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BSDM > SEC Filings for BSDM > Form 10-K on 14-Nov-2012All Recent SEC Filings

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Form 10-K for BSD MEDICAL CORP


14-Nov-2012

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

This Management's Discussion and Analysis of Financial Condition and Results of Operations and other parts of this annual report on Form 10-K contain forward-looking statements that involve risks and uncertainties. Forward-looking statements can also be identified by words such as "anticipates," "expects," "believes," "plans," "predicts," and similar terms. Forward-looking statements are not guarantees of future performance and our actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in the subsection entitled "Forward-Looking Statements" below and the Item 1A "Risk Factors" above. The following discussion should be read in conjunction with our financial statements and notes thereto included in Item 8 of this Form 10-K. All information presented herein is based on our fiscal year ended August 31, 2012. We assume no obligation to revise or update any forward-looking statements for any reason, except as required by law.

We develop, manufacture, market, and service systems to treat cancer and benign diseases using heat therapy delivered using focused radiofrequency (RF) and microwave energy. Our product lines include both ablation and hyperthermia treatment systems. Our microwave ablation system has been developed as a stand-alone therapy to employ precision-guided microwave energy to ablate (destroy) soft tissue. Our hyperthermia cancer treatment systems, which have been in use for several years in the United States, Europe and Asia, are used to treat certain tumors with heat (hyperthermia) while increasing the effectiveness of other therapies such as radiation therapy. We have developed extensive intellectual property, multiple products in the market and established distribution in the United States, Europe and Asia. Certain of our products have received regulatory approvals and clearances in the United States, Europe and China.


On August 18, 2010 we announced that the FDA granted the Company a 510(k) clearance to market our MicroThermX® for ablation of soft tissue. Clearance from the FDA of BSD's 510(k) Premarket Notification submission authorizes the commercial sale of the MicroThermX® in the United States. The MicroThermX® was designed to provide a higher power, optimized system targeted to the growing therapeutic interventional and surgical oncology market. The MicroThermX® represents a major part of our business plan moving forward. It introduces into our product line an innovative disposable that is used in each treatment, which we believe will provide a significant ongoing revenue stream.

To accelerate revenues from the MicroThermX® line of products, we have launched a program that allows hospitals to purchase disposable SynchroWave antennas and pay a fee-per-use rental for the treatment of patients using the MicroThermX®. We expanded the equipment rental program throughout the U.S., hiring new direct sales representatives in key major metropolitan areas who will provide "personal service" to new users of the microwave ablation technique. These new hires are experienced interventional sales representatives with seasoned contacts in the field of interventional oncology. We have experienced early success with this direct sales program with increasing levels of revenues from the MicroThermX® line of products.

We also continue our emphasis on Europe and other international markets. We hired a Director of International Sales, have met with several international distribution firms and have entered into exclusive distribution agreements with specialty distribution firms in Italy, Ireland, Northern Ireland, The Netherlands and Turkey. International sales of our MicroThermX® family of products will depend on our ability to successfully establish sales distribution channels in Europe and other international markets.

Through August 31, 2012, most of our operating revenues have been from the sale of our hyperthermia cancer systems and related revenues. In addition to revenues from the sale of ablation and hyperthermia treatment systems, we recognize revenue from the sale of parts, accessories, and disposables related to our systems, equipment rental, training, service support contracts, and other miscellaneous revenues. System and product sales totaled $1,358,604, $2,581,275 and $1,261,490 for the years ended August 31, 2012, 2011 and 2010, respectively. Equipment rental income was $129,350, $110,207and $0 for the years ended August 31, 2012, 2011 and 2010, respectively. Sales of disposables, service and other revenues totaled $583,238, $345,993 and $320,786 for the years ended August 31, 2012, 2011 and 2010, respectively.

As of August 31, 2012, we had no sales backlog.

Results of Operations

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 and market acceptance for our ablation and hyperthermia systems and related component parts and services, world-wide economic conditions, availability of financing for our customers, changes in the medical capital equipment market, changes in order mix and product order configurations, competition, regulatory developments, insurance reimbursement and other matters. Operating expenses may fluctuate as a result of the timing of sales and marketing activities, research and development, 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.


Revenues

We recognize revenue from the sale of our ablation and hyperthermia cancer treatment systems and related parts and accessories (collectively, product sales), the sale of disposables used with certain of our systems, training, service support contracts and other miscellaneous revenues. During the years ended August 31, 2012 and 2011, we also recognized revenues from equipment rental, including our fee-per-use rental income from our MicroThermX®. Our revenues can fluctuate significantly from period to period because our sales, to date, have been based upon a relatively small number of hyperthermia systems, the sales price of each being substantial enough to greatly impact revenue levels in the periods in which they occur. Sales of a few hyperthermia systems, particularly BSD-2000/3D/MR systems, can cause a large change in our revenues from period to period and the sales cycle for our systems generally extends over multiple financial reporting periods. In addition, differences in the configuration of the hyperthermia systems sold, pricing, and other factors can result in significant differences in the sales price per system and in the total revenues reported in a given period. As a result, there may be quarterly financial reporting periods where we may report no or minimal revenues from the sale of hyperthermia systems. Through fiscal year 2011 and the first part of fiscal year 2012, we had minimal revenues from our MicroThermX® family of products. However, with the successful introduction of our fee-per-use rental program and accelerating sales of disposable SynchroWave antennas, our revenues from our MicroThermX® family of products continue to grow.

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 inaccurate conclusions drawn in early scientific studies that hyperthermia was only marginally effective. Additionally, we do not believe that reimbursement rates from third-party payers have been adequate to promote hyperthermia therapy acceptance in the medical community.

We also believe the continuing worldwide economic downturn has made it difficult for many of our customers to obtain approval for the purchase of our hyperthermia and microwave ablation systems and to arrange related financing.

Political, economic and regulatory influences are subjecting the U.S. healthcare industry to fundamental changes. We may continue to face significant uncertainty in the industry due to recent governmental healthcare reform. We believe the uncertainties regarding the ultimate features of reform initiatives and their enactment and implementation may also have an adverse effect on our customers' purchasing decisions regarding our products and services.

As a result of these negative factors, we have been unable to sustain a significant increase in the number of hyperthermia systems sold, and we believe these difficulties may continue to negatively impact the sales of our hyperthermia systems, the market introduction of our MicroThermX®, and our operating results.


The following table summarizes the number of our ablation and hyperthermia systems sold for the years ended August 31, 2012, 2011 and 2010:

                                            2012      2011      2010

                    MicroThermX®               5         1         -

                    Hyperthermia Systems:
                      BSD-500                  3         4         3
                      BSD-2000                 2         2         2
                      BSD-2000/3D              -         -         -
                      BSD-2000/3D/MR           -         1         -

                    Total                      5         7         5

We have historically derived a significant portion of our revenues from sales to related parties. All of the related party revenue was for the sale of hyperthermia systems and related component parts and services sold to Dr. Sennewald Medizintechnik GmbH. Dr. Sennewald, one of our directors and significant stockholders, is a stockholder, executive officer and a director of Medizintechnik. We derived $333,663, or approximately 16%, of our total revenue in the year ended August 31, 2012 from sales to related parties, compared to $1,063,495 or approximately 35%, in the year ended August 31, 2011, and $309,259 or approximately 20% in the year ended August 31, 2010.

In the year ended August 31, 2012, we derived $1,737,529, or approximately 84%, of our total revenue from non-related parties, as compared to $1,973,980, or 65%, in the year ended August 31, 2011, and $1,273,017, or 80%, in the year ended August 31, 2010.

The following tables summarize the sources of our revenues for the years ended August 31, 2012, 2011 and 2010:

            Non-Related Parties      2012            2011            2010

            Product sales         $ 1,063,754     $ 1,569,688     $ 1,095,440
            Disposables               316,701         116,724          12,300
            Service contracts         202,613         141,224         131,826
            Other                      25,111          36,137          33,451

                                    1,608,179       1,863,773       1,273,017
            Equipment rental          129,350         110,207               -

            Total                 $ 1,737,529     $ 1,973,980     $ 1,273,017



                Related Parties     2012           2011           2010

                Product sales     $ 294,850     $ 1,011,587     $ 166,050
                Disposables          28,050          38,700        33,000
                Other                10,763          13,208       110,209

                Total             $ 333,663     $ 1,063,495     $ 309,259

Total revenues for the year ended August 31, 2012 were $2,071,192 compared to $3,037,475 for the year ended August 31, 2011, a decrease of $966,283, or approximately 32%. The overall decrease in revenues in fiscal year 2012 is due to the sale of fewer hyperthermia systems, partially offset by higher levels of equipment rental from our MicroThermX® fee-per-use rental program and increasing sales of disposable SynchroWave antennas. We sold five hyperthermia systems in fiscal year 2012 compared to seven hyperthermia systems in fiscal year 2011, which included the sale of a higher priced BSD-200/3D/MR to a related party.


Total revenues for the year ended August 31, 2011 were $3,037,475 compared to $1,582,276 for the year ended August 31, 2010, an increase of $1,455,199, or approximately 92%. The overall increase in revenues in fiscal year 2011 is due to more sales of hyperthermia systems, including the sale of one higher priced BSD-2000/3D/MR to a related party. We sold seven hyperthermia systems in fiscal year 2011 compared to five hyperthermia systems in fiscal year 2010. In addition, we recorded revenues in fiscal year 2011 of $110,207 from equipment rental and $189,257 from our MicroThermX® family of products. We had no revenues in the prior fiscal years from these sources.

Gross Margin

Our gross margin and gross margin percentage will fluctuate from period to period depending on the mix of revenues reported for the period and the type and configuration of the hyperthermia systems sold during the period. Our total gross margin was $554,561, or 27% of total sales, for fiscal year 2012, $1,324,549, or 44% of total sales, for fiscal year 2011, and $81,266, or 5%, for fiscal year 2010. The decrease in gross margin and gross margin percentage in fiscal years 2012 and 2010 resulted primarily from the decrease in product sales, for which our gross margin is higher than our other sources of revenue. In addition, as sales volume increases, we believe we will more fully absorb certain fixed operating costs that are included in cost of sales, thus increasing our gross profit percentage.

Operating Costs and Expenses: Comparison of Fiscal Years ended August 31, 2012 and 2011

Cost of Sales - Cost of sales include raw material, labor and allocated overhead costs. We calculate and report separately cost of sales for both non-related and related party sales, which are sales to Medizintechnik. Cost of sales as a percentage of sales will fluctuate from period to period depending on the mix of sales for the period and the type and configuration of the hyperthermia systems sold during the period. Total cost of sales for fiscal 2012 was $1,516,631 compared to $1,712,926 for fiscal 2011, a decrease of $196,295, or approximately 11%. This decrease resulted primarily from the sale of fewer hyperthermia systems in the current fiscal year compared to the last fiscal year, as further discussed above.

Research and Development Expenses - Research and development expenses include expenditures for new product development and development of enhancements to existing products. Research and development expenses were $2,364,608 for fiscal 2012 compared to $1,483,659, for fiscal 2011, an increase of $880,949, or approximately 59%. Our research and development expenses for the year ended August 31, 2011 have been partially offset by the $488,958 proceeds from two separate U.S. government grants under the QTDP Program received in November 2010. In addition, research and development expenses increased in the current fiscal year primarily due to new MicroThermX® product line enhancement projects, including development of the table top MicroThermX® and the SynchroWave short tip antenna.

Selling, General and Administrative Expenses - Selling, general and administrative expenses were $6,203,200 for fiscal 2012 compared to $5,189,561 in fiscal 2011, an increase of $1,013,639, or approximately 20%. We expanded our successful MicroThermX® equipment rental program throughout the U.S. by hiring new direct sales representatives in key metropolitan areas, adding a new Vice President of Sales and Marketing and incurring additional marketing, sales and related operating expenses. We believe that the level of our selling, general and administrative expenses will continue to increase over the levels reported for the year ended August 31, 2012, and the increase may be significant.


Operating Costs and Expenses: Comparison of Fiscal Years ended August 31, 2011 and 2010

Cost of Sales - Cost of sales include raw material, labor and allocated overhead costs. We calculate and report separately cost of sales for both non-related and related party sales, which are sales to Medizintechnik. Cost of sales as a percentage of sales will fluctuate from period to period depending on the mix of sales for the period and the type and configuration of the hyperthermia systems sold during the period. Total cost of sales for fiscal 2011 was $1,712,926 compared to $1,501,010 for fiscal 2010, an increase of $211,916, or approximately 14%. This increase resulted primarily from the sale of more hyperthermia systems in fiscal year 2011 compared to fiscal year 2010, as further discussed above.

Research and Development Expenses - As discussed above, our research and development expenses for the year ended August 31, 2011 have been partially offset by the $488,958 proceeds from two separate U.S. government grants under the QTDP Program received in November 2010. Research and development expenses were $1,483,659 for fiscal 2011 compared to $2,429,215, for fiscal 2010, a decrease of $945,556, or approximately 39%. In addition to the offset of the QTDP grants, research and development expenses decreased in fiscal year 2011 primarily from the shift from product development activities to initial sales and marketing efforts for the MicroThermX® product line, and due to our operating expense reduction measures.

Selling, General and Administrative Expenses - Selling, general and administrative expenses were $5,189,561 for fiscal 2011 compared to $5,130,017 in fiscal 2010, an increase of $59,544, or approximately 1%. We implemented headcount reductions and other operating expense reduction measures in the latter part of fiscal year 2010. However, as we continued the roll out of the MicroThermX® product line and the support of its global distribution network, we increased our marketing and sales staff, including three regional sales managers, an international sales manager, a director of marketing and a customer service manager, and incurred additional marketing, sales and related operating expenses. As a result, we incurred an increase in our selling, general and administrative expenses for the year ended August 31, 2011.

Other Income (Expense)

Interest Income: Interest income earned on our money market funds and savings accounts is currently immaterial to our business, and was $59,783, $67,233, and $11,042 for the years ended August 31, 2012, 2011 and 2010, respectively.

Other Income (Expense): Other income (expense) is also immaterial to our business, and was $(6,208), $(3,279) and $3,405 for the years ended August 31, 2012, 2011 and 2010, respectively.

Income Tax (Provision) Benefit

For the years ended August 31, 2012 and 2011, we recorded an income tax provision of $988 and $800, respectively, and we recorded an income tax benefit of $6,571 for the year ended August 31, 2010. Due to our operating losses, our income tax (provision) benefit is primarily related to state income taxes and is currently immaterial to our business.

Liquidity and Capital Resources

Since inception through August 31, 2012, we have generated an accumulated deficit of $37,377,247 where generally our operating revenues have been insufficient to cover our operating expenses. We have financed our operations primarily through the sale of our common stock and the exercise of stock options and warrants. As of August 31, 2012, we had cash and cash equivalents of $11,102,508, comprised primarily of money market funds and savings accounts.


As of August 31, 2012, we had current liabilities totaling $742,297, comprised of accounts payable, accrued liabilities, customer deposits and deferred revenue incurred in the normal course of our business. Our long-term liabilities consisted of deferred revenue of $126,420.

Stock Offerings

On October 1, 2009, a universal shelf registration statement was declared effective by the SEC for the issuance of common stock, preferred stock, warrants, senior debt, subordinated debt and units up to an aggregate amount of $50.0 million. We completed four stock offerings utilizing the universal shelf registration statement during calendar year 2010, and we received total net proceeds of approximately $16.2 million.

On September 28, 2012, we again filed a universal shelf registration statement with the SEC for the issuance of common stock, preferred stock, warrants, senior debt, subordinated debt and units up to an aggregate amount of $50.0 million. We may periodically offer one or more of these securities in amounts, prices and on terms to be announced when and if the securities are offered. At the time any of the securities covered by the registration statement are offered for sale, a prospectus supplement will be prepared and filed with the SEC containing specific information about the terms of any such offering. On October 11, 2012, the universal shelf registration statement was declared effective by the SEC.

Warrant Exercises

During our fiscal year ended August 31, 2011, investors exercised warrants issued in the stock offerings to purchase a total of 1,501,134 common shares, with net proceeds to the Company of approximately $3.0 million.

Cash Flows from Operating, Investing and Financing Activities

During the year ended August 31, 2012, we used net cash of $5,935,939 in operating activities, primarily as a result of our net loss of $7,960,660, decreased by non-cash expenses of $1,538,237, including depreciation and amortization, stock-based compensation, stock issued for services and loss on disposition of property and equipment. Net cash used in operating activities also included decreases in accounts payable of $106,182 and accrued liabilities of $11,087, partially offset by decreases in receivables of $482,743, inventories of $2,257 and other current assets of $1,079, and increases in accrued liabilities of $92,694 and customer deposits of $24,980.

During the year ended August 31, 2011, we used net cash of $4,157,225 in operating activities, primarily as a result of our net loss of $5,285,517, decreased by non-cash expenses totaling $1,362,205, including depreciation and amortization, stock-based compensation and stock issued for services. Net cash used in operating activities also included increases in receivables of $414,223 and inventories of $167,960, partially offset by decreases in income tax receivable of $50,000 and other current assets of $13,902, and increases in accounts payable of $104,854, accrued liabilities of $108,084 and deferred revenue of $71,430.

Net cash used in investing activities, resulting from the purchase of property and equipment, was $97,521 and $214,554 for the years ended August 31, 2012 and 2011, respectively.


We had no net cash provided by financing activities for the year ended August 31, 2012.

Net cash provided by financing activities for the year ended August 31, 2011 was $13,024,182, comprised of net proceeds from the sale of common stock of $9,702,656, proceeds from the exercise of warrants of $2,989,406 and proceeds from the exercise of stock options of $332,120.

We believe that our current cash and cash equivalents will be sufficient to fund our operations for the next twelve months.

If we cannot cover any future cash shortfalls with cost cutting or available cash, or our sales are less than projected, we would need to obtain additional financing. Due to adverse conditions in the global financial markets, we cannot be certain that any financing will be available when needed or will be available on terms acceptable to us. If we raise equity capital, our stockholders will be diluted. Insufficient funds may require us to delay, scale back or eliminate some or all of our programs designed to facilitate the commercial introduction of our systems or entry into new markets.

As of August 31, 2012, we had no significant commitments for the purchase of property and equipment.

We had no material off balance sheet arrangements as of August 31, 2012.

Other Cash Receipts

In November 2010, we were awarded two separate U.S. government grants under the QTDP Program. We submitted grant applications for our BSD-2000 and our MicroThermX® and both applications were approved for the maximum award for a single program of $244,479, or a total of $488,958. In order to qualify for the QTDP grants, the project must have the potential to develop new treatments that address "unmet medical needs" or chronic and acute diseases; reduce long-term health care costs; represent a significant advance in finding a cure for cancer; advance U.S. competitiveness in the fields of life, biological, and medical sciences; or create or sustain well-paying jobs, either directly or indirectly. The QTDP was created by Congress in March 2010 as part of the Patient Protection and Affordable Care Act and provides a tax credit or a grant equal to 50% of eligible costs and expenses for tax years 2009 and 2010.

Critical Accounting Policies

The following is a discussion of our critical accounting policies and estimates that management believes are material to an understanding of our results of operations and which involve the exercise of judgment or estimates by management.

Revenue Recognition: Revenue from the sale of cancer treatment systems is recognized when a purchase order has been received, the system has been shipped, the selling price is fixed or determinable, and collection is reasonably assured. Most system sales are F.O.B. shipping point; therefore, shipment is deemed to have occurred when the product is delivered to the transportation carrier. Most system sales do not include installation. If installation is included as part of the contract, revenue is not recognized until installation has occurred, or until any remaining installation obligation is deemed to be perfunctory. Some sales of systems may include training as part of the sale. In such cases, the portion of the revenue related to the training, calculated based on the amount charged for training on a stand-alone basis, is deferred and recognized when the training has been provided. The sales of our cancer treatment systems do not require specific customer acceptance provisions and do not include the right of return except in cases where the product does not function as warranted by us. To date, returns have not been significant.

Revenue from the sale of consumable devices is recognized when a purchase order has been received, the devices have been shipped, the selling price is fixed or determinable, and collection is reasonably assured. Currently, our customers are not required to purchase a minimum number of disposable devices in connection with the purchase of our systems.


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.

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