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BSDM > SEC Filings for BSDM > Form 10-Q on 10-Jul-2014All Recent SEC Filings

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Form 10-Q for BSD MEDICAL CORP


10-Jul-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

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

Overview

BSD Medical Corporation (the "Company" or "BSD") was originally incorporated under the laws of the State of Utah on March 17, 1978. On July 3, 1986, the Company was reincorporated in the State of Delaware.

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 business objectives are to commercialize our products for the treatment of cancer and to further expand our products 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 using microwave/RF systems, including both ablation and hyperthermia treatment systems. Studies have shown that both ablation and hyperthermia treatments kill cancer, but they have different clinical applications.

Our microwave ablation system is used to ablate (destroy) soft tissue with heat alone. Thermal ablation usually refers to heat treatments delivered at temperatures above 55°C for short periods of time. Thermal ablation is used to destroy local tumors using a short intense focus of heat on a specific area.

Our hyperthermia cancer treatment systems are used to treat cancer with heat (hyperthermia) while boosting the effectiveness of radiation and chemotherapy for certain tumors through a number of biological mechanisms. Hyperthermia is usually used to increase the effectiveness of other therapies; e.g., radiation therapy and chemotherapy for the treatment of locally advanced cancers. Hyperthermia usually refers to treatments delivered at temperatures of 40-45°C for one hour.

Commercialization of our systems that are used to treat cancer is our most immediate business objective. Current and future cancer treatment sites for our systems may include cancers of the prostate, breast, head, neck, bladder, cervix, colon/rectum, ovaries, esophagus, liver, kidney, brain, bone, stomach and lung. Our cancer treatment systems have been used to treat thousands of patients throughout the world and have received many awards, including the Frost & Sullivan "Technology Innovation of the Year Award" for cancer therapy devices, which was awarded in 2005 for the development of the BSD-2000 Hyperthermia System.

Although we have not yet taken advantage of many of these market opportunities, we believe our technology has application for a number of other medical purposes in addition to cancer.

We are experiencing growth in our operating revenues from our MicroThermX® Microwave Ablation System ("MicroThermX") line of products as a result of an exclusive, long-term, multi-million dollar distribution agreement with Terumo Europe NV (Terumo), a wholly owned subsidiary of Terumo Corporation. The agreement with Terumo, which we announced in April 2013, covers 100 countries in Europe, Western Asia, and Northern Africa. In addition, MicroThermX revenues and sales of disposable SynchroWave antennas have increased in the U.S. market as well.

The number of hyperthermia systems sold varies from period to period and sales are impacted by several factors including regulatory, economic and other healthcare industry factors. We have experienced declining hyperthermia revenues from our distributor in Europe, a related party. We have entered into distribution agreements for our hyperthermia systems in China, South Korea and Taiwan. We anticipate these distribution agreements will result in increased hyperthermia sales. For example, we recently received approval to market our BSD-2000 in Taiwan and commenced shipping systems to Taiwan in February, 2014. Regulatory approvals are pending in China and South Korea, but we are not able to predict the outcome of these efforts.

We recognize revenues from the sale of our ablation and hyperthermia cancer treatment systems and related parts and accessories (collectively, product sales), the sale of disposable devices used with certain of our systems, from training, and from service support contracts and other miscellaneous revenues. We also recognize revenues from equipment rental, including fee-per-use rental income from our MicroThermX.

Our current corporate strategy includes the possibility of entering into additional collaborative arrangements with third parties to expand and improve the commercialization of all our products, including our hyperthermia systems. The signing of the master distribution agreement with Terumo for our MicroThermX line of products was a result of this strategy. Consistent with this strategy, we continue to seek out and identify opportunities and, if possible, secure a transaction or transaction(s) relating to BSD's hyperthermia business, including, but not limited to, partnering or other collaborative agreements, a sale of assets and/or other strategic arrangements. There can be no assurance that the exploration of strategic alternatives will result in any agreements or transactions, or that, if completed, any agreements or transactions will be successful or on attractive terms.


Backlog

As of the date of the filing of this report, we had a total sales backlog of approximately $917,500.

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 recognized revenue from the sale of our ablation and hyperthermia cancer treatment systems and related parts and accessories (collectively, product sales), the sale of disposable devices used with certain of our systems, from training, and from service support contracts and other miscellaneous revenues. We also recognized revenues from equipment rental, including our fee-per-use rental income from our MicroThermX.

For the three months and nine months ended May 31, 2014 and May 31, 2013, our revenues consisted of the following:

                                    Three Months Ended               Nine Months Ended
                                          May 31,                         May 31,
                                   2014            2013            2014            2013

  Product sales                 $   719,750     $   819,751     $ 2,543,275     $ 1,580,451
  Disposable devices                326,635         342,730       1,167,375         774,065
  Service contracts and other        93,904          94,332         295,708         262,541

                                  1,140,289       1,256,813       4,006,358       2,617,057
  Equipment rental                  112,900          59,900         268,200         178,700

  Total                         $ 1,253,189     $ 1,316,713     $ 4,274,558     $ 2,795,757

Total revenues for the three months ended May 31, 2014 were $1,253,189 compared to total revenues of $1,316,713 for the three months ended May 31, 2013, a decrease of $63,524, or approximately 5%. Total revenues for the nine months ended May 31, 2014 were $4,274,558 compared to total revenues of $2,795,757 for the nine months ended May 31, 2013, an increase of $1,478,801, or approximately 53%.

Revenue from the sale of MicroThermX products were lower in the current year three month period than the prior year three month period due primarily to the large number of MTX systems shipped in the prior year three month period following the signing of our MTX distribution partner in Europe. The increase in total revenues in the current year nine month period over the comparable prior year nine month period is due to increases in both our MicroThermX line of products and our hyperthermia related products, including increased sales of MicroThermX systems, growth in our MTX equipment rental business and higher sales of SynchroWave disposable antennas that are used in each ablation treatment.

During the third quarter of fiscal year 2013, we commenced shipping MicroThermX systems and SynchroWave antennas to Terumo Europe pursuant to an exclusive distribution agreement covering 100 countries in Europe, Western Asia, and Northern Africa. In addition, 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 has grown.


During the three months and nine month periods ended May 31, 2014, we sold 2 and 6 hyperthermia systems, respectively. By comparison, we sold 1 and 3 hyperthermia systems in the three months and nine month periods ended May 31, 2013.

Historically, our revenues have fluctuated significantly from period to period because our sales were 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. However, we have been unable to sustain an increase in the number of hyperthermia systems sold due to various factors, including: non-acceptance by cancer-treating physicians of hyperthermia therapy; inadequate reimbursement rates from third-party payers; and significant uncertainty in the U.S. healthcare industry due to recent governmental healthcare reform. We believe these difficulties may continue to negatively impact the sales of our hyperthermia systems and our operating results.

At times, we have derived a significant portion of our revenues from sales to related parties. All of our related party revenue results from the sale of hyperthermia systems and related component parts and services to Dr. Sennewald Medizintechnik GmbH or BSD Biosystems Design S.A. Dr. Sennewald, one of our directors and significant stockholders, is a stockholder, executive officer and a director of Medizintechnik and BSD Biosystems Design S.A. We derived $376,245, or approximately 30%, of our total revenue in the three months ended May 31, 2014, from sales to related parties, compared to $230 or approximately 0.0%, in the three months ended May 31, 2013.

We derived $394,679 or approximately 9.2%, of our total revenue in the nine months ended May 31, 2014, from sales to related parties, compared to $76,776, or approximately 3%, in the nine months ended May 31, 2013. The related party revenue recognized in the three and nine months ended May 31, 2014 is derived from the shipment of one hyperthermia system to a related party in the three months ended May 31, 2014. No sales of hyperthermia systems to related parties were made in the three and nine month periods ended May 31, 2013.

Sales of hyperthermia products in the European Union ("EU") have been trending down as a percent of the Company's total sales since fiscal 2011, and this trend is expected to continue in the future. Effective July 22, 2014 the European Union's Restriction of Hazardous Substances ("RoHS") regulatory mandate will prohibit the Company from selling its hyperthermia products in the EU under their current configuration. Although the Company's MTX products are in compliance with RoHS requirements, in order to continue to sell its hyperthermia systems within the EU after July 22, 2014 the Company would need to make significant and costly changes to component parts used in its hyperthermia products to become RoHS compliant and available for sale in the EU. The Company does not believe that it is economically justifiable at this time to continue to offer hyperthermia systems in the EU, given RoHS requirements. For the immediate future, the Company will continue to focus its marketing efforts for hyperthermia systems in Asian and domestic U.S. markets.

The following tables summarize the sources of our revenues for the three months and nine months ended May 31, 2014 and 2013:

                                     Three Months Ended              Nine Months Ended
                                          May 31,                         May 31,
   Non-Related Parties              2014           2013            2014            2013

   Product sales                 $  359,750     $   819,751     $ 2,182,025     $ 1,530,451
   Disposable devices               318,385         342,730       1,149,075         771,665
   Service contracts and other       85,909          94,102         280,579         238,165

   Total                         $  764,044     $ 1,256,583     $ 3,611,679     $ 2,540,281



                                  Three Months Ended          Nine Months Ended
                                        May 31,                    May 31,
           Related Parties          2014          2013        2014          2013

           Product sales        $    360,000      $   0     $ 361,250     $ 50,000
           Disposable devices          8,250          0        18,300        2,400
           Other                       7,995        230        15,129       24,376

           Total                $    376,245      $ 230     $ 394,679     $ 76,776


Cost of Revenues

Cost of sales includes 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 or BSD Biosystems Design S.A
. 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. Cost of equipment rental includes installation, training, maintenance and support costs and depreciation of rental equipment.

Total cost of revenues for the three months ended May 31, 2014 was $747,919, compared to $716,411 for the three months ended May 31, 2013, an increase of $31,508, or approximately 4%. Total cost of revenues for the nine months ended May 31, 2014 was $2,308,863, compared to $1,608,986 for the nine months ended May 31, 2013, an increase of $699,877 or approximately 43%. These increases resulted from the significantly increased sales in the current year.

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 $505,270, or approximately 40% of total revenues, for the three months ended May 31, 2014, compared to a gross margin of $600,302, or approximately 46%, for the three months ended May 31, 2013. The lower gross margin percentage in the three months ended May 31, 2014, compared to the three months ended May 31, 2013, reflects the effects of less favorable manufacturing overhead absorption and one hyperthermia system shipped in the recent three month period that had a lower than normal gross margin.

Our total gross margin was $1,965,695, or approximately 46% of total revenues, for the nine months ended May 31, 2014, and $1,186,771, or approximately 42%, for the nine months ended May 31, 2013. The increase in gross margin and gross margin percentage in the first nine months of the current fiscal year compared to the first nine months of the prior fiscal year resulted from the significantly higher level of sales, and a more favorable mix of products sold, including increasing sales of SynchroWave disposable antennas and fee-per-use rental revenues from our MicroThermX. In addition, as our sales volume increases, we are more able to fully absorb certain fixed overhead costs that are allocated to cost of sales, thus increasing our gross profit percentage.

Operating Costs and Expenses

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 for the three months ended May 31, 2014 were $559,568, compared to $607,690 for the three months ended May 31, 2013, a decrease of $48,122 or approximately 7.9%. Research and development expenses for the nine months ended May 31, 2014 were $1,621,612, compared to $1,693,648 for the nine months ended May 31, 2013, a decrease of $72,036 or approximately 4.3%, mainly due to lower expenses for consulting and stock-based compensation. We believe that the level of our research and development expenses will likely increase slightly in the fourth quarter, over the levels reported for the first three quarters of the current fiscal year due to spending on specific projects that are coming to completion.

Selling, General and Administrative Expenses - Selling, general and administrative expenses were $1,934,277 for the three months ended May 31, 2014, compared to $1,967,082 for the three months ended May 31, 2013, a decrease of $32,805, or approximately 1.7%. Selling, general and administrative expenses were $5,321,309 for the nine months ended May 31, 2014, compared to $5,562,013 for the nine months ended May 31, 2013, a decrease of $240,704, or approximately 4.3%. These decreases are primarily due to lower wage related, legal, and stock-based compensation expenses. These decreases are partially offset by a $47,130 accrual for settlement costs related to the terminated ATM Agreement (see Note 10. Subsequent Events - Settlement Agreement) and a $50,000 accrual for partial future costs associated with the CEO succession plan and severance agreement (see Item 6. Exhibits - Exhibit 10.1). As part of our continuing roll out of the MicroThermX ® product line and the support of its global distribution network, we have increased our marketing and sales staff and incurred additional marketing, sales and related operating expenses. Due to this, we believe that the level of our selling, general and administrative expenses will increase over the levels reported for the first three quarters of our current fiscal year.

Other Income (Expense)

During the three and nine months ended May 31, 2014 and 2013, other income (expense) was not material to our operations.

Liquidity and Capital Resources

From inception through May 31, 2014, we have generated an accumulated deficit of $50,600,752 where our operating revenues have been insufficient to cover our operating expenses. We have financed our operations primarily through the sale of our common stock. As of May 31, 2014, we had cash and cash equivalents of $5,174,602, comprised primarily of money market funds and savings accounts. Current assets were $8,237,014, including $626,161 of net accounts receivable.

As of May 31, 2014, we had current liabilities totaling $1,541,973, comprised of accounts payable, accrued liabilities, customer deposits, note payable and deferred revenue incurred in the normal course of our business. We had no long-term liabilities as of May 31, 2014.


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 $19 million, including proceeds from the exercise of warrants issued in the stock offerings.

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.

April 2013 Offering - In April 2013, we completed an offering of 4,065,042 shares of our common stock and warrants to purchase a total of 3,048,782 shares of our common stock with certain institutional investors (the "Offering"). The Offering was completed using our shelf registration statement, and net proceeds to us were approximately $4.6 million.

The warrants became exercisable six months and one day following the closing date of the Offering and will remain exercisable for five years thereafter at an exercise price of $1.65 per share. The exercise price of the warrants is subject to adjustment in the case of stock splits, stock dividends, combinations of shares and similar recapitalization transactions. The exercisability of the warrants may be limited if, upon exercise, the holder or any of its affiliates would beneficially own more than 4.9% of our common stock.

We agreed with each of the purchasers that, subject to certain exceptions, we will not, within the 30 trading days following the closing of the Offering (which period may be extended in certain circumstances), enter into any agreement to issue or announce the issuance or proposed issuance of any securities.

We also agreed with each of the purchasers that while the warrants are outstanding, we will not affect or enter into an agreement to affect a "Variable Rate Transaction," which means a transaction in which we:

· Issue or sell any convertible securities either (A) at a conversion, exercise or exchange rate or other price that is based upon and/or varies with the trading prices of, or quotations for, the shares of our common stock at any time after the initial issuance of such convertible securities, or (B) with a conversion, exercise or exchange price that is subject to being reset at some future date after the initial issuance of such convertible securities or upon the occurrence of specified or contingent events directly or indirectly related to our business or the market for our common stock, other than pursuant to a customary "weighted average" anti-dilution provision; or

· Enter into any agreement (including, without limitation, an equity line of credit) whereby we may sell securities at a future determined price (other than standard and customary "preemptive" or "participation" rights).

We also agreed with each of the purchasers if we issue securities within the 12 months following the closing of the Offering, the purchasers shall have the right to purchase all of the securities on the same terms, conditions and price provided for in the proposed issuance of securities.

We also agreed to indemnify each of the purchasers against certain losses resulting from our breach of any of our representations, warranties, or covenants under agreements with each of the purchasers, as well as under certain other circumstances described in the Purchase Agreement.

May 2014 Offering - On May 9, 2014 the Company entered into an At-the-Market Issuance Sales Agreement (the "ATM Agreement") with MLV & Co. LLC ("MLV"). Under this sales agreement, BSD could issue and sell from time to time, up to $8,000,000 of common stock. These shares are registered under the universal shelf registration filed with the SEC on September 28, 2012. MLV would act as sales agent, using commercially reasonable efforts consistent with its normal trading and sales practices. The Agreement provided that BSD common shares will be sold at market prices prevailing at the time of the sale of its common stock, at no discount to market and no warrants attached. BSD was not obligated to make any sales under the sales agreement. The Company would pay MLV a commission rate of 3.0% of the gross proceeds from the sale of any common stock sold through MLV as sales agent under the sales agreement, reimburse MLV for certain expenses incurred in connection with entering into the sales agreement, and provide MLV with customary indemnification rights. The full terms and text of the sales agreement was filed by the Company on a Current Report on Form 8-K on May 9, 2014. Through May 31, 2014, the Company sold 25,200 shares of its common stock at an average price per share of $1.093, for gross proceeds of $27,545. From June 1 through June 22, 2014, an additional 21,422 shares were sold, at an average price per share of $1.051, for gross proceeds of $22,523. The At-the-Market Sales Agreement was terminated on June 22, 2014 (see Note 10. Subsequent Events - At-the-Market Offering).


June 2014 Offering - On June 25, 2014, the Company and certain institutional investors entered into a securities purchase agreement (the "Offering") in which the Company agreed to sell an aggregate of 5,500,000 shares of its common stock and warrants to purchase a total of 4,400,000 shares of its common stock to such investors for aggregate gross proceeds of approximately $5.2 million, and net proceeds of approximately $4.7 million, after deducting placement agency fees and other costs associated with the transaction. The common stock and warrants were sold in fixed combinations, with each combination consisting of one share of common stock and a warrant to purchase 0.8 shares of common stock. The purchase price was $0.95 per fixed combination. The warrants will become exercisable six months and one day following the closing date of the Offering and will remain exercisable for five years thereafter at an exercise price of $1.10 per share. The exercise price of the warrants is subject to adjustment in the case of stock splits, stock dividends, combinations of shares and similar recapitalization transactions. The exercisability of the warrants may be limited if, upon exercise, the holder or any of its affiliates would beneficially own more than 4.99% of the Company's common stock.

Under the Purchase Agreement, the Company has agreed with each of the purchasers that, subject to certain exceptions, it will not, within the 75 days following the closing of the Offering enter into any agreement to issue or announce the issuance or proposed issuance of any securities. The Company also agreed with . . .

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