The
BSD-500c-4 and BSD-500c-8 provide both superficial and interstitial hyperthermia
treatments using four or eight channel generators. These systems include a touch
screen display monitor by which the operator controls the hyperthermia
treatment, computer equipment and software that controls the delivery of
8
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
hyperthermic microwave energy to cancerous tumors, including those located deep
within the body. These systems include a computer and software that control the
delivery of microwave energy to the tumor, a microwave energy generator, an
amplifier that boosts the microwave power, and a special applicator that
delivers the microwave energy to the patient lying in a prone position on a
specially designed support table. The BSD-2000 systems are able to direct, focus
and deliver microwave energy deep within the body by precisely "steering" the
energy to the tumor from an array of cylindrical antennae. The basic BSD-2000
has eight microwave antennae enabling this electronic steering of energy within
the patient's body. The BSD-2000/3D has 24 microwave antennae enabling
additional electronic steering along the long axis of the body. The 3D steering
is particularly useful when implemented with a magnetic resonance system that is
capable of non-invasive 3D imaging showing the heated regions, thus permitting
the 3D steering to more accurately target the energy to the tumor site.
The BSD-2000 systems have not yet received pre-market approval from the
FDA for commercial marketing in the United States, but the BSD-2000 has obtained
an investigational device exemption, or IDE, for sale in the United States for
research purposes only. We have also certified the BSD-2000 family for the CE
Mark required for export into certain European countries 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.
Development of the BSD-2000, the BSD-2000/3D and the BSD-2000/3D/MR has
required substantial effort involving the cooperative work of such American
research institutions as Duke University, Northwestern University, University of
Southern California, Stanford University, University of Utah and University of
Washington St. Louis. Contributing European research institutions include Daniel
den Hoed Cancer Center of the Academisch Ziekenhuis (Rotterdam, Netherlands),
Haukeland University Hospital (Bergen, Norway), Dusseldorf University Medical
School, Tubingen University Medical School, Essen University Hospital, Charite
9
Medical School of Humboldt University (Berlin), Luebeck University Medical
School, Munich University Medical School Grosshadern, Interne Klinik Argirov of
the Munich Comprehensive Cancer Center, University of Erlangen (all of Germany),
University of Verona Medical Center (Italy), Graz University Medical School
(Austria) and Kantonsspital Aarau (Switzerland).
BSD-2000/3D. Through research funded by the National Cancer Institute
in the United States and supportive efforts by other domestic and international
research institutions, we enhanced the BSD-2000 to create the new BSD-2000/3D.
The BSD-2000/3D adds three-dimensional steering of deep focused energy, as
opposed to the two-dimensional steering of energy available in the BSD-2000,
delivering even more precise heating the tumor. As part of our international
collaborative research efforts, sophisticated treatment planning software for
the BSD-2000/3D has also been developed.
As previously noted, we have not yet submitted to the FDA a pre-market
approval application for the BSD-2000/3D. However, we have obtained the CE Mark
necessary to export the BSD-2000/3D to certain European countries and other
countries requiring CE Mark certification.
BSD-2000/3D/MR. As a further enhancement of the BSD-2000/3D, we have
added to it the option of concurrent magnetic resonance imaging, or MRI, used
for monitoring the delivery of deep hyperthermia therapy. Using sophisticated
microwave filtering and imaging software, the BSD-2000/3D/MR allows an MRI
system to be interfaced with and operate simultaneously with a BSD-2000/3D. The
development of MRI treatment monitoring is a significant breakthrough in the
development of hyperthermic oncology primarily because it allows non-invasive
"on-line" review of hyperthermic treatment progress.
We installed and tested the first BSD-2000/3D/MR system at a leading
German oncological research institution, the Clinic of Medical Oncology of the
Klinikum Gro(beta)hadern Medical School of Ludwigs-Maximilians-Universitat
Munchen, in Munich, Germany. We installed a second BSD-2000/3D/MR system at the
Department of Radiology of Charite University Medical School of Humboldt
University in Berlin, Germany, as part of a collaborative effort with Siemens
Medical Systems. The funding for purchase and development of these systems was
provided by the German government and public foundation funds.
As is the case for the BSD-2000/3D, we have not yet submitted to the
FDA a pre-market approval application for the BSD-2000/3D/MR. We can, however,
market the BSD-2000/3D/MR in Europe as we have CE Mark approval for the
BSD-2000/3D provided 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
10
obtained Chinese regulatory approval during 2005, allowing the distributor to
begin to market in that country, opening the way for BSD-2000 systems to be sold
and installed in hospitals in China.
In August 2006, we engaged Richter7 as a public relations agency.
Richter7 has broad experience in the medical and healthcare industry. They have
worked with companies such as Medtronic, Ultradent, Myriad Genetics, Siemens,
Stryker/Howmedica and others to build awareness and recognition of new products
in the marketplace.
Anticipating an expanding need for present and future sales and
marketing, especially with the potential FDA approval for the BSD-2000 and the
MicroThermX 100, we hired Brian Ferrand, a seasoned Vice President of Sales, in
September 2005, and have increased our sales, marketing and marketing support
organization to ten people. The primary mission of this group is to provide
sales and pre-market preparation for our systems.
Medizin Technik is our exclusive distributor of hyperthermia systems in
Germany, Austria and Switzerland and to certain medical institutions in Belgium
and the Netherlands. Medizin Technik is required to use best efforts to sell our
product within its territory. Due to the limited number of systems that are sold
through this relationship, we do not have pre-negotiated price terms with
Medizin Technik. If Medizin Technik identifies a potential customer, it will
negotiate the price of a hyperthermia system with us, purchase the system, and
resell the system to the customer on terms it negotiates with the customer. Our
distributorship agreement with Medizin Technik runs from year-to-year and may be
terminated by either party by providing written notice to the other party before
December 31 and automatically terminates upon the occurrence of certain events,
including the retirement or death of Dr. Sennewald. Dr. Sennewald is a director
and shareholder of BSD and of Medizin Technik.
Our sales and marketing strategy involves three main components:
o promoting acceptance by the scientific community and
cancer-treating healthcare professionals of hyperthermia therapy;
o disseminating information about and marketing our hyperthermia
therapy systems to the scientific community, cancer-treating
healthcare professionals, cancer patients and the general public;
and
o working to continuously improve third-party reimbursement for
medical services performed with our products.
We disseminate information about our company and our hyperthermia
therapy systems by encouraging articles about hyperthermia therapy to be
published in scientific journals, periodicals and other publications, and
promoting dissemination of BSD information through television, radio and other
media outlets. We post information about our products on our web site,
www.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.
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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,
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. 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 BSD's
business, financial condition and results of operations, or that reimbursement,
existing or in the future, will be adequate for all customers.
Competition
-----------
Competition in the medical products industry is intense. We believe
that established product lines and cancer therapies, FDA approvals, know-how and
reputation in the industry are key competitive factors. Currently, only a few
companies besides BSD have received FDA approval to manufacture and sell
hyperthermia therapy systems within the United States, including U.S.
Labthermics and Celsion Corporation. Celsion 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.
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,
12
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.
Although we have not currently entered the thermal ablation market with
cancer treatment systems, we anticipate that future competitors in that market
will include RadioTherapeutics, a division of Boston Scientific Corporation,
Valleylab, a division of Tyco Healthcare, which is a division of Tyco
International, and Rita Medica. Microsulis Limited is developing microwave
technologies for tumor ablation, but is not commercially active in selling tumor
ablation systems at this time.
Product Service
---------------
We provide a 12-month warranty and record a liability for the warranty
following installation on all cancer treatment systems and a 90-day limited
warranty on individual components. We install and service the hyperthermia
systems we sell to domestic customers. In addition, we or our consultants
provide technical and clinical training to our customers. Subsequent to the
applicable warranty period, we offer our domestic customers full or limited
service contracts.
Generally, our distributors install and service systems sold to foreign
customers and are responsible for managing their own warranty programs for their
customers, including labor and travel expenses. We provide warranties for the
replacement and/or repair of parts for 12 months for systems sold
internationally through distributors and for 90 days for individual components.
Spare parts are generally purchased by the distributors and stored at the
distributors' maintenance facilities to allow prompt repair. Distributor service
personnel are usually trained at customer sites and at our facilities in Salt
Lake City, Utah.
Production
----------
We manufacture and test our systems and products at our facilities in
Salt Lake City, Utah. Our manufacturing facility is ISO 9001-1994 certified and
follows FDA quality systems regulations. Some equipment components we purchase
from suppliers are customized to our specifications. Key factors in our
manufacturing process are assembly and testing. We purchase component parts and
other materials from a variety of suppliers. We do not depend on a single
supplier for any item, and believe we can acquire materials and parts from
multiple sources on a timely basis.
Product Liability Exposure
--------------------------
The manufacturing and marketing of medical devices involves an inherent
risk of product liability. Because our products are intended to be used in
hospitals on patients who may be physiologically unstable and severely ill, we
are exposed to potential product liability claims. We presently carry product
13
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.
Although our MicroThermX 100 system will be filed for FDA approval as a
510(k) submission, 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.
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 under 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. A PMA submission was made to the
FDA for the BSD-2000 in March 2006.
Foreign countries, in which our products are or may be sold, have
regulatory requirements that can vary widely from country to country. Sales into
the European Union, or EU, require compliance with the Medical Devices
Directive, or MDD, and require us to obtain the necessary certifications to have
a CE Mark affixed to our products. We have obtained necessary ISO certification
of our quality, development, and manufacturing processes, and we have
successfully completed the CE Mark testing and Annex II audit. This allows us to
certify our own products and to affix the CE Mark label on them. However, we
must maintain compliance with all current and future directives and requirements
to maintain ISO certification and to continue to affix the CE Mark, and there
can be no assurance that we will continue to maintain compliance with regulatory
requirements imposed on us.
After we receive FDA approval to distribute a medical device, we
continue to have ongoing responsibilities under the Federal Food, Drug, and
Cosmetic Act and FDA regulations. The FDA reviews design and manufacturing
practices, labeling, record-keeping, and required reporting of adverse
experiences. All medical devices must be manufactured in accordance with
regulations specified in the FDA Quality System regulations, or QSR, and in
compliance with the ISO and other applicable standards. In complying with these
regulations, we must continue to expend time, money and effort in the areas of
14
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
15
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. In addition,
five initial patents were assigned to TherMatrx, for which we obtained a
license, four subsequent patents were obtained and assigned to TherMatrx, and we
obtained one patent license from the National Institutes of Health. Three new
U.S. patent applications are pending. We believe that our patents represent the
early pioneering and dominant patents in this field.
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 integration of magnetic resonance with 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 an 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, the exclusive patent obtained from UCSF, and our enhancements to such
systems involve incorporating some of the Clini-Therm rights we acquired into
such systems. This involved only a one-time cash payment with no continuing
costs.
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.
16
Research and Development
------------------------
Research and development expenses for fiscal 2006 were $1,251,956
compared to $859,614 for fiscal 2005, an increase of $392,342, or 46%. Research
and development expenses in fiscal 2006 related to the following:
o completion of our commercial version of the BSD-2000 with complete
modernization of the computer system
o addition of the Sigma Ellipse phased array applicator
o a complete new design of the BSD-2000 patient support system
o enhancements to the BSD 500 and 2000 systems including language
translations to German and Chinese
o development of various spiral array applicator systems to
compliment the BSD-500
o completion of regulatory certifications of the improvements of the
BSD-500 and BSD-2000 systems
o PMA filing for the BSD-2000 system
o development of the first model of the MicroThermX 100 microwave
ablation system
o development of new microwave ablation disposable applicators and
technical research to evaluate the various treatment sites and
diseases suitable for the application of the MicroThermX 100.
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 costs, risks
and uncertainties that could aversely affect our projections, outlook and
operating results.
Company History
---------------
BSD was originally incorporated under the laws of the State of Utah on
March 17, 1978. In July 1986, BSD was reincorporated in Delaware.
Employees
---------
As of August 31, 2006, we had 39 employees; 36 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.
17
Risks Related to Our Business
-----------------------------
Our future operating results are highly uncertain. Before deciding to
invest in BSD Medical or to maintain or increase your investment, you should
carefully consider the risks described below, in addition to the other
information contained in this annual report on Form 10-KSB. 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 2006, we recorded a net profit of
$9,249,496 which eliminated the accumulated deficit and resulted in positive
retained earnings of $498,042.
Our net profit was primarily due to the sale of our ownership in
TherMatrx, to American Medical Systems Holdings, Inc., or AMS. Substantially all
revenues from this sale have now been received with no significant future
revenues expected. 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 have been unable to do this in the past and we may
be unable to do so in the future, 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 not gained 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 be able to obtain profitable recurring operations.
Sales of our product could be significantly reduced if government,
private health insurers and other third-party payors do not provide sufficient
coverage or reimbursement.
Our success in selling our products will depend in large part on the
extent to which reimbursement for the costs of our products and related
treatments are available from government health agencies, private health
insurers and other third-party payors. Despite the existence of general
18
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 also may refuse to pay 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.
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.
A limited number 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
19
new distribution channels can take time and considerable expense. We project
that sales and marketing expenses will increase substantially in the future as
compared to past years. This added expense could have an adverse effect on our
future financial performance that is greater than any potential increases in
sales.
In addition, there can be no assurance that our channels of
distribution that have been successful in the past will be successful in the
future. We have derived most of our revenue from sales in Europe through our
distributor Medizin-Technik, GmbH, which also purchases equipment components and
parts from us. Medizin-Technik is controlled by Dr. Sennewald, one of our
directors. The loss or ineffectiveness of Medizin-Technik as a distributor and
significant customer could result in lower revenue.
We are subject to government regulations that can delay our ability to
sell our products and cause us to incur substantial expenses.
Our research and development efforts, pre-clinical tests and clinical
trials, and the manufacturing, marketing, distribution and labeling of our
products are subject to extensive regulation by the FDA and comparable
international agencies. The process of obtaining FDA and other required
regulatory approvals is lengthy and expensive and our financial resources are
limited.
We have not yet received pre-market approval for our BSD-2000 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. 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.
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.
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.
20
In the past, we have participated in substantial litigation regarding
our patent and other intellectual property rights in the medical device
industry. We have previously filed lawsuits for patent infringement against
three of our competitors and subsequently settled all three of those lawsuits.
Additional litigation against other parties may be necessary in the future to
enforce our intellectual property rights, to protect our patents and trade
secrets, and to determine the validity and scope of our proprietary rights. This
litigation may require more financial resources than are available to us. We
cannot guarantee that we will be able to successfully protect our rights in
litigation. Failure to successfully protect our rights in litigation could
reduce our ability to be competitive and generate sales and profitability.
A product liability settlement could exceed our ability to pay.
The manufacturing and marketing of medical devices involves an inherent
risk of product liability. Because our products are intended to be used in
hospitals on patients who may be physiologically unstable and severely ill, we
are exposed to potential product liability claims. We presently carry product
liability insurance with coverage limits of $1 million. Our product liability
insurance does not cover intended injury, injury or damage resulting from the
intoxication of any person, payment of workers' compensation benefits, injury of
our own employee, injury or damage due to war, damage to property that we own,
damage to our work, loss of use of property, patent infringements, pollution
claims, interest payments, depreciation of property, or injury or damage
resulting from asbestos inhalation. We are responsible to pay the first $10,000
resulting from any claim up to a maximum of $50,000 in one year. We cannot
assure you that our product liability insurance will provide adequate coverage
against potential claims that might be made against us. If we were to be subject
to a claim in excess of our coverage or to a claim not covered by our insurance
and the claim succeeded, we would be required to pay the claim from our limited
resources, which would reduce our limited capital resources and liquidity and
reduce capital we could otherwise use to obtain approvals for and market our
products. In addition, liability or alleged liability could harm our business by
diverting the attention and resources of our management and by damaging our
reputation.
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 of the Board, Senior Vice President, and Chief Technology
Officer, 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
stock, investors may face difficulties in selling shares at attractive prices
21
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.
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.
Anti-takeover provisions in our certificate of incorporation may have a
possible negative effect on our stock price.
Certain provisions of our certificate of incorporation and bylaws may
make it more difficult for a third party to acquire, or discourage a third party
from attempting to acquire, control of us. We have in place several
anti-takeover measures that could discourage or prevent a takeover, even if an
acquisition would be beneficial to our stockholders. The increased difficulties
faced by a third party who wishes to acquire us could adversely affect our stock
price.
ITEM 2. DESCRIPTION OF PROPERTIES
-------------------------
Our office, production and research facilities are located in Salt Lake
City, Utah. The complete headquarters and production facility occupies
approximately 20,000 square feet. In November 2002, we renewed our lease for
five years, which includes payments of approximately $82,000 per year for five
years adjusted annually for increases in the cost of living based on the
Consumer Price Index for Urban Consumers. We have an option to purchase the
building for $1,000,000 upon 60 days notice for six years beginning December 1,
2002. Thereafter, the purchase price increases by $50,000 each year, and the
22
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. Our lease on this building expires in
November of 2007.
ITEM 3. LEGAL PROCEEDINGS
-----------------
There are no legal proceedings pending against or being taken by BSD
Medical Corporation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
The Company's Annual Meeting of Shareholders was held on February 13,
2006. Of the 20,519,632 shares of common stock outstanding and entitled to vote
at the meeting, 14,096,138 shares were present, either in person or by proxy.
The following proposals were submitted to a vote of security holders at the
meeting;
1. To elect six members of the Board of Directors to serve until the next
annual meeting of the Company and their successors have been duly
appointed and are qualified.
2. To approve and ratify an amendment to the 1998 Director Stock Plan to
extend the term of the plan and to increase the compensation paid to
directors under the plan.
3. To ratify the selection of Tanner LC as the Company's independent
registered public accounting firm for the fiscal year ending August 31,
2006.
The above proposals were approved and the results of the voting are
summarized in the following table:
Proposal For Against Withheld Abstain
-------- --- ------- -------- -------
1. Elect Board of Directors:
o Paul F. Turner 14,019,420 -- 76,718 --
o Hyrum A. Mead 14,027,420 -- 68,718 --
o Gerhard W. Sennewald 14,018,820 -- 77,318 --
o Steven G. Stewart 14,062,120 -- 34,018 --
o Michael Nobel 14,070,120 -- 26,018 --
o Douglas P. Boyd 14,062,120 -- 34,018 --
2. Approve and ratify an 13,930,382 163,906 -- 23,350
amendment to the 1998
Director Stock Plan
3. Ratify selection of 14,076,780 8,335 -- 11,023
Tanner LC as independent
registered public
accounting firm
23
PART II
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS
------------------------------------------------------------------------
ISSUER PURCHASES OF EQUITY SECURITIES
-------------------------------------
On July 9, 2005, the American Stock Exchange approved the listing for
BSD Medical Corporation and the 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 AMEX for the quarters in fiscal year
2005 and 2006. The amounts reflect inter-dealer prices, without retail mark-up,
markdown or commission, and may not represent actual transactions.
Bid
--------------------------
Quarter Ended: High Low
--------------------------------------------------------------------
November 30, 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
November 30, 2005.............. 9.47 4.25
February 28, 2006............... 5.78 4.10
May 31, 2006..................... 7.13 4.40
August 31, 2006.................. 6.15 4.40
As of August 31, 2006, there were approximately 542 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 OR PLAN OF OPERATION
---------------------------------------------------------
This Management's Discussion and Analysis or Plan of Operation and
other parts of this annual report on Form 10-KSB 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 annual
report on Form 10-KSB. All information presented herein is based on our fiscal
year ended August 31, 2006. We assume no obligation to revise or update any
forward-looking statements for any reason, except as required by law.
24
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 for cancer as provided through
microwave/RF systems.
On July 15, 2004 TherMatrx, Inc. was sold to American Medical Systems
Holdings, Inc. (AMS). Our part of the total proceeds from this sale was
approximately 25%. A portion of the payout from the sale was based on
contingency payments. By the close of fiscal 2006 we had received the last of
the contingency payments from the TherMatrx sale. The total payout to us,
including contingency payments, was approximately $33.5 million.
Our accumulated deficit since inception decreased from $8,751,454 as of
August 31, 2005, to positive retained earnings of $498,042 as of August 31, 2006
due to net income for fiscal 2006 of $9,249,496 as compared to a net income of
$3,321,692 in fiscal 2005. The primary reason for the net income in fiscal 2006
and fiscal 2005 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 $2,706,214 and $1,844,321 for the
years ended August 31, 2006 and 2005, respectively. Service revenue was $192,188
and $176,783 for the years ended August 31, 2006 and 2005, respectively.
We derived $689,086, or 24%, of our revenue in fiscal 2006 from sales
to related parties. All of the related party revenue was for the sale of the
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.
In fiscal 2006, we derived $2,209,316, or 76%, of our total revenue as
compared to $1,033,632, or 51%, in fiscal 2005 from non-related party sales. Our
fiscal 2006 non-related party revenue consisted of sales of BSD-500 and BSD-2000
systems for approximately $1,902,175. The balance of our non-related party
revenue consisted of consumable devices of $126,896, service contracts of
$18,245, billable labor of $17,250 and consulting revenue of $144,750.
Cost of sales for the year ended August 31, 2006 included raw material
and labor costs. Research and development expenses include expenditures for new
product development and development of enhancements to existing products.
25
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, so shipment is
deemed to have occurred when the product is delivered to the transportation
carrier. Most system sales do not include installation. If installation is
included as part of the contract, revenue is not recognized until installation
has occurred, or until any remaining installation obligation is deemed to be
perfunctory. Some sales of cancer treatment systems may include training as part
of the sale. In such cases, the portion of the revenue related to the training,
calculated based on the amount charged for training on a stand-alone basis, is
deferred and recognized when the training has been provided. The sales of our
cancer treatment systems do not require specific customer acceptance provisions
and do not include the right of return except in cases where the product does
not function as guaranteed by BSD. We provide a reserve allowance for estimated
returns. To date, returns have not been significant.
Revenue from manufacturing services is recorded when an agreement with
the customer exists for such services, the services have been provided, and
collection is reasonably assured. Revenue from training services is recorded
when an agreement with the customer exists for such training, the training
services have been provided, and collection is reasonably assured. Revenue from
service support contracts is recognized on a straight-line basis over the term
of the contract, which approximates recognizing it as it is earned.
Our revenue recognition policy is the same for sales to both related
parties and non-related parties. We provide the same products and services under
the same terms for non-related parties as with related parties. Sales to
distributors are recognized in the same manner as sales to end-user customers.
Deferred revenue and customer deposits payable include amounts from service
contracts as well as cash received for the sales of products, which have not
been shipped.
Inventory Reserves. As of August 31, 2005, we had recorded a reserve
for potential inventory impairment of $80,000. During fiscal 2006, we reduced
our inventory reserve from $80,000 to $40,000. In addition to the reduction of
inventory reserve we also wrote off $24,003 in obsolete inventory. We
periodically review our inventory levels and usage, paying particular attention
to slower-moving items. If projected sales for fiscal 2007 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
26
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, 2006 and 2005
--------------------------------------------------------------------------------
Revenue. Total revenue for fiscal 2006 was $2,898,402 compared to
$2,021,104 for fiscal 2005, an increase of $877,298, or 43%. The increase in
total revenue was primarily due to an increase in sales of our BSD-2000 and BSD
500 systems during fiscal 2006. Product sales increased to $2,706,214 in fiscal
2006 from $1,844,321 in fiscal 2005, an increase of $861,893, or 47%. Service
revenue increased to $192,188 in fiscal 2006 as compared to $176,783 in fiscal
2005 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.
Related Party Revenue. We derived $689,086, or 24%, of our total
revenue in fiscal 2006 from sales to related parties as compared to $987,472, or
49%, in fiscal 2005. All of the related party revenue in fiscal 2006 was for
BSD-2000 and BSD-500 systems and various component parts sold to
Medizin-Technik. Sales to Medizin-Technik may fluctuate significantly depending
on Medizin-Technik's anticipated sales and ability to place orders in Europe.
Since the sale of our ownership in TherMatrx we no longer consider TherMatrx a
related party.
Non-related Party Revenue. In fiscal 2006, we derived $2,209,316, or
76%, of our total revenue as compared to $1,033,632, or 51%, in fiscal 2005 from
non-related party sales. Our fiscal 2006 non-related party revenue consisted of
sales of BSD-500 and BSD-2000 systems for $1,902,175. The balance of our
non-related party revenue consisted of consumable devices of $126,896, service
contracts of $18,245, billable labor of $17,250 and consulting revenue of
$144,750.
Cost of Sales. Cost of sales for fiscal 2006 was $1,716,640 compared to
$1,320,110 for fiscal 2005, an increase of $396,530 or 30%. This increase
resulted primarily from higher sales in fiscal 2006. Cost of sales to related
parties in fiscal 2006 decreased to $371,214 from $644,980, in fiscal 2005
primarily due to the decrease in related party sales. During fiscal 2006 and
2005 all of the related party costs were attributable to sales to
Medizin-Technik.
Gross Profit. Gross profit for the fiscal year ending August 31, 2006
was $1,181,762, or 41%, as compared to $700,994, or 35%, of total product sales
for the fiscal year ended August 31, 2005. The increase in gross profit margin
was primarily due to production efficiencies obtained from a higher volume of
hyperthermia system sales in the fiscal year ended August 31, 2006.
27
Research and Development Expenses. Research and development expenses
for fiscal 2006 were $1,251,956 compared to $859,614 for fiscal 2005, an
increase of $392,342, or 46%. Research and development expenses in fiscal 2006
related to the following:
o completion of our commercial version of the BSD-2000 with complete
modernization of the computer system, addition of the Sigma
Ellipse phased array applicator
o a complete new design of the BSD-2000 patient support system,
enhancements to the BSD 500 and 2000 systems including language
translations of the operating manuals to German and Chinese
development of various spiral array applicator systems to
compliment the BSD-500
o completion of regulatory certifications of the improvements of the
BSD-500 and BSD-2000 systems
o PMA filing for the BSD-2000 system, development of the first model
of the MicroThermX 100 microwave ablation system
o and development of new microwave ablation disposable applicators
o technical research to evaluate the various treatment sites and
diseases suitable for the application of the MicroThermX 100.
Inventory Impairment Expense. As of August 31, 2005, we had recorded a
reserve for potential inventory impairment of $80,000. During fiscal 2006, we
reduced our inventory reserve from $80,000 to $40,000. In addition to the
reduction of inventory reserve we also wrote off $24,003 in obsolete inventory.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for fiscal 2006 were $5,028,957 as compared to
$2,135,076 in fiscal 2005, an increase of $2,893,881, or 136%. This increase was
primarily due to increases in sales and marketing expense, and overall higher
payroll and employee benefits in fiscal 2006 as compared to fiscal 2005.
Interest Income. Interest income increased to $1,301,341 in fiscal 2006
as compared to $362,462 in fiscal 2005 due to increased investments, including
cash, generated from the sale of TherMatrx.
Other Income. Other income for fiscal 2006 was $18,256,306 compared to
$6,555,926 in fiscal 2005. This income resulted almost entirely from a gain
recognized on the sale of TherMatrx in fiscal 2006 and 2005.
Provision for Income Taxes. Income tax expense increased to $5,209,000
for fiscal 2006 from $1,303,000 in fiscal 2005.
28
Net Profit/ Loss. In fiscal 2006, we had after-tax net income of
$9,249,496 as compared to after tax net income in fiscal 2005 of $3,321,692. The
increase in after-tax net profit related to the sale of our interest in
TherMatrx.
Fluctuation in Operating Results. Our results of operations have
fluctuated in the past and may fluctuate in the future from year to year as well
as from quarter to quarter. Revenue may fluctuate as a result of factors
relating to the demand for thermotherapy systems and component parts supplied by
us to TherMatrx, market acceptance of our BSD hyperthermia systems, changes in
the medical capital equipment market, changes in order mix and product order
configurations, competition, regulatory developments and other matters.
Operating expenses may fluctuate as a result of the timing of sales and
marketing activities, research and development and clinical trial expenses, and
general and administrative expenses associated with our potential growth. For
these and other reasons described elsewhere, our results of operations for a
particular period may not be indicative of operating results for any other
period.
Liquidity and Capital Resources
-------------------------------
Since inception, we have generated accumulated retained earnings of
$498,042. We have historically financed our operations through cash from
operations, research grants, licensing of technological assets and issuance of
common stock. As of August 31, 2006, we had cash and available for sale
securities of $24,735,200 as compared to cash and available for sale securities
of $13,527,197 as of August 31, 2005.
We used $6,883,132 of cash in operating activities in fiscal 2006
compared to cash used of $2,723,482 in fiscal 2005. This was primarily a result
of gains on the sale of our TherMatrx shares of $18,016,272 and net income of
$9,249,496. In addition, in fiscal 2006 accounts receivable increased by
$922,163, accounts payable increased by $252,583, inventories increased by
$231,911, income tax payable increased by $2,271,469 and accrued expenses
increased by $296,737. Our investing activities resulted in net cash provided of
$7,729,216 relating to the proceeds of our sale in TherMatrx of $18,016,272
offset by purchase of investments of available for sale securities of
$10,073,884 and the purchase of certain property and equipment of $213,172. Cash
flows from financing activities consisted of proceeds from the exercise of stock
options of $424,336.
Based upon our financial performance in fiscal 2006, we believe our
$24,735,200 in cash and available for sale securities at August 31, 2006,
together with the funds generated from operations, will be sufficient to fund
our working capital and capital resources needs for at least the next 12 months.
On July 15, 2004 TherMatrx, Inc. was sold to American Medical Systems
Holdings, Inc. (AMS). Our part of the total proceeds from this sale was 25%. A
portion of the payout from the sale was based on contingency payments. By the
close of our fiscal year for 2006 we had received the last of the contingency
payments from the TherMatrx sale. The total payout to us, including contingency
payments, was approximately $33.5 million.
We expect to incur additional expenses related to the commercial
introduction of our BSD-2000 and MicroThermx systems, which will precede any
revenue from the sale of such systems. We project that our sales and marketing
29
expenses in fiscal 2007 will be consistent with fiscal 2006 to support the
commercial introduction of the BSD-2000 and MicroThermx systems.
We believe we can cover any cash shortfall with cost cutting or
available cash. If we cannot cover any such cash shortfall with cost cutting or
available cash, we would need to obtain additional financing. We cannot be
certain that any financing will be available when needed or will be available on
terms acceptable to us. 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.
The Company has no off balance sheet arrangements as August 31, 2006.
FORWARD-LOOKING STATEMENTS
With the exception of historical facts, the statements contained in
sections entitled "Management's Discussion and Analysis or Plan of Operation"
and "Business" are forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995, which reflect our current expectations
and beliefs regarding our future results of operations, performance and
achievements. These statements are subject to risks and uncertainties and are
based upon assumptions and beliefs that may or may not materialize. These
forward-looking statements include, but are not limited to, statements
concerning:
o our belief about the market opportunities for our products;
o our anticipated financial performance and business plan;
o our expectations regarding the commercial introduction of the
BSD-2000 and MicroThermx systems;
o our expectations that in a higher production environment of
established commercial sales we could achieve a 60% gross margin
on system sales and 80% gross margin on service agreements and
disposable applicators used with our MicroThermx 100 system;
o our expectations and efforts regarding FDA approvals relating to
the BSD-2000 and MicroThermx systems;
o our belief that FDA approval for the BSD-2000 system would greatly
contribute to our sales efforts;
o our development or acquisition of new technologies;
o our belief that our technology has application for numerous other
medical purposes;
o the amount of expenses we will incur for the commercial
introduction of the BSD-2000 and MicroThermx systems;
30
o the expectation that our need present and future sales and
marketing forces will expand;
o our belief that we can acquire materials and parts from multiple
sources on a timely basis;
o our belief that our current working capital and cash from
operations will be sufficient to fund our working capital and
capital resources needs for fiscal 2006; and
o our belief that we can cover any cash shortfall with cost cutting
or available cash.
We wish to caution readers that the forward-looking statements and our
operating results are subject to various risks and uncertainties that could
cause our actual results and outcomes to differ materially from those discussed
or anticipated, including the factors set forth in the section entitled "Risk
Factors" included elsewhere in this report. We also wish to advise readers not
to place any undue reliance on the forward-looking statements contained in this
report, which reflect our beliefs and expectations only as of the date of this
report. We assume no obligation to update or revise these forward-looking
statements to reflect new events or circumstances or any changes in our beliefs
or expectations, other than as required by law.
ITEM 7. FINANCIAL STATEMENTS
--------------------
BSD MEDICAL CORPORATION
Financial Statements
As of August 31, 2006 and for the Years Ended August 31, 2006 and 2005
Together with Report of Independent Registered Public Accounting Firm
31
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, 2006, and the related statements of income,
stockholders' equity, and cash flows for the years ended August 31, 2006 and
2005. 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
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, 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, 2006, and the results of its operations and its cash flows for the
years ended August 31, 2006 and 2005 in conformity with U.S. generally accepted
accounting principles.
Salt Lake City, Utah
November 29, 2006
F-1
BSD MEDICAL CORPORATION
Balance Sheet
August 31, 2006
--------------------------------------------------------------------------------
Assets
------
Current assets:
Cash and cash equivalents $ 2,179,094
Investments 22,556,106
Receivables, net of allowance for doubtful
accounts of $20,000 1,186,800
Related party trade receivables 261,543
Inventories, net 1,366,264
Deferred tax asset 178,000
Other current assets 120,277
---------------
Total current assets 27,848,084
Property and equipment, net 303,034
Note receivable 137,500
Patent, net of amortization of $10,678 21,250
---------------
$ 28,309,868
---------------
--------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 365,396
Accrued liabilities 545,113
Income taxes payable 1,539,946
Deferred revenue - current portion 17,912
---------------
Total current liabilities 2,468,367
---------------
Deferred revenue - less current portion 217,500
---------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value; 10,000,000
authorized, no shares issued and outstanding -
Common stock, $.001 par value; 40,000,000 shares
authorized; 21,023,668 shares issued and
outstanding 21,024
Additional paid-in capital 25,452,231
Deferred compensation (247,700)
Treasury stock, at cost (234)
Other comprehensive loss (99,362)
Retained earnings 498,042
---------------
Total stockholders' equity 25,624,001
---------------
$ 28,309,868
---------------
--------------------------------------------------------------------------------
See accompanying notes to financial statements. F-2
BSD MEDICAL CORPORATION
Statements of Income
Years Ended August 31,
--------------------------------------------------------------------------------
2006 2005
--------------------------------
Revenues:
Sales $ 2,209,316 $ 1,033,632
Sales to related parties 689,086 987,472
--------------------------------
2,898,402 2,021,104
--------------------------------
Costs and expenses:
Cost of sales 1,399,426 675,130
Cost of sales to related parties 317,214 644,980
Research and development 1,251,956 859,614
Selling, general, and administrative 5,028,957 2,135,076
--------------------------------
7,997,553 4,314,800
--------------------------------
Operating loss (5,099,151) (2,293,696)
--------------------------------
Other income (expense):
Gain on sale of equity interest 18,016,272 6,551,087
Interest income 1,301,341 362,462
Other 240,034 4,839
--------------------------------
19,557,647 6,918,388
--------------------------------
Income before income taxes 14,458,496 4,624,692
Income tax provision (5,209,000) (1,303,000)
--------------------------------
Net income $ 9,249,496 $ 3,321,692
--------------------------------
Income per common share - basic $ 0.45 $ 0.16
--------------------------------
Income per common share - diluted $ 0.42 $ 0.15
--------------------------------
Weighted average shares - basic 20,766,000 20,198,000
--------------------------------
Weighted average shares - diluted 22,174,000 21,453,000
--------------------------------
--------------------------------------------------------------------------------
See accompanying notes to financial statements. F-3
BSD MEDICAL CORPORATION
Statements of Stockholders' Equity
Years Ended August 31, 2006 and 2005
-------------------------------------------------------------------------------------------------------------------------------
Other Com- (Accumulated
Common Stock Additional Deferred prehensive Deficit) Treasury Stock
------------------ Paid-in Compen- Income Retained ---------------
Shares Amount Capital sation (loss) Earnings Shares Amount Total
-----------------------------------------------------------------------------------------------------
Balance, September 1,
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
Common stock issued
for:
Cash 644,991 645 423,691 - - - - - 424,336
Services 13,607 14 48,457 - - - - - 48,471
Income tax benefit
from exercise of
stock options - - 972,282 - - - - - 972,282
Amortization of
deferred compensation - - - 88,050 - - - - 88,050
Decrease in other
comprehensive income - - - - (136,301) - - - (136,301)
Deferred compensation - - 301,700 (301,700) - - - - -
Net income - - - - - 9,249,496 - - 9,249,496
-------------------------------------------------------------------------------------------------------
Balance, August 31,
2006 21,023,668 $ 21,024 $ 25,452,231 $ (247,700) $(99,362) $ 498,042 24,331 $ (234) $ 25,624,001
-------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements F-4
BSD MEDICAL CORPORATION
Statements of Cash Flows
Years Ended August 31,
--------------------------------------------------------------------------------
2006 2005
--------------------------------
Cash flows from operating activities:
Net income $ 9,249,496 $ 3,321,692
Adjustments to reconcile net income to
net cash used in operating activities:
Provision for doubtful accounts (22,500) 42,500
Depreciation and amortization 86,860 76,991
Gain on sale of investment in TherMatrx (18,016,272) (6,551,087)
Gain on sale of property - (1,050)
Amortization of deferred compensation 88,050 9,508
Stock issued for services 48,471 141,500
Decrease (Increase) in:
Receivables (922,163) (286,876)
Note receivable (137,500) -
Inventories (231,911) (393,937)
Deferred tax asset (74,000) 725,000
Other current assets 12,464 (81,675)
Increase (decrease) in:
Accounts payable 252,583 13,682
Income tax payable 2,271,469 513,704
Accrued liabilities 296,737 (175,539)
Deferred revenue 228,084 (39,895)
Deferred tax liability (13,000) (38,000)
--------------------------------
Net cash used in
operating activities (6,883,132) (2,723,482)
--------------------------------
Cash flows from investing activities:
Proceeds from sale of investment in
TherMatrx 18,016,272 6,551,087
Purchase of investments (10,073,884) (12,581,584)
Proceeds from sale of property - 1,050
Purchase of property and equipment (213,172) (110,856)
--------------------------------
Net cash provided by (used in)
investing activities 7,729,216 (6,140,303)
-------------------------------
Cash flows from financing activities-
proceeds from issuance of common stock 424,336 75,305
--------------------------------
Increase (decrease) in cash and cash
equivalents 1,270,420 (8,788,480)
Cash and cash equivalents, beginning of year 908,674 9,697,154
--------------------------------
Cash and cash equivalents, end of year $ 2,179,094 $ 908,674
--------------------------------
--------------------------------------------------------------------------------
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 in
Significant 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 interest in TherMatrx until July 15, 2004. On July 15,
2004, TherMatrx, Inc. was sold to American Medical
Systems Holdings, Inc. (AMS). The Company's part of the
total proceeds from this sale was approximately 25%. A
portion of the payout from the sale was based on
contingency payments. By the close fiscal year 2006 the
Company had received the last of the contingency payments
from the TherMatrx sale. The total payout to the Company,
including contingency payments, was approximately $33.5
million.
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
Investment 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, 2006 as available-for sale. The
short-term investments are recorded at fair value, with
net unrealized gains and losses reported as other
comprehensive income in the statements of stockholders'
equity. Realized gains and losses are included in the
statements of income.
Trade Accounts Receivable
Trade accounts receivable are carried at original invoice
amount less an estimate made for doubtful receivables
based on a review of all outstanding amounts on a monthly
basis. Management estimates an allowance 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.
--------------------------------------------------------------------------------
F-6
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
1. Organization Inventories
and Parts and supplies inventories are stated at the lower of
Significant cost or market. Cost is determined using the average cost
Accounting method. Work-in-process and finished goods are stated at
Policies the lower of the accumulated manufacturing costs or
Continued market. Provisions, when required, are made to reduce
excess and obsolete inventories to their estimated net
realizable value. The provision was $40,000 at August 31,
2006.
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
following estimated useful lives of the assets.
Equipment 2-5 years
Furniture and fixtures 5 years
Leasehold improvements 10 years
Leasehold improvements are depreciated over the shorter
of their estimated useful life or the remaining term of
the lease. Expenditures for maintenance and repairs are
expensed when incurred and betterments are capitalized.
Gains and losses on sales of property and equipment are
reflected in operations.
Investment in Joint Venture
The Company had an ownership interest in TherMatrx, a
corporate joint venture that is engaged in the
manufacture and sale of medical devices. The investment
was accounted for on the equity method of 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
TherMatrx, Inc. was sold to American Medical Systems
Holdings, Inc. (AMS). The Company's part of the total
proceeds from this sale was approximately 25%. A portion
of the payout from the sale was based on contingency
payments. By the close of fiscal year 2006 the Company
had received the last of the contingency payments from
the TherMatrx sale. The total payout to the Company,
including contingency payments, was approximately $33.5
million.
Patents
Patents are carried at cost and are being amortized over
17 years.
--------------------------------------------------------------------------------
F-7
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
1. Organization Warranty Reserve
and The Company provides limited warranties to its customers
Significant for products sold. Estimated future warranty obligations
Accounting are accrued each period. As of August 31, 2006, the
Policies accrued warranty reserve was approximately $31,000.
Continued During the fiscal years ended August 31, 2006 and 2005,
total warranty expense was $24,763 and $21,662,
respectively.
Income Taxes
The Company accounts for income taxes using the asset and
liability method. Under the asset and liability method,
deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences
between the financial statement carrying amounts of
existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences
are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes
the enactment date.
Income Per Common Share
The computation of basic income (loss) per common share
is based on the weighted average number of shares
outstanding during each year.
The computation of diluted earnings per common share is
based on the weighted average number of shares
outstanding during the year, plus the common stock
equivalents that would arise from the exercise of stock
options and warrants outstanding, using the treasury
stock method and the average market price per share
during the year. Common stock equivalents are not
included in the diluted loss per share calculation when
their effect is anti-dilutive. Options and warrants to
purchase 1,809,051 and 2,122,934 shares of common stock
at prices ranging from $.37 to $5.76 and $.10 to $2.54
per share were outstanding at August 31, 2006 and 2005,
respectively.
The shares used in the computation of the Company's basic
and diluted earnings per share are reconciled as follows:
2006 2005
--------------------------------
Weighted average number
of shares outstanding
- basic 20,766,000 20,198,000
Dilutive effect of stock
options 1,408,000 1,255,000
--------------------------------
Weighted average number
of shares outstanding,
assuming dilution 22,174,000 21,453,000
--------------------------------
--------------------------------------------------------------------------------
F-8
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
1. Organization Stock-Based Compensation
and The Company accounts for stock options granted to
Significant employees under the recognition and measurement
Accounting principles of APB Opinion No. 25, Accounting for Stock
Policies Issued to Employees, and related Interpretations, and has
Continued adopted the disclosure-only provisions of Statement of
Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation". Accordingly,
compensation costs are recognized in the financial
statements for options granted with an exercise price
less than the market value of the underlying common stock
on the date of grant. During the years ended August 31,
2006 and 2005, the Company recognized $88,050 and $9,508,
respectively, related to stock options granted to
employees with an exercise price less than the market
value of the underlying common stock. 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,
--------------------------------
2006 2005
--------------------------------
Net income - as reported $ 9,249,496 $ 3,321,692
Add: Stock-based employee compensation expense
included in reported net income, net of related
tax effects 88,050 9,508
Deduct: total stock based employee compensation
expense determined under fair value based
method for all awards, net of related tax
effects (749,586) (504,839)
--------------------------------
Net income - pro forma $ 8,587,960 $ 2,826,361
--------------------------------
Earnings per share:
Basic - as reported $ .45 $ .16
--------------------------------
Basic - pro forma $ .41 $ .14
--------------------------------
Diluted - as reported $ .42 $ .15
--------------------------------
Diluted - pro forma $ .39 $ .13
--------------------------------
--------------------------------------------------------------------------------
F-9
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 2006 2005
--------------------------------
Expected dividend yield $ - $ -
Expected stock price
volatility 68% - 76% 71% - 83%
Risk-free interest rate 4.0% - 5.0% 3.3% - 4.1%
Expected life of options 3 - 5 years 3 - 5 years
The weighted average fair value of options granted during
the years ended August 31, 2006 and 2005 were $3.50 and
$1.97, 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 $ 2,706,214 and $1,844,321
for the years ended August 31, 2006 and 2005,
respectively. Service revenue was $192,188 and $176,783
for the years ended August 31, 2006 and 2005,
respectively.
Revenue from the sale of cancer treatment systems is
recognized when a purchase order has been received, the
system has been shipped, the selling price is fixed or
determinable, and collection is reasonably assured. Most
system sales are F.O.B. shipping point, therefore
shipment is deemed to have occurred when the product is
delivered to the transportation carrier. Most system
sales do not include installation. If installation is
included as part of the contract, revenue is not
recognized until installation has occurred, or until any
remaining installation obligation is deemed to be
perfunctory. Some sales of cancer treatment systems may
include training as part of the sale. In such cases, the
portion of the revenue related to the training,
calculated based on the amount charged for training on a
stand-alone basis, is deferred and recognized when the
training has been provided. The sales of the Company's
cancer treatment systems do not require specific customer
acceptance provisions and do not include the right of
return except in cases where the product does not
function as guaranteed by the Company. The Company
provides a reserve allowance for estimated returns. To
date, returns have not been significant.
--------------------------------------------------------------------------------
F-10
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
1. Organization Revenue Recognition - Continued
of Revenue from the sale of software license rights is
Significant recognized when a valid purchase order has been received,
Accounting the software license has been delivered to the customer,
Policies the selling price is fixed or determinable, and
Continued collection is reasonably assured. Delivery is deemed to
have occurred if diskettes have been shipped, or if the
software has been delivered electronically by email. To
date, the sale of software license rights has not been
material.
Revenue from manufacturing services is recorded when an
agreement with the customer exists for such services, the
services have been provided, and collection is reasonably
assured.
Revenue from training services is recorded when an
agreement with the customer exists for such training, the
training services have been provided, and collection is
reasonably assured.
Revenue from service support contracts is recognized on a
straight-line basis over the term of the contract, which
approximates recognizing it as it is earned.
The Company's revenue recognition policy is the same for
sales to both related parties and non-related parties.
The Company provides the same products and services under
the same terms for non-related parties as with related
parties.
Sales to distributors are recognized in the same manner
as sales to end-user customers.
Deferred revenue and customer deposits payable include
amounts from service contracts as well as cash received
for the sales of products, which have not been shipped.
--------------------------------------------------------------------------------
F-11
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
1. Organization Concentration of Credit Risk
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 the bank and short-term
investments that 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.
Advertising and Promotion
Advertising and promotion costs, which are principally
included in sales expenses, are expensed as incurred.
Advertising and promotion expense was approximately
$758,000 and $103,000 for the years ended August 31, 2006
and 2005, respectively.
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.
Comprehensive Income (loss)
Comprehensive income (loss) consists of net income and
net unrealized gains and losses from the Company's
investments classified as available-for sale, which is
reported on the accompanying statements of stockholders'
equity as a component of other comprehensive income.
Reclassifications
Certain amounts in the prior year have been reclassified
to conform with the current year presentation.
--------------------------------------------------------------------------------
F-12
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
2. Detail of Details of certain balance sheet accounts as of August
Certain 31, 2006, are as follows:
Balance
Sheet Receivables:
Accounts
Trade receivables - non-related party $ 1,076,006
Other receivables 8,000
Accrued interest receivable 122,794
Less allowance for doubtful accounts (20,000)
---------------
$ 1,186,800
---------------
Inventories:
Parts and supplies $ 711,552
Work-in-process 641,608
Finished goods 53,104
Reserve for obsolete inventory (40,000)
---------------
$ 1,366,264
---------------
Accrued liabilities:
Accrued vacation $ 192,203
Accrued taxes payable 60,311
Customer deposits 100,000
Other accrued expenses 192,599
---------------
$ 545,113
---------------
3. Investments As of August 31, 2006, investments consist of mutual
funds. All investments at August 31, 2006 were considered
available-for-sale securities. As of August 31, 2006,
investments had a cost of $22,655,468, fair value of
$22,556,106 and unrealized losses of $99,362. As of
August 31, 2005, investments had a cost of $12,581,584,
fair value of $12,618,523 and unrealized gains of
$36,939. No realized gains or losses on investments were
recorded in the years ended August 31, 2006 and 2005.
--------------------------------------------------------------------------------
F-13
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
4. Property Property and equipment consists of the following:
and
Equipment Equipment $ 997,053
Furniture and fixtures 298,597
Leasehold improvements 17,420
---------------
1,313,070
Less accumulated depreciation (1,010,036)
---------------
$ 303,034
---------------
Depreciation expense for the years ended August 31, 2006
and 2005 totaled $84,982 and $75,113, respectively.
5. Note During the year ended August 31, 2006, the Company
Receivable entered into a sales agreement with one of its customers
with extended payment terms. These terms allowed for
$137,500 of the purchase price to be due within two years
from the date of the sale. Accordingly, this amount has
been recorded as non-current and interest imputed on the
amount calculated at market rates.
6. Patent The Company has one patent recorded net of accumulated
amortization. The patent is being amortized on a
straight-line basis over its estimated useful life with
an amortization period of 17 years. Amortization expense
was $1,878 for each of the years ended August 31, 2006
and 2005. For each of the next five years, amortization
expense relating to the patent is expected to be $1,878
per year.
--------------------------------------------------------------------------------
F-14
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
7. Operating The Company renewed its building lease in November of
Lease 2002 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 lease payments at August 31, 2006, are as
follows:
Years Ending August 31,
Amount
---------------
2007 $ 92,174
2008 23,213
---------------
$ 115,387
---------------
Annual rent expense on this operating lease for the years
ended August 31, 2006 and 2005 amounted to $ 89,393 and
$86,400, respectively.
8. 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, 2006, the Company had $235,412 of
deferred revenue.
9. Major The Company had the following customer revenue
Customers concentrations for the years ended August 31, 2006 and
2005:
2006 2005
--------------------------------
Customer A 45.48% 29.84%
Customer B 23.77% 48.55%
Customer C 10.38% *
*Sales to customers were less than 10%.
--------------------------------------------------------------------------------
F-15
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
10. Income The components of the income tax (provision) benefit are
Taxes as follows:
Years Ended August 31,
--------------------------------
Current:
Federal $ (4,606,000) $ (452,000)
State (690,000) (164,000)
--------------------------------
(5,296,000) (616,000)
--------------------------------
Deferred:
Federal 87,000 (687,000)
--------------------------------
$ (5,209,000) $ (1,303,000)
--------------------------------
The income tax (provision) benefit differs from the
amount computed at federal statutory rates as follows:
Years Ended August 31,
--------------------------------
2006 2005
--------------------------------
Income tax benefit
(expense) at $ (5,393,000) $ (1,711,000)
statutory rate
Change in estimate of
use of net operating
loss carryforwards - 284,000
Research and development
tax credits 190,000 76,000
Other (6,000) 48,000
--------------------------------
$ (5,209,000) $ (1,303,000)
--------------------------------
Deferred tax assets (liabilities) are comprised of the
following at August 31, 2006:
Accruals and reserves $ 96,000
Deferred revenue 80,000
Depreciation (55,000)
Deferred compensation expense 57,000
---------------
$ 178,000
---------------
--------------------------------------------------------------------------------
F-16
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
11. 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 amended in
February of 2006 to provide an annual retainer of $30,000
to each non-employee director with the exception of the
Audit Committee Chairman who is to receive $35,000. The
annual compensation plan calls for payment to be made
twice a year with each payment consisting of $15,000 in
cash and $15,000 in common stock, with the exception of
the Audit Committee Chairman who is to receive $20,000 in
cash and $15,000 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 30,000
options each year at an exercise price 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
--------------------------------------------------------------------------------
11. Stock A schedule of the options and warrants is as follows:
Options and
Warrants
Continued Price Per
Options Warrants Share
------------------------------------------
Outstanding at September 1, 2004 2,334,553 102,980 $ .10 to 2.54
Granted 225,000 - 1.20 to 2.54
Exercised (401,619) - .10 to .66
Forfeitures (35,000) - .10
------------------------------------------
Outstanding at August 31, 2005 2,122,934 102,980 .10 to 2.54
Granted 364,368 - 2.44 to 5.76
Exercised (588,251) (102,980) .10 to .2.54
Forfeitures (90,000) - .54 to 4.92
------------------------------------------
Outstanding at August 31, 2006 1,809,051 - $ .37 to 5.76
------------------------------------------
The following table summarizes information about stock
options and warrants outstanding at August 31, 2006:
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
----------------------------------------------------------------------------
$ .37-81 411,348 3.86 $ .65 393,230 $ .65
1.11-2.74 1,168,335 7.83 1.44 808,827 1.31
2.75-5.76 229,368 9.42 5.14 26,820 5.11
----------------------------------------------------------------------------
$ .37-5.76 1,809,051 7.13 $ 1.72 1,228,877 $ 1.18
----------------------------------------------------------------------------
12. Foreign During the years ended August 31, 2006 and 2005, the
Customer Company had sales to a European entity controlled by a
and Major significant stockholder and member of the Board of
Customer Directors of the Company of $689,086 and $987,472
respectively.
--------------------------------------------------------------------------------
F-18
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
13. Related Party At August 31, 2006, accounts receivable includes $261,543
Transactions due from an entity controlled by a significant
Not otherwise stockholder and member of the Board of Directors.
disclosed
14. Supplemental Actual amounts paid for interest and income taxes are as
Cash Flow follows:
Information Years Ended
August 31,
--------------------------------
Interest expense $ - $ -
--------------------------------
Income taxes $ 2,576,605 $ 351,354
--------------------------------
During the year ended August 31, 2006, the Company:
o Had other comprehensive loss of $136,301.
o Recorded deferred compensation of $301,700.
o Recorded an increase in additional paid in
capital of $972,282 and corresponding decrease
to income taxes payable related to the tax
benefit from the exercise of stock options.
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.
--------------------------------------------------------------------------------
F-19
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
15. Commitments The Company has an employment agreement with the
and President of the Company. The agreement provides that the
Contingencies 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 was approximately $3,500 in accrued
royalties as of August 31, 2006. Royalty expense amounted
to approximately $6,180 and $4,710 for the years ended
August 31, 2006 and 2005, respectively.
16. 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, 2006 and
2005 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
--------------------------------------------------------------------------------
17. 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 of
ments 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.
The FASB has issued Statement No. 154, Accounting Changes
and Error Corrections. This new standard replaces APB
Opinion No. 20, Accounting Changes, and FASB Statement
No. 3, Reporting Accounting Changes in 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-21
BSD MEDICAL CORPORATION
Notes to Financial Statements
Continued
--------------------------------------------------------------------------------
17. Recent In July 2006, the FASB issued FIN 48, entitled Accounting
Accounting for Uncertainty in Income Taxes. FIN 48 clarifies the
Pronounce- accounting for uncertainty in income taxes recognized in
ments financial statements in accordance with SFAS No. 109,
Continued entitled 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 are currently evaluating the impact this
Interpretation will have on our financial statements.
This Interpretation will be effective in the Company's
financial statements for the fiscal year beginning
September 1, 2007.
In September 2006, the FASB issued SFAS No. 157, entitled
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 [level 3], including a reconciliation of the
beginning and ending balances separately for each major
category of assets and liabilities. SFAS No. 157 is
effective for financial statements issued for fiscal
years beginning after November 15, 2007, and interim
periods within those fiscal years. We believe that the
adoption of SFAS No. 157 will not have a material impact
on the financial statements.
--------------------------------------------------------------------------------
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 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.
32
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
-------------------------------------------------------------
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
-------------------------------------------------
The following table sets forth certain information concerning our
directors, executive officers and key employees. The directors have served in
their respective capacities since their election and/or appointment and will
serve until the next annual stockholders' meeting or until a successor is duly
elected, unless the office is vacated in accordance with our certificate of
incorporation or bylaws. The executive officers serve at the pleasure of the
Board of Directors. There are no family relationships among any of our directors
or officers.
Name Age Position
------------------------------- ------ -----------------------------------------
Paul F. Turner, MSEE(1) 59 Chairman of the Board, Senior Vice
President, and Chief Technology Officer
Hyrum A. Mead, MBA(1) 59 President and Member of the Board of
Directors
Gerhard W. Sennewald, Ph.D. 70 Member of the Board of Directors
Michael Nobel, Ph.D. 66 Member of the Board of Directors
Douglas P. Boyd, Ph.D. 65 Member of the Board of Directors
Steven G. Stewart 58 Member of the Board of Directors
_______________
(1) Executive officers of BSD.
Paul F. Turner, MSEE, has served as a director of BSD since 1994 and
currently serves as Chairman of the Board of Directors. Mr. Turner also has
served as the Senior Vice President and Chief Technology Officer of BSD since
August 1999. From October 1995 to August 1999, Mr. Turner also served as the
Acting President of BSD. From 1986 to October 1995, Mr. Turner served in various
capacities with BSD, including Staff Scientist, Senior Scientist, Vice President
of Research, and Senior Vice President of Research. Mr. Turner has led the
design of microwave treatment systems for tumors, including the development of
external phased array antenna technology to focus radiated microwave energy deep
into the central area of the body to treat deep tumors. He has also integrated
this novel technology with magnetic resonance imaging to non-invasively monitor
treatments within the patient's body.
Hyrum A. Mead, MBA, has served as President and a director of BSD since
August 1999. Previously, he served five years as Vice President of Business
Development at ZERO Enclosures, a leading manufacturer in the
telecommunications, computer and aerospace enclosures industry and seven years
as President of Electro Controls, a manufacturer of computer controlled power
systems. Mr. Mead began his career in marketing with IBM where he was involved
with the introduction of many new products.
33
Gerhard W. Sennewald, Ph.D., has served as a director of BSD since
1994. Dr. Sennewald has served as the President and Chief Executive Officer of
Medizin-Technik GmbH, of Munich, Germany, a firm which is engaged in the
business of distributing hyperthermia equipment and diagnostic imaging equipment
and services, from April 1985 to the present. In connection with his service to
Medizin-Technik GmbH, Dr. Sennewald has been BSD's key European representative
and distributor for 17 years and has been instrumental in obtaining the majority
of BSD's foreign sales. He also serves on the Board of Directors of TherMatrx,
Inc.
Michael Nobel, Ph.D., has served as a director of BSD since January
1998. From 1991 to the present, Dr. Nobel has served as the Executive Chairman
of the MRAB Group, a privately-held company that provides diagnostic imaging
services. From 1995 to the present, Dr. Nobel has served as the Chairman of the
Board of the Nobel Family Society. From 1995 to the present, he also has served
as Chairman of the American Non-Violence Project Inc., and has served as a
consultant to Unesco in Paris and the United Nations Social Affairs Division in
Geneva. Dr. Nobel participated in the introduction of magnetic resonance imaging
as European Vice President for Fonar Corp.
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 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 symposia.
Steven G. Stewart, CPA, served as Chief Financial Officer for
Headwaters, Inc. (a New York Stock Exchange Company) from July 1998 until
October 2005 when he became the Treasurer and subsequently the Director of
Financial Affairs. Previously, Mr. Stewart served as a business assurance
partner for PricewaterhouseCoopers LLP (formerly Coopers & Lybrand LLP), and as
an audit partner with Ernst & Young (formerly Arthur Young), including service
as the Salt Lake City office Director of High Technology and Entrepreneurial
Services. Mr. Stewart's involvement with Headwaters is part-time now and will be
through March 2009 when he will fully retire from Headwaters.
Section 16(a) of the Securities Act of 1934 requires our directors,
executive officers, and any persons who own more than 10% of a registered class
of our equity securities, to file reports of ownership and changes in ownership
with the Securities and Exchange Commission. SEC regulation requires executive
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, 2006 our
executive officers, directors, and greater than 10% stockholders complied with
all applicable filing requirements.
34
COMPOSITION OF THE BOARD
The Board of Directors of the Company 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
Company's directors, officers or key employees.
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:
Douglas P. Boyd
Steven G. Stewart
Michael Nobel
MEETINGS AND COMMITTEES OF THE BOARD OF DIRECTORS
During fiscal year 2006, the Company's 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 four meetings
during fiscal year 2006, is responsible for reviewing and monitoring the
Company's 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 the
Company's independent auditor prior to presentation of financial statements to
stockholders and, as appropriate, initiating inquiries into aspects of the
Company's internal accounting controls and financial affairs. The Board of
Directors has adopted a written audit committee charter.
The members of the Audit Committee are Messrs. Sennewald, Boyd, Stewart
and Nobel. Mr. Stewart is currently serving as the audit committee chairman and
financial expert. All members of the Audit Committee are independent directors,
except Mr. Sennewald.
The Nominating Committee. The Company does not have a standing
nominating committee. Each director participates in decisions relating to making
the Company's 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 case-by-case basis and there is no need for
the added formality of a nominating committee. Based on criteria established by
the American Stock Exchange relating to director independence, Messrs. Stewart,
Boyd and Nobel are the Company's 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
35
stockholders, and has not adopted a formal process for considering director
candidates who may be recommended by stockholders. However, the Company's 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 the Company's industry. The Company does not pay
fees to any third parties to assist it in identifying potential nominees.
Although the Company does not have a formal policy regarding attendance
by directors at the Company's Annual Meeting, it encourages 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.
The Compensation Committee. The Company does not have a standing
compensation committee. The independent directors of the Board act as a
committee on compensation issues.
COMMUNICATIONS WITH DIRECTORS
The Company has not adopted a formal process for stockholder
communications with the Board. Nevertheless, the Company has 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. The Company believes its responsiveness to stockholder
communications to the Board has been good.
EXECUTIVE OFFICERS
The following table presents information as of August 31, 2006
regarding the current executive officers of the Company:
Name Age Position
---- --- --------
Paul F. Turner, MSEE 59 Chairman of the Board, Senior VP and
Chief Technology Officer
Hyrum A. Mead, MBA 59 President
Information on the business background of Paul F. Turner and Hyrum A.
Mead is set forth above under the caption "Election of Directors."
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 2007:
Name Age Position
---- --- --------
Dixie Toolson Sells 56 Vice President of Regulatory Affairs
Ray Lauritzen 56 Vice President of Field Service
36
Brian L. Ferrand 51 Vice President of Sales
Richard A. White 51 Vice President of Business Development
Dixie Toolson Sells has served as Vice President of Regulatory Affairs
of BSD since December 1994. Ms. Sells served as Administrative Director of BSD
from 1978 to 1984; as Director of Regulatory Affairs from 1984 to September
1987; and as Vice President of Regulatory Affairs from September 1987 to October
1993. In October 1993, Ms. Sells resigned as Vice President of Regulatory
Affairs, and she served as Director of Regulatory Affairs from October 1993 to
December 1994. In December 1994, Ms. Sells was re-appointed as Vice President of
Regulatory Affairs and was appointed as Corporate Secretary by the Board of
Directors. Ms. Sells also serves on the Board of Directors of the Intermountain
Biomedical Association. Ms. Sells resigned as Corporate Secretary of BSD in
March 2002.
Ray Lauritzen served as Field Service Manager of BSD from 1982 to
January 1988 and has served as Vice President of Field Service Operations from
January 1988 to the present.
Brian L. Ferrand, joined BSD Medical as Vice President of Sales in
2005. Previously, Mr. Ferrand served as Vice President of Sales and as a
corporate officer of Merit Medical Systems, Inc. (a company traded on NASDAQ)
from 1993 until October 2004. Previously Mr. Ferrand served as Director of Sales
(1992-1993) and as a National Sales Manager (1991-1992) for Merit Medical. Merit
Medical Systems is a producer of medical products used in Cardiology and
Radiology sold on a worldwide basis.
Richard A. White, joined BSD Medical in 2004, and serves as Vice
President of Business Development, looking for growth opportunities for the
company, as well as overseeing the marketing and reimbursement efforts. Richard
has been deeply involved in business development and growth since obtaining his
degree in international business at The Garvin School of International
Management "Thunderbird" in 1980. He has played a key role in the founding of
new companies, has led a national sales organization selling large capital
equipment in power control systems and served as International Sales Manager for
Merit Medical Systems, a leading manufacturer and marketer of products used in
diagnostic and interventional cardiology and radiology procedures.
CODE OF ETHICS
We have adopted a Code of Ethics that applies to all employees,
including our principal executive officers. Our Code of Ethics is available on
our website (www.bsdmc.com) on our investor information webpage. We intend to
post amendments to or waivers from our Code of Ethics (to the extent applicable
to our chief executive officer, principal financial officer or principal
accounting officer) on our website.
37
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 2006, 2005, and 2004.
SUMMARY COMPENSATION TABLE
-------------------------------------- ------- ----------------------------- -------------------------------
Annual Compensation Long-Term Compensation Awards
-------------------------------------- ------- --------------- ------------- -------------------------------
Name and Principal Position Year Salary ($) Bonus ($) Securities Underlying Options
/ SARs (#)
-------------------------------------- ------- --------------- ------------- -------------------------------
Paul Turner, 2006 $172,160 $500 300,000 (1)
Chairman of the Board, Senior Vice 2005 $155,000 $500
President, Chief Technology Officer 2004 $149,990 $400
-------------------------------------- ------- --------------- ------------- -------------------------------
Hyrum A. Mead, 2006 $181,660 $500 400,000 (1)
President, Director 2005 $165,000 $500
2004 $148,325 $400
-------------------------------------- ------- --------------- ------------- -------------------------------
(1) There were no stock options granted to Messrs. Turner or Mead in fiscal 2006
and 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 2006 Mr. Mead exercised 15,252 options and none were
exercised by Mr. Turner. 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 and Mead.
Paul F. Turner and Hyrum A. Mead are the only members of the Board of
Directors who are employed by us. Messrs. Turner and Mead do not receive any
separate compensation for services performed as directors.
COMPENSATION OF DIRECTORS
During fiscal 2006 we revised our 1998 Director Stock Option Plan to
provide an annual retainer in the amount of $30,000 to each non-employee
director other than the Chair of the Audit Committee, who is to receive $35,000.
Of the Annual Retainer, a cash payment of $15,000 is to be paid in cash and the
balance is to be paid in the form of restricted shares of our common stock to
each Non-Employee Director, other that the Chair of the Audit Committee, who is
to receive a cash payment of $20,000, payable in equal installments 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 that is paid
in restricted stock will be determined by reference closing price for the Common
Stock on the day of the payment. Each non-employee director will receive an
annual option to purchase 30,000 restricted shares of our common stock at a
purchase price calculated with respect to the Annual Retainer. The options vest
ratably over 5 years and expire in 10 years.
38
For the period of September 1, 2003 through February 28, 2004 these
directors were compensated with payments of $5,000 in cash and issued common
stock in the amount of 3,546 shares. For the period March 1, 2004 through August
31, 2004, the directors were paid $5,000 in cash and issued 3,571 shares of
common stock. For the period September 1, 2004 to February 28, 2005 the
directors were compensated with payments of $5,000 in cash and issued 2,183
shares of restricted common stock and for the period March 1, 2005 to August 31,
2005 they were issued $5,000 in cash and 2,049 shares of restricted stock for
their services with the exception of Douglas Boyd who was issued a prorated
payment of $3,050 in cash and 1,250 shares of common stock based on his start
date on the Board of Directors of May 12, 2005. On September 20, 2005 these
directors were issued a stock option grant of 25,000 shares based on a strike
price of $2.44 per share for their services for FYE 2006. On March 1, 2006 each
non-employee director received a cash payment of $7,500 and 1,531 shares of
restricted stock for their services from September 1, 2005 to February 28, 2006,
other than the Audit Committee Chair who received a pro-rated payment of $2,659
in cash, 543 shares of restricted stock and a stock option grant of 16,368
shares at a strike price of $5.76 per share. On September 1, 2006 these
directors were issued a stock option grant of 30,000 shares based on a strike
price of $4.77 per share for their services for fiscal 2007. Each director was
paid for their services from March 1, 2006 to August 31, 2006 with a cash
payment of $7,500 and 1,572 shares of restricted stock, other than the Audit
Committee Chair, who received a cash payment of $10,000 and 1,572 restricted
stock.
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 2006 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, 200,000 100,000 $700,000 $350,000
Chairman of the
Board, Sr. VP and
Chief Technology
Officer
Hyrum A. Mead, 14,000 $63,140 546,415 133,333 $2,056,640 $466,665
President
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
39
12-month period preceding termination (excluding any signing bonus received
during such period). The agreement also requires us to vest any options granted
to Mr. Mead for the purchase of our common stock, allowing a 90-day period for
Mr. Mead to exercise those options. Mr. Mead's agreement includes a
non-competition covenant prohibiting him from competing with us for one year
following his termination.
We entered into an employment agreement with Mr. Turner dated November
2, 1988. The agreement provides that Mr. Turner's salary will be based upon a
reasonable mutual agreement. The agreement provides that if Mr. Turner's
employment is involuntarily terminated, he will receive severance pay for a
one-year period, which pay includes an extension of all of his rights,
privileges and benefits as an employee (including medical insurance). The
one-year severance pay shall be equal to Mr. Turner's regular salary for the
12-month period immediately prior to the termination. The agreement also
requires us to pay Mr. Turner for any accrued, unused vacation at the time of
termination. We are also obligated to pay Mr. Turner $1,000 (or the equivalent
value in stock options) for each newly issued patent obtained by us as a result
of Mr. Turner's efforts (Mr. Turner receives only $500 if multiple inventors are
involved). Mr. Turner's agreement includes a non-competition covenant
prohibiting him from competing with us for one year following his termination.
We may continue the non-competition period for up to four additional years by
notifying Mr. Turner in writing and by continuing the severance payments for the
additional years during which the non-competition period is extended.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
------------------------------------------------------------------
RELATED STOCKHOLDER MATTERS
---------------------------
The following table sets forth, as of October 24, 2006, 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 20, 2006, 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 21,040,116 shares of common stock outstanding
as of November 20, 2006. Except as otherwise noted, the address of each person
listed on the following table is 2188 West 2200 South, Salt Lake City, Utah
84119.
40
Common Stock
Beneficially Owned
-------------------
Title of Class Name of Beneficial Owner Shares Percent
-------------- ------------------------ ------ -------
Officers and Directors
Common Stock Dr. Gerhard W. Sennewald (1) 6,903,051 32.65%
Common Stock Paul F. Turner (2) 2,085,342 9.81%
Common Stock Hyrum A. Mead (3) 655,402 3.03%
Common Stock Dr. Michael Nobel (4) 244,170 1.15%
Common Stock Douglas P. Boyd (5) 9,353 *
Common Stock Steven G. Stewart 2,115 *
Holders of More Than 5%
Common Stock John E. Langdon (6) 1,295,010 6.15%
Common Stock All Executive Officers and Directors 9,899,433 45.16%
as a Group (5 persons) (7)
-------------------------
* Less than 1%
(1) Includes 100,000 shares subject to options. Does not include 500,000
shares held by Dr. Sennewald's spouse, for which he disclaims
beneficial ownership.
(2) Includes 200,000 shares subject to options.
(3) Includes 546,415 shares subject to options.
(4) Includes 25,000 shares subject to options.
(5) Includes 5,000 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 876,415 shares subject to options.
We have two equity compensation plans, our 1998 Employee Stock Option
Plan and our 1998 Director Stock Plan, both of which were approved by our
stockholders. Shown below on an aggregate basis is a summary of equity
compensation plan information with respect to our equity compensation plans:
41
EQUITY COMPENSATION PLAN INFORMATION
------------------------------- ---------------------------- ---------------------------- ----------------------------
Number of Securities to be Weighted-Average Exercise Number of Securities
Remaining Available for
Future Issuance Under
Issued Upon Exercise of Price of Outstanding Equity Compensation Plans
Outstanding Options, Options, Warrants and (Excluding Securities
Warrants and Rights Rights Reflected in Column (a))
(a) (b) (c)
------------------------------- ---------------------------- ---------------------------- ----------------------------
Equity Compensation Plans 1,809,051 1.72 729,429
Approved by Security Holders
------------------------------- ---------------------------- ---------------------------- ----------------------------
Equity Compensation Plans not - - -
Approved by Security Holders
------------------------------- ---------------------------- ---------------------------- ----------------------------
Total 1,809,051 $1.72 729,429
------------------------------- ---------------------------- ---------------------------- ----------------------------
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
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 $689,086 in fiscal 2006 from the sale of
systems and various component parts sold to Medizin-Technik. During fiscal 2005,
we had sales of $987,472 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 stockholders. Management believes the
terms of the transactions with Medizin-Technik were arms length and fair to the
Company.
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 Annual Report 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.
42
4.2 Emerson Securities Purchase Agreement. Incorporated by
reference to Exhibit 4.1 of the BSD Medical Corporation Annual
Report on 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 Annual Report on
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 Current Report on 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 Annual Report
on Form 10-KSB filed December 10, 1998.
10.5 BSD Medical Corporation 1998 Director Stock Plan. Incorporated
by reference to Exhibit A of the BSD Medical Corporation
Schedule 14A, filed July 27, 1998.
10.6 BSD Medical Corporation 1998 Stock Incentive Plan.
Incorporated by reference to Exhibit B of the BSD Medical
Corporation Schedule 14B, filed July 27, 1998.
21 Subsidiary List. Incorporated by reference to Exhibit 21 of
the BSD Medical Corporation Annual Report on 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.
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
ended August 31, 2006 and August 31, 2005 and fees billed for other services
rendered by Tanner LC during those periods.
43
Fiscal 2006 Fiscal 2005
Audit Fees(1) $75,500 $52,619
Audit-Related Fees(2) 6,265 5,902
Tax Fees(3) - 23,075
All Other Fees(4) - 1,560
Total $81,765 $83,156
_________________________
(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 auditors 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 auditors.
44
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
BSD MEDICAL CORPORATION
Date: November 29, 2006 By: /s/ Hyrum A. Mead
----------------------------------------
Hyrum A. Mead
President and Member of the Board of
Directors (principal executive officer)
Date: November 29, 2006 By: /s/ Dennis Bradley
----------------------------------------
Dennis Bradley
Controller (principal financial and
accounting officer)
In accordance with the Exchange Act, 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, 2006 By: /s/ Paul F. Turner
----------------------------------------
Paul F. Turner
Chairman of the Board, Senior Vice
President and Chief Technology Officer
Date: November 29, 2006 By: /s/ Hyrum A. Mead
----------------------------------------
Hyrum A. Mead
President and Member of the Board of
Directors (principal executive officer)
Date: November 29, 2006 By: /s/ Gerhard W. Sennewald
----------------------------------------
Dr. Gerhard W. Sennewald
Member of the Board of Directors
45
Date: November 29, 2006 By: /s/ Steven G. Stewart
----------------------------------------
Steven G. Stewart
Member of the Board of Directors
Date: November 29, 2006 By: /s/ Michael Nobel
----------------------------------------
Dr. Michael Nobel
Member of the Board of Directors
Date: November 29, 2006 By: /s/ Douglas P. Boyd
----------------------------------------
Dr. Douglas P. Boyd
Member of the Board of Directors
46