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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended August 31, 2007
[ ] 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: 001-32526
BSD MEDICAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 75-1590407
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2188 West 2200 South, Salt Lake City, Utah 84119
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (801) 972-5555
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Par Value $.001
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
Yes [ ] No[X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
Yes [ ] No[X]
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 of 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No[ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not 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-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
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 registrant's revenues for its most recent fiscal year: $2,834,386
As of October 29, 2007, the registrant had 21,288,333 shares of its common
stock, par value $.001, outstanding. The aggregate market value of the common
stock held by non-affiliates of the registrant as of October 29, 2007 was
approximately $73,490,000.
Documents Incorporated by Reference: Portions of the definitive Proxy Statement
to be delivered to shareholders in connection with the Annual Meeting of
Shareholders to be held January 28, 2008, are incorporated by reference into
Part III hereof.
BSD MEDICAL CORPORATION
FORM 10-K
For the Year Ended August 31, 2007
TABLE OF CONTENTS
Part I
Item 1. Business.................................................. 3
Item 1A Risk Factors.............................................. 16
Item 1B Unresolved Staff Comments................................. 20
Item 2. Properties................................................ 20
Item 3. Legal Proceedings......................................... 21
Item 4. Submission of Matters to a Vote of Security Holders....... 21
Part II
Item 5. Marketfor the Registrant's Common Equity, Related
Stockholder Matters and IssuerPurchases of
Equity Securities....................................... 21
Item 6. Selected Financial Data................................... 23
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 24
Item 7A. Quantitative and Qualitative Disclosure About
Market Risk............................................. 34
Item 8. Financial Statements and Supplementary Data............... 34
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.................. 34
Item 9A. Controls and Procedures................................... 35
Item 9B. Other Information......................................... 36
Part III
Item 10. Directors, Executive Officers and Corporate
Governance.............................................. 36
Item 11. Executive Compensation.................................... 37
Item 12. Security Ownership of Certain Beneficial Owners
and Management.......................................... 37
Item 13. Certain Relationships and Related Transactions,
and Director Independence............................... 37
Item 14. Principal Accountant Fees and Services.................... 37
Part IV
Item 15. Exhibits and Financial Statement Schedules................ 37
Signatures.............................................................. 39
2
PART I
ITEM 1. BUSINESS
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Overview
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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. We consider our operations to comprise one business
segment.
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 addressing the needs of men's health. 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, 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 cancer 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. 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
awarded for the development of the BSD-2000.
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 are prescribed for treatment with heat alone.
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.
3
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. The submission seeking FDA approval for the MicroThermX 100 system is
currently being prepared. 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 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.
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. In April 2007, the
Company received an additional $202,223 in proceeds from the sale of TherMatrx.
Our Contributions to Cancer Therapy
-----------------------------------
Despite the massive attention given to cancer prevention and treatment,
the American Cancer Society estimates that 1,444,920 new cancer cases will be
diagnosed and that 559,650 Americans will die from cancer during 2007. In the
United States the chance of developing cancer during a person's lifetime is one
in two for men and one in three for women. 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.
4
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 leading
cause of death, these three cancer therapies are still grossly inadequate, and
an enormous need for better treatment is obvious. We have engineered systems
designed to increase the effectiveness of these cancer treatments through the
use of precision-focused RF/microwave energy to selectively heat cancer,
creating "hyperthermia" in cancerous tumors. Hyperthermia is an emerging cancer
therapy that both kills cancer cells directly and has been shown to be a potent
additive treatment in making certain of the major existing cancer therapies more
effective for some cancers.
Hyperthermia therapy has been shown to substantially improve the
results from cancer treatments for a variety of tumors. Completed randomized
clinical trials in which the effectiveness of radiation therapy combined with
hyperthermia therapy was compared with the results of radiation therapy alone in
cancer treatment produced the following results: For melanoma, after two years,
local control (local regression or disappearance of the tumor) was 28% for the
control group of patients who received radiation therapy alone versus 46% local
control for the patients who received both hyperthermia and radiation therapy.
For recurrent breast cancer, the complete response rate (complete disappearance
of the tumor) increased from 38% for those receiving radiation therapy alone to
60% for those patients who received both hyperthermia and radiation therapy. For
glioblastoma (brain cancer), the two-year survival rate for patients who
received radiation therapy alone was 15%, compared to 31% survival rate two
years after treatment for those who received both hyperthermia and radiation
therapy. For advanced cervical cancer, the complete response rate (disappearance
of the tumor) rose from 57% for patients who received radiation treatments alone
to 83% for patients receiving both hyperthermia and radiation therapy. The
cervical cancer data was based on the condition of patients three years after
treatment.
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 cancer cell DNA. Blood depletion also
makes cancer resistant to chemotherapy, where blood transport is required to
deliver the drug into the tumor. Our hyperthermia therapy systems precisely
deliver microwave energy to elevate the temperature of tumors, usually between
40(degree)C and 45(degree)C (104(degree)F to 113(degree)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.
5
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
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.
6
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 have used
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. Preparation for the FDA submission is currently
underway.
Most 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 and the MicroThermx 100 would greatly contribute to our sales efforts
by providing the additional technology required for the treatment of solid
tumors located virtually anywhere in the body.
Our Products and Services
-------------------------
We have developed the technology and products required to approach
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
7
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
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 a cylindrical array of 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 supporting the review of 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
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).
8
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
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
9
September 2005, and maintain a sales, marketing and marketing support
organization of 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.
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.
10
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,
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, Rita Medical and Microsulis Limited.
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.
11
Production
----------
We manufacture and test our systems and products at our facilities in
Salt Lake City, Utah. Our manufacturing facility is ISO 9001-1994 certified and
follows FDA quality systems regulations. Some equipment components we purchase
from suppliers are customized to our specifications. Key factors in our
manufacturing process are assembly and testing. We purchase component parts and
other materials from a variety of suppliers. We do not depend on a single
supplier for any item, and believe we can acquire materials and parts from
multiple sources on a timely basis.
Product Liability Exposure
--------------------------
The manufacturing and marketing of medical devices involves an inherent
risk of product liability. Because our products are intended to be used in
hospitals on patients who may be physiologically unstable and severely ill, we
are exposed to potential product liability claims. We presently carry product
liability insurance with coverage limits of $1 million. However, we cannot
assure 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
12
compliance with the ISO and other applicable standards. In complying with these
regulations, we must continue to expend time, money and effort in the areas of
design control, production, and quality control to ensure full compliance. The
FDA's mandatory Medical Device Reporting regulation requires us to provide
information to the FDA on death or serious injuries alleged to have been
associated with the use of our products, as well as information on product
malfunctions that would likely cause or contribute to a death or serious injury
if the malfunctions were to recur. In Europe, the MDD vigilance system
regulations require that we, through a representative in Europe, provide
information to authorities on death or serious injuries alleged to have been
associated with the use of our products, as well as information on product
malfunctions that would likely cause or contribute to a death or serious injury
if the malfunctions were to recur. If the FDA were to assert that we are not in
compliance with applicable laws or regulations, or that any of our medical
devices are ineffective or pose an unreasonable risk to patient health, the FDA
could seize our medical devices, ban such medical devices, or order a recall,
repair, replacement or refund of such devices, and require us to notify health
care professionals and others that the devices present unreasonable risk of
substantial harm to the public. The FDA may also impose operating restrictions,
restrain certain violations of law, and assess civil or criminal penalties
against us. The FDA can also recommend prosecution to the Department of Justice.
Certain regulations are subject to administrative interpretation and we cannot
assure that future interpretations made by the FDA or other regulatory bodies,
with possible retroactive effect, will not adversely affect us.
International sales of medical devices are subject to FDA export
requirements. We have obtained export approvals for all countries into which we
have delivered products. This includes countries in Western Europe and much of
Eastern Europe and many Asian countries.
International sales are subject to the regulatory and safety
requirements of the country into which the sale occurs. There can be no
assurance that all of the necessary approvals will be granted on a timely basis
or at all. Delays in receipt of or failure to receive such approvals would have
a material adverse effect on our financial condition and results of operations.
In addition to FDA regulations, certain U.S. health care laws apply
when a claim for reimbursement for one of our medical devices is submitted to
Medicare, Medicaid, or other federal health care programs. For instance, federal
law prohibits the filing of false or improper claims for federal payments. In
addition, federal law prohibits the payment of anything of value for the purpose
of inducing referrals of business reimbursable under a federal health care
program. Other federal laws prohibit physicians from making referrals for
certain services and items payable under certain federal programs if the
physician has a financial relationship with the entity providing the service or
item.
All of these laws are subject to evolving interpretations. If the
federal government were to conclude that we are not in compliance with any of
these health care laws, we could be subject to substantial criminal and civil
penalties, and could be excluded from participation as a supplier to
beneficiaries in federal health care programs.
The Federal Communications Commission, or FCC, regulates the
frequencies of microwave and radio frequency emissions from medical and other
types of equipment to prevent interference with commercial and governmental
communications networks. The BSD-500 fixed frequency systems and applicators
emit 915 MHz for U.S. and some European installations and 433.92 MHz for some
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.
13
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 four patents
in the United States and six 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 BSD and we
obtained one patent license from the National Institutes of Health and one from
Duke University. 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 31, 2007, BSD obtained an exclusive sub-license to a patent
owned by Duke University using phased array technology for the treatment of
primary breast cancer on terms that included hyperthermia equipment upgrades and
payment of some prior patent costs. This technology and patent is expected to
enhance future developments with the current BSD phased array hyperthermia
systems.
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.
Research and Development
------------------------
Research and development expenses for fiscal 2007 were $1,875,147
compared to $1,251,956 for fiscal 2006, an increase of $623,191, or 50%.
Research and development expenses in fiscal 2007 related to the following:
o completion of our commercial version of the BSD-2000 with complete
modernization of the computer system, applicators and patient
supports and development of commercial configuration of BSD-2000
3D/MR
14
o addition of the Sigma Ellipse phased array applicator to the
standard system configuration of the BSD-2000
o a complete new design of the BSD-2000 patient support system for
commercialization
o enhancements to the BSD 500 and 2000 systems including language
translations to German and Chinese
o Completion of development collaboration projects with Duke
University of various spiral array applicator systems to
compliment the BSD-500
o Incorporate new development regulations in design process
o development 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.
Seasonality
-----------
Our operations are generally not subject to seasonal fluctuations.
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.
Segment Information and Sales Concentrations
--------------------------------------------
We consider our operations to comprise one business segment. All of our
operating assets are located in the United States.
A significant portion of our revenues are derived from sales to
Medizin-Technik GmbH located in Munich, Germany, which is a significant
distributor of our products in Europe and which is owned by Dr. Gerhard W.
Sennewald, one of our directors and a significant stockholder. For the fiscal
year 2007 we had sales of $1,385,332, or 49% of our total sales, from the sale
of systems and various component parts sold to Medizin-Technik, as compared to
sales of $689,086, or 24% of our total sales, in fiscal 2006. Management
believes the terms of the transactions with Medizin-Technik were arms length and
fair to the Company.
A significant portion of our revenues are derived from sales to foreign
customers. During the years ended August 31, 2007, 2006 and 2005, total export
sales totaled $1,787,363, $2,413,807 and $1,595,050, or 63%, 83% and 79% of
total sales, respectively. During fiscal year 2007, export sales to Switzerland
were approximately 44% of total sales. During fiscal year 2006, export sales to
China, Switzerland and Poland were approximately 45%, 21% and 10% of total
sales, respectively. During fiscal year 2005, export sales to Switzerland and
China were approximately 45% and 30% of total sales, respectively.
Backlog
-------
As of August 31, 2007, the Company had a sales backlog of $2,018,813,
consisting of orders from related parties.
15
Employees
---------
As of August 31, 2007, we had 45 employees; 41 of whom were full-time
employees. None of our employees are 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.
Available Information
---------------------
We file annual, quarterly and current reports, and other reports and
documents with the Securities and Exchange Commission (the "SEC"). The public
may read and copy any materials we file with the SEC at the SEC's Public
Reference Room at Station Place, 100 F Street, N.E., Washington, D.C. 20549. The
public may obtain information on the operation of the Public Reference Room by
calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet site that
contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC. The address of that
website is http://www.sec.gov.
The Company's Internet address is http://www.bsdmc.com. We make
available on or through our investor link on our website, free of charge, our
Annual Reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and any amendments to those reports as soon as reasonably practicable
after this material is electronically filed or furnished to the SEC. We also
make available, on our website, the charter of the Audit Committee of our Board
of Directors and our Code of Ethics.
ITEM 1A. RISK FACTORS
----------------------
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-K. 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. Although the Company
has attempted to list the factors that it is currently aware may have an impact
on its operations, there may be other factors of which the Company is currently
unaware or to which it does not assign sufficient significance, and the
following list should not be considered comprehensive.
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
$2,850,153 at August 31, 2007. In fiscal 2006, we recorded net income of
$9,249,496 which eliminated the accumulated deficit and resulted in positive
retained earnings of $498,042 as of August 31, 2006. In fiscal 2007, however, we
recorded a net loss of $3,348,195, which increased our accumulated deficit to
$2,850,153.
Our net profit for the fiscal years ended August 31, 2006 and 2005 was
primarily due to the sale of our ownership in TherMatrx, to American Medical
Systems Holdings, Inc., or AMS. 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
16
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 payers. Despite the existence of general
reimbursement policies, local medical review policies may differ for public and
private insurance payers, which may cause payment to be refused for some
hyperthermia treatments. Private payers 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 our stock. While we attempt to provide for
foreseeable doubtful accounts, we cannot assure that this provision will always
be adequate to cover our credit risks.
17
Increasing sales of our hyperthermia systems depends on our ability to
successfully expand our sales distribution channels; we have had failures with
the productivity of new channels of distribution in the past. Expanding our
channels of distribution will also significantly increase our sales expenses,
which could negatively impact our financial performance.
We believe that the success of our efforts to increase sales of our
hyperthermia systems in the future depends on our ability to successfully expand
our sales distribution channels. Historically, we have sometimes failed in
establishing successful new sales channels.
We anticipate that the success of our multi-year plan for selling
hyperthermia systems will require expanding our sales and marketing organization
through a combination of direct sales people, distributors and internal and
external marketing expertise. However, as we pursue our marketing plan, there
can be no assurance that we will be successful in securing reliable channels of
distribution to meet our plan through expanded sales. Recruiting and training
new distribution channels can take time and considerable expense. We project
that sales and marketing expenses will increase substantially in the future as
compared to past years. This added expense could have an adverse effect on our
future financial performance that is greater than any potential increases in
sales.
In addition, there can be no assurance that our channels of
distribution that have been successful in the past will be successful in the
future. We have derived a significant portion of our revenue from sales in
Europe and in China. Sales in Europe were made 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 either Medizin-Technik or our Chinese distributor 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 and
MicroThermx 100 systems. Obtaining these pre-market approvals from the FDA is
necessary for us to commercially market these systems in the United States.
Obtaining approvals is a lengthy and expensive process. 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.
18
We rely on patents, trade secrets, trademarks, copyrights, know-how,
license agreements and contractual provisions to establish and protect our
intellectual property rights. Our success will substantially depend on our
ability to protect our intellectual property rights and maintain rights granted
to us through license agreements. Our intellectual property rights may only
afford us limited protection and may not adequately protect our rights or
remedies to gain or keep any advantages we may have over our competitors, which
could reduce our ability to be competitive and generate sales and profitability.
In the past, we have participated in substantial litigation regarding
our patent and other intellectual property rights in the medical device
industry. We have previously filed lawsuits for patent infringement against
three of our competitors and subsequently settled all three of those lawsuits.
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 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
19
stock, investors may face difficulties in selling shares at attractive prices
when they want to. The average daily trading volume for our stock has varied
significantly from week to week and from month to month, and the trading volume
often varies widely from day to day. The following factors could impact the
market for our stock and cause further volatility in our stock price:
o announcements of new technological innovations;
o FDA and other regulatory developments;
o changes in third-party reimbursements;
o developments concerning proprietary rights;
o third parties receiving FDA approval for competing products; and
o market conditions generally for medical and technology stocks.
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 1B. UNRESOLVED STAFF COMMENTS
-----------------------------------
None.
ITEM 2. 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 included 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 5,
1997. Thereafter, the purchase price increases by $50,000 each year, and the
20
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. When our lease on this building
expired in November of 2007, we exercised our option to purchase the building
for a purchase price of $1,200,000.
ITEM 3. LEGAL PROCEEDINGS
-------------------------
There are no legal proceedings, to our knowledge, pending against or
being taken by BSD Medical Corporation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
-----------------------------------------------------------
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
----------------------------------------------------------------------
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
-------------------------------------------------
On July 9, 2005, the American Stock Exchange (AMEX) 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 AMEX for the quarters in fiscal year 2006 and 2007.
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, 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
November 30, 2006.............. 5.90 4.45
February 28, 2007............... 9.25 5.00
May 31, 2007..................... 9.00 5.75
August 31, 2007.................. 8.72 4.60
As of August 31, 2007, there were approximately 507 holders of record
of our common stock. We have not paid any cash dividends on our common stock
since our inception.
On November 9, 2007, the last reported sales price of our common stock
on the AMEX was $5.41 per share.
Repurchases of Equity Securities
None.
21
Recent Sales of Unregistered Securities
Following is a summary of sales of unregistered securities for the
fiscal years ended August 31, 2007, 2006 and 2005. All securities were issued as
restricted common shares, which are subject to Rule 144 of the Securities and
Exchange Commission. Generally, Rule 144 requires shareholders to hold the
shares for a minimum of one year before sale. In addition, officers, directors
and more than 10% shareholders are further restricted in their ability to sell
such shares. There have been no underwriters of these securities and no
commissions or underwriting discounts have been paid.
Consideration or Nature Shares Value
of Service Performed Issued Received
----------------------- ------ ---------
Year Ended August 31, 2005
--------------------------
Members of Board of Directors Board Services 27,900 $ 45,000
Year Ended August 31, 2006
--------------------------
Members of Board of Directors Board Services 13,607 48,471
Year Ended August 31, 2007
--------------------------
Members of Board of Directors Board Services 10,288 60,000
Equity Compensation Plan Information
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, as amended, provides for the granting
of options for an aggregate of 2,677,300 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.
The following table summarizes the Company's equity compensation plans
as of August 31, 2007.
Number of Weighted Number of
Securities to Average Securities
be Issued Exercise Remaining
Upon Exercise Price of Available
of Outstanding Outstanding for Future
Plan Category Options Options Issuance
Equity compensation
plans approved by
security holders (1) 1,795,853 $2.31 631,185
(1) A total of 3,677,300 shares of common stock have been reserved for
issuance under the plans. To date, a total of 1,092,231 options have been
exercised under the plans.
22
Performance Graph
The following graph shows a comparison of the five-year cumulative
total return for the Company's common stock, the S&P 500 Index, and the S&P
Health Care Equipment Index, assuming an investment of $100 on August 31, 2002.
The cumulative return of the Company was computed by dividing the difference
between the price of the Company's common stock at the end and the beginning of
the measurement period (August 31, 2002 to August 31, 2007) by the price of the
Company's common stock at the beginning of the measurement period.
[GRAPHIC OMITTED]
ITEM 6. SELECTED FINANCIAL DATA
-------------------------------
The following selected financial data as of and for each of the fiscal
years in the five year period ended August 31, 2007 were derived from the
Company's financial statements audited by Tanner LC, independent registered
public accountants. The data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in Item 7 of this Form 10-K and the financial statements
and notes thereto included in Item 8 of this Form 10-K.
Years Ended August 31,
2007 2006 2005 2004 2003
---------------------------------------------------------------
Results of Operations Data:
Revenues $ 2,834,386 $ 2,898,402 $ 2,021,104 $ 1,630,648 $ 2,572,682
Loss from operations (6,384,540) (5,099,151) (2,293,696) (1,290,618) (629,000)
Net income (loss) (3,348,195) 9,249,496 3,321,692 8,412,961 (570,285)
Income (loss) per
common share - diluted $(0.16) $0.42 $0.15 $0.41 $(0.03)
Dividends per common share $ - $ - $ - $ - $ -
Balance Sheet Data:
Total Assets $24,341,640 $28,309,868 $15,599,943 $11,741,047 $ 1,553,615
Long-term debt - - - - -
Stockholders' equity 23,183,788 25,624,001 14,977,667 11,119,778 574,957
23
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 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 financial statements and notes thereto included in this
annual report on Form 10-K. All information presented herein is based on our
fiscal year ended August 31, 2007. We assume no obligation to revise or update
any forward-looking statements for any reason, except as required by law.
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 fiscal year 2006, the Company had received a
total payout, including contingency payments, of approximately $33.5 million. In
April 2007, the Company received an additional $202,223 in proceeds from the
sale of TherMatrx.
Our accumulated deficit since inception increased to $2,850,153 as of
August 31, 2007 from positive retained earnings of $498,042 as of August 31,
2006 due to the net loss for fiscal year 2007, as compared to net income for
fiscal 2006 and 2005 of $9,249,496 and $3,348,195, respectively. 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, providing
manufacturing services, training, and service support contracts. Product sales
24
were $2,520,818, $2,706,214 and $1,844,321 for the years ended August 31, 2007,
2006 and 2005, respectively. Service and other revenues were $313,568, $192,188
and $176,783 for the years ended August 31, 2007, 2006 and 2005, respectively.
We derived $1,385,332, or approximately 49%, of our total revenue in
fiscal 2007 from sales to related parties, as compared to $689,086, or 24% from
sales to related parties in fiscal 2006. 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 2007, we derived $1,449,054, or approximately 51%, of our
total revenue as compared to $2,209,316, or 76%, in fiscal 2006 from non-related
party sales. Our fiscal 2007 non-related party revenue consisted of sales of our
BSD-500 systems of $1,347,887, consumable devices of $22,970, service contracts
of $41,338, billable labor of $550 and consulting revenue of $36,309. Our fiscal
2006 non-related party revenue consisted of sales of BSD-500 and BSD-2000
systems of $1,902,175, 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, 2007 included raw material
and labor costs. Research and development expenses include expenditures for new
product development and development of enhancements to existing products.
As of August 31, 2007, the Company had a sales backlog of $2,018,813,
consisting of orders from related parties.
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 cancer treatment systems may include
training as part of the sale. In such cases, the portion of the revenue related
to the training, calculated based on the amount charged for training on a
stand-alone basis, is deferred and recognized when the training has been
provided. The sales of our cancer treatment systems do not require specific
customer acceptance provisions and do not include the right of return, except in
cases where the product does not function as warranted by us. We provide a
reserve allowance for estimated returns. To date, returns have not been
significant.
Revenue from manufacturing services is recorded when an agreement with
the customer exists for such services, the services have been provided, and
collection is reasonably assured. Revenue from training services is recorded
when an agreement with the customer exists for such training, the training
services have been provided, and collection is reasonably assured. Revenue from
service support contracts is recognized on a straight-line basis over the term
of the contract.
Our revenue recognition policy is the same for sales to both related
parties and non-related parties. We provide the same products and services under
the same terms to non-related parties as to related parties. Sales to
distributors are recognized in the same manner as sales to end-user customers.
Deferred revenue and customer deposits payable include amounts from service
contracts as well as cash received for the sales of products, which have not
been shipped.
Inventory Reserves. As of August 31, 2007, we had recorded a reserve
for potential inventory impairment of $40,000. We periodically review our
25
inventory levels and usage, paying particular attention to slower-moving items.
If projected sales for fiscal 2008 do not materialize or if our hyperthermia
systems do not receive increased market acceptance, we may be required to
increase the reserve for inventory impairment in future periods.
Product Warranty. We provide product warranties on our BSD-500 and
BSD-2000 systems. These warranties vary from contract to contract, but generally
consist of parts and labor warranties for one year from the date of
installation. To date, expenses resulting from such warranties have not been
material. We record a warranty expense at the time of each sale. This reserve is
estimated based on prior history of service expense associated with similar
units sold in the past.
Allowance for Doubtful Accounts. We maintain allowances for doubtful
accounts for estimated losses resulting from the inability of our customers to
make required payments. As of August 31, 2007 we had a $20,000 balance in this
account. This allowance is a significant estimate and is regularly evaluated by
us for adequacy by taking into consideration factors such as past experience,
credit quality of the customer base, age of the receivable balances, both
individually and in the aggregate, and current economic conditions that may
affect a customer's ability to pay. If the financial condition of our customers
were to deteriorate, resulting in an impairment of their ability to make
payments, additional allowances may be required.
Stock-based Compensation - Effective September 1, 2006 we adopted SFAS
No. 123(R), which requires us to measure the compensation cost of stock options
and other stock-based awards to employees and directors at fair value at the
grant date and recognize compensation expense over the requisite service period
for awards expected to vest. During the year ended August 31, 2007, we recorded
compensation expense of $832,224 for stock options issued to directors and
employees. The fair value of stock options is computed using the Black-Scholes
valuation model, which model utilizes inputs that are subject to change over
time, including the volatility of the market price of our common stock, risk
free interest rates, requisite service periods and assumptions made by us
regarding the assumed life and vesting of stock options and stock-based awards.
As new options or stock-based awards are granted, additional non-cash
compensation expense will be recorded by us. Upon adoption of SFAS No. 123 (R)
effective September 1, 2006, we reclassified the balance of deferred
compensation of $247,700 to additional paid-in capital.
Results of Operations: Comparison of Fiscal Years ended August 31, 2007 and 2006
--------------------------------------------------------------------------------
Revenues. Total revenues for fiscal 2007 were $2,834,386 compared to
$2,898,402 for fiscal 2006, a decrease of $64,016, or 2%. Our revenues can
fluctuate significantly from period to period because our sales, to date, have
been based upon a relatively small number of systems, the sales price of each
being substantial enough to greatly impact revenue levels in the periods in
which they occur. Sales of a few systems can cause a large change in our
revenues from period to period.
Related Party Sales. We earned $1,385,332, or approximately 49%, of our
revenues in the year ended August 31, 2007 from sales to related parties as
compared to $689,086 or approximately 24%, in the year ended August 31, 2006.
These sales for the year ended August 31, 2007 were to Medizin-Technik and
consisted of product sales of $1,172,930, probes of $47,902 and other revenues
of $164,500. All of the related party revenues in the year ended August 31, 2006
was from sales of systems and component parts. Sales to Medizin-Technik may
fluctuate significantly from period to period because our sales, to date, have
been based upon a relatively small number of systems, the sales price of each
being substantial enough to greatly impact revenue levels in the periods in
which they occur. Sales of a few systems can cause a large change in our revenue
from period to period.
Non-Related Party Sales. In the year ended August 31, 2007, we earned
$1,449,054, or 51%, of our revenues from sales to unrelated parties, as compared
to $2,209,316, or 76%, for the year ended August 31, 2006. These sales for the
26
year ended August 31, 2007 consisted of product sales of $1,347,887, consulting
services of $36,309, service contracts of $41,338, probes of $3,300 and other
revenue of $20,220. By comparison, these sales for the year ended August 31,
2006 consisted of product sales of $1,902,175, sales of consumable devices of
$126,896, consulting services of $144,750, service contracts of $18,245, and
other revenue of $17,250.
Cost of Sales. Cost of sales for fiscal 2007 was $1,581,562 compared to
$1,716,640 for fiscal 2006, a decrease of $135,078 or 8%. This decrease resulted
primarily from lower sales in fiscal 2007. Cost of sales as a percentage of
sales will fluctuate from period to period depending on the mix of sales for the
period. Cost of sales to related parties in fiscal 2007 increased to $815,522
from $317,214 in fiscal 2006 primarily due to the increase in related party
sales. During fiscal 2007 and 2006, all of the related party cost of sales were
attributable to sales to Medizin-Technik.
Gross Profit. Gross profit for the year ended August 31, 2007 was
$1,252,824 or 44% of total sales, as compared to $1,181,762 or 41% of total
sales for the year ended August 31, 2006. As sales volume increases, we believe
we will more fully absorb our fixed overhead costs, thus increasing our gross
profit percentage. The gross margin percentage will also fluctuate from period
to period depending on the mix of revenues reported for the period.
Research and Development Expenses. Research and development expenses
were $1,875,147 for the year ended August 31, 2007, as compared to $1,251,956,
for the year ended August 31, 2006, an increase of $623,191, or approximately
50%. Research and development expenses in the year ended August 31, 2007
increased due to expanded activities related to the following:
o Update of our commercial version of the BSD-2000 with complete
modernization of the computer system, including addition of the
Sigma Ellipse phased array applicator.
o Support for field implementation of 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 and development of various spiral
array applicator systems to compliment the BSD-500.
o Support for PMA filing for the BSD-2000 system, development of the
first model of the MicroThermX 100 microwave ablation system.
o 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.
Selling General and Administrative Expenses. Selling, general and
administrative expenses increased to $5,762,217 in the year ended August 31,
2007, from $5,028,957 for the year ended August 31, 2006, an increase of
$733,260 or approximately 15%. This increase was primarily due to a non-cash
stock-based compensation expense of $832,224 related to issuance of stock
options. We anticipate that our selling, general and administrative expenses
will continue at this increased level, at least in the short term.
Interest Income. Interest income decreased to $1,133,125 for the year
ended August 31, 2007, as compared to $1,301,341 for the year ended August 31,
2006, due to lower average levels of cash and investments in the current fiscal
year.
27
Gain on Sale of Equity Interest. Other income for fiscal 2007 included
$202,223 additional proceeds received from the sale of our equity interest in
TherMatrx. During fiscal 2006, we recognized a gain on sale of our equity
interest in TherMatrx of $18,016,272.
Net Income (Loss). During the year ended August 31, 2007 we had a net
loss of $3,348,195, after recording a tax benefit of $1,865,000, as compared to
an after tax net income of $9,249,496 in the year ended August 31, 2006. The net
income in the previous fiscal year was attributed primarily to the gain on sale
of our investment in TherMatrx.
Results of Operations: Comparison of Fiscal Years ended August 31, 2006 and 2005
--------------------------------------------------------------------------------
Revenues. Total revenues for fiscal 2006 were $2,898,402 compared to
$2,021,104 for fiscal 2005, an increase of $877,298, or 43%. The increase in
total revenues 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 revenues can
fluctuate significantly from period to period because our sales, to date, have
been based upon a relatively small number of systems, the sales price of each
being substantial enough to greatly impact revenue levels in the periods in
which they occur.
Related Party Sales. We derived $689,086, or 24%, of our total revenues
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 Sales. In fiscal 2006, we derived $2,209,316, or 76%,
of our total revenues 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 compared to fiscal 2005.
Cost of sales as a percentage of sales will fluctuate from period to period
depending on the mix of sales for the period. Cost of sales to related parties
in fiscal 2006 decreased to $317,214 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 cost of sales 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. The gross
margin percentage will also fluctuate from period to period depending on the mix
of revenues reported for the period.
Research and Development Expenses. Research and 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:
28
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.
Gain on Sale of Equity Interest. Other income for fiscal 2006 included
$18,016,272 gain on sale of our equity interest in TherMatrx, compared to
$6,551,087 gain on sale of our equity interest in TherMatrx in fiscal 2005.
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.
29
Liquidity and Capital Resources
-------------------------------
Since inception through August 31, 2007, we have generated an
accumulated deficit of $2,850,153. We have historically financed our operations
through cash from operations, research grants, licensing of technological
assets, issuance of common stock and sale of investments in spinoff operations.
As of August 31, 2007, we had cash, cash equivalents and investments totaling
$19,506,658 as compared to cash, cash equivalents and investments totaling
$24,735,200 as of August 31, 2006.
During the year ended August 31, 2007, we used $5,120,462 of cash in
operating activities, primarily as a result of our net loss of $3,348,195,
decrease in income tax payable of $1,500,000, and increase in income tax
receivable of $1,752,492, offset by a decrease in receivables of $894,376. By
comparison, net cash used in operating activities was $6,883,132 during the year
ended August 31, 2006.
Net cash provided by investing activities for the year ended August 31,
2007 was $3,128,201, resulting from the sale of investments of $2,992,590 and
additional proceeds from the sale of our investment in TherMatrx of $202,223,
partially offset by the purchase of property and equipment of $66,612. For the
year ended August 31, 2006, net cash provided by investing activities was
7,729,216, resulting from proceeds from the sale of our investment in TherMatrx
of $18,016,272, partially offset by the purchase of investments of $10,073,884
and the purchase of property and equipment of $213,172.
Net cash provided by financing activities consisted of proceeds from
the sale of common stock through the exercise of stock options of $229,707 in
fiscal 2007 and $424,336 in fiscal 2006.
We expect to incur additional expenses related to the commercial
introduction of our systems, due to additional participation at trade shows,
expenditures on publicity, additional travel, increased sales salaries and
commissions and other related expenses. In addition, we anticipate that we will
incur increased expenses related to seeking governmental and regulatory
approvals for our products and continued expenses related to corporate
governance and compliance with the Sarbanes-Oxley Act of 2002, during fiscal
2008.
We believe we can cover any cash requirements with cost cutting or
available cash. If we cannot cover any such cash shortfall with cost cutting or
available cash, we would need to obtain additional financing. We cannot be
certain that any financing will be available when needed or will be available on
terms acceptable to us. If we raise equity capital our stockholders will be
diluted. Insufficient funds may require us to delay, scale back or eliminate
some or all of our programs designed to facilitate the commercial introduction
of our systems or entry into new markets.
As of August 31, 2007, we have no significant commitments for the
purchase of property and equipment.
The Company has no off balance sheet arrangements as of August 31,
2007.
We believe that our current cash and cash equivalents, investments, and
expected cash provided from operating activities will be sufficient to fund our
operations for the next twelve months.
Recent Accounting Pronouncements
--------------------------------
In July 2006, the FASB issued FASB Interpretation (FIN) 48, Accounting
for Uncertainty in Income Taxes. FIN 48 clarifies the accounting for uncertainty
in income taxes recognized in financial statements in accordance with Statement
of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes.
This Interpretation prescribes a recognition threshold and measurement attribute
30
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. The Company is currently evaluating the
impact this Interpretation will have on its financial statements. This
Interpretation will be effective in the Company's financial statements for the
fiscal year beginning September 1, 2007.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option
for Financial Assets and Financial Liabilities - Including an Amendment of FASB
Statement No. 115. This statement permits entities to choose to measure many
financial instruments and certain other items at fair value. Most of the
provisions of SFAS No. 159 apply only to entities that elect the fair value
option. However, the amendment to SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities, applies to all entities with
available-for-sale and trading securities. SFAS No. 159 is effective as of the
beginning of an entity's first fiscal year that begins after November 15, 2007.
Early adoption is permitted as of the beginning of a fiscal year that begins on
or before November 15, 2007, provided the entity also elects to apply the
provision of SFAS No. 157, Fair Value Measurements. The adoption of this
statement is not expected to have a material effect on the Company's financial
statements.
In September 2006, the FASB issued SFAS Statement No. 158, Employers'
Accounting for Defined Benefit Pension and Other Postretirement Plans. This new
standard will require employers to fully recognize the obligations associated
with single-employer defined benefit pension, retiree healthcare and other
postretirement plans in their financial statements. The Company anticipates
adopting SFAS No. 158 on September 1, 2007, and does not believe the adoption of
the new accounting standard will result in a material impact on the financial
statements of the Company since the Company currently does not sponsor the
defined benefit pension or postretirement plans within the scope of the
standard.
In September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements. SFAS No. 157 defines fair value, establishes a framework for
measuring fair value, and requires enhanced disclosures about fair value
measurements. SFAS No. 157 requires companies to disclose the fair value of
their financial instruments according to a fair value hierarchy as defined in
the standard. Additionally, companies are required to provide enhanced
disclosure regarding financial instruments in one of the categories, including a
reconciliation of the beginning and ending balances separately for each major
category of assets and liabilities. SFAS No. 157 is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years. The Company believes that the
adoption of SFAS No. 157 will not have a material impact on its financial
statements.
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing
of Financial Assets, to simplify accounting for separately recognized servicing
assets and servicing liabilities. SFAS No. 156 amends SFAS No. 140, Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities. Additionally, SFAS No. 156 applies to all separately recognized
servicing assets and liabilities acquired or issued after the beginning of an
entity's fiscal year that begins after September 15, 2006, although early
adoption is permitted. The Company does not expect the adoption of this new
standard to have a material impact on its financial position, results of
operations or cash flows.
In February 2006, the FASB issued SFAS No. 155, Accounting for Certain
Hybrid Instruments, which amends SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, and SFAS No. 140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No.
155 allows financial instruments that have embedded derivatives to be accounted
for as a whole (eliminating the need to bifurcate the derivative from its host)
if the holder elects to account for the whole instrument on a fair value basis.
SFAS No. 155 also clarifies and amends certain other provisions of SFAS No. 133
and SFAS No. 140. This statement is effective for all financial instruments
acquired or issued in financial years beginning after September 15, 2006. The
Company does not expect the adoption of this new standard to have a material
impact on its financial position, results of operations or cash flows.
31
On December 21, 2006, the FASB issued FASB Staff Position (FSP)
Emerging Issues Task Force (EITF) 00-19-2, Accounting for Registration Payment
Arrangements, which requires an issuer to account for a contingent obligation to
transfer consideration under a registration payment arrangement in accordance
with FASB Statement No. 5, Accounting for Contingencies, and FASB Interpretation
14, Reasonable Estimation of the Amount of Loss. Registration payment
arrangements are frequently entered into in connection with issuance of
unregistered financial instruments, such as equity shares or warrants. A
registration payment arrangement contingently obligates the issuer to make
future payments or otherwise transfer consideration to another party if the
issuer fails to file a registration statement with the SEC for the resale of
specified financial instruments or fails to have the registration statement
declared effective within a specific period. The FSP requires issuers to make
certain disclosures for each registration payment arrangement or group of
similar arrangements. The FSP is effective immediately for registration payment
arrangements and financial instruments entered into or modified after the FSP's
issuance date. For previously issued registration payment arrangements and
financial instruments subject to those arrangements, the FSP is effective for
financial statements issued for fiscal years beginning after December 15, 2006.
To the extent that the Company enters into financing arrangements in the future
that include registration payment arrangements, the future application of this
FSP may have a material effect on its financial condition and results of
operations.
In June 2006, the FASB ratified EITF, No. 06-3, How Taxes Collected
from Customers and Remitted to Governmental Authorities Should Be Presented in
the Income Statement (That Is, Gross versus Net Presentation). EITF No. 06-3
requires that, for interim and annual reporting periods beginning after December
15, 2006, the Company disclose its policy related to the presentation of sales
taxes and similar assessments related to our revenue transactions. Early
adoption is permitted. The Company presents revenue net of sales taxes and any
similar assessments. EITF No. 06-3 had no effect on the Company's financial
position and results of operations.
EITF No. 07-3, Accounting for Nonrefundable Advance Payments for Goods
or Services Received for Use in Future Research and Development Activities, was
issued in June 2007. The EITF reached a consensus that nonrefundable payments
for goods and services that will be used or rendered for future research and
development activities should be deferred and capitalized. Such amounts should
be recognized as an expense as the related goods are delivered and the related
services are performed. Entities should continue to evaluate whether they expect
the goods to be delivered or services to be rendered. If the entity does not
expect the goods to be delivered or services to be rendered, the capitalized
advance payment should be charged to expense. This pronouncement is effective
for financial statements issued for fiscal years beginning after December 15,
2007 (the Company's fiscal year beginning September 1, 2008) and interim periods
within those fiscal years. Earlier application is not permitted. Entities are
required to report the effects of applying this pronouncement prospectively for
new contracts entered into on or after the effective date of this pronouncement.
The Company currently is not a party to research and development arrangements
that include nonrefundable advance payments. To the extent that the Company
enters into research and development arrangements in the future that include
nonrefundable advance payments, the future application of this pronouncement may
have a material effect on its financial condition and results of operations.
FORWARD-LOOKING STATEMENTS
With the exception of historical facts, the statements contained in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" are forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995, which reflect our current expectations
32
and beliefs regarding our future results of operations, performance and
achievements. These statements are subject to risks and uncertainties and are
based upon assumptions and beliefs that may or may not materialize. These
forward-looking statements include, but are not limited to, statements
concerning:
o our belief about the market opportunities for our products;
o our anticipated financial performance and business plan;
o our expectations regarding the commercialization of the BSD-2000,
BSD 500 and MicroThermX 100 systems;
o our expectations to further expand our developments to treat other
diseases and medical conditions;
o our expectations that in a higher production environment of
established commercial sales we could achieve a 60% gross margin
on system sales and an 80% gross margin on service agreements and
disposable applicators used with our MicroThermX 100 system;
o our belief concerning the market potential for developed cancer
therapy systems;
o our expectations related to the after-market opportunity for
service agreements;
o our expectations related to the replacement cycle for our systems;
o our expectations that we will incur increased expenses related to
seeking governmental and regulatory approvals for our products;
o our expectations and efforts regarding FDA approvals relating to
the BSD-2000 and MicroThermX 100 systems;
o our belief that our technology has application for additional
approaches to treating cancer and for other medical purposes;
o our expectations related to the amount of expenses we will incur
for the commercial introduction of the BSD-2000 and MicroThermX
100 systems;
o our expectation that we will incur increased expenses related to
our corporate governance and compliance with the Sarbanes-Oxley
Act of 2002;
o our expectation that our selling, general and administrative
expenses will continue at increased levels at least in the short
term;
o our belief that we can cover any cash shortfall with cost cutting
or available cash; and
o our belief that our current working capital, investments and cash
from operations will be sufficient to finance our operations
through working capital and capital resources needs for the next
twelve months.
We wish to caution readers that the forward-looking statements and our
operating results are subject to various risks and uncertainties that could
cause our actual results and outcomes to differ materially from those discussed
or anticipated, including the factors set forth in the subsection entitled
"Risks Related to Our Business" included in our Annual Report on Form 10-KSB for
33
the year ended August 31, 2006 and our other filings with the Securities and
Exchange Commission. We also wish to advise readers not to place any undue
reliance on the forward-looking statements contained in this report, which
reflect our beliefs and expectations only as of the date of this report. We
assume no obligation to update or revise these forward-looking statements to
reflect new events or circumstances or any changes in our beliefs or
expectations, other than as required by law.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
--------------------------------------------------------------------
A significant portion of the Company's cash equivalents and short-term
investments bear variable interest rates that are adjusted to market conditions.
Changes in market rates will affect interest earned and potentially the market
value of the principal of these instruments. The Company does not utilize
derivative instruments to offset the exposure to interest rate changes.
Significant changes in interest rates may have a material impact on the
Company's investment income, but not on the Company's consolidated results of
operations.
The Company does have significant sales to foreign customers and is
therefore subject to the effects of changes in foreign currency exchange rates
may have on demand for its products and services. The Company does not utilize
derivative instruments to offset the exposure to changes in foreign currency
exchange rates. To minimize foreign exchange risk, the Company's export sales
are transacted in United States dollars.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
---------------------------------------------------
The Financial Statements of the Company called for by this item are
contained in a separate section of this report. See "Index to Financial
Statements" on Page F-1.
The following table presents selected unaudited quarterly financial
data for each of the four quarters in our fiscal years 2007 and 2006. The
selected quarterly financial data reflects, in the opinion of management, all
adjustments necessary to fairly present the results of operations for such
periods. Results of any one or more quarters are not necessarily indicative of
continuing trends.
2007 2006
-------------------------------------------- --------------------------------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
-- -- -- -- -- -- -- --
Total revenues $ 664,655 $ 660,657 $ 953,176 $ 555,898 $ 521,167 $ 439,376 $ 712,771 $ 1,225,088
Net income loss (861,671) (712,785) (634,638) (1,139,101) 3,136,242 3,181,679 2,987,623 (56,048)
Income (loss) per
common share
- diluted
$(0.04) $(0.03) $(0.03) $(0.06) $ 0.14 $ 0.14 $ 0.14 $ (0.00)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
-----------------------------------------------------------------------
FINANCIAL DISCLOSURES
---------------------
None.
34
ITEM 9A. CONTROLS AND PROCEDURES
---------------------------------
Disclosure Controls and Procedures
The Company intends to maintain disclosure controls and procedures
designed to provide reasonable assurance that information required to be
disclosed in reports filed under the Securities Exchange Act of 1934 (the "Act")
is recorded, processed, summarized and reported within the specified time
periods and accumulated and communicated to management, including its Chief
Executive Officer (Principal Executive Officer) and Chief Financial Officer
(Principal Accounting Officer), as appropriate, to allow timely decisions
regarding required disclosure.
Management, under the supervision and with the participation of its
Chief Executive Officer (Principal Executive Officer) and Chief Financial
Officer (Principal Accounting Officer), evaluated the effectiveness of the
Company's disclosure controls and procedures (as defined in Rules 13a-15(e) or
15d-15(e) promulgated under the Act), as of August 31, 2007. Based on that
evaluation, management concluded that our internal control over financial
reporting was effective as of August 31, 2007.
Attached as exhibits to this Annual Report on Form 10-K are
certifications of the Company's Chief Executive Officer (Principal Executive
Officer) and Interim Chief Financial Officer (Principal Accounting Officer),
which are required in accordance with Rule 13a-14 of the Act. This Disclosure
Controls and Procedures section includes information concerning management's
evaluation of disclosure controls and procedures referred to in those
certifications and, as such, should be read in conjunction with the
certifications of the Company's Chief Executive Officer (Principal Executive
Officer) and Chief Financial Officer (Principal Accounting Officer).
Management's assessment of the effectiveness of the Company's internal
control over financial reporting has been audited by Tanner LC, an independent
registered public accounting firm, as stated in their report which is included
herein.
Management's Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining effective
internal control over financial reporting of the Company. Management's intent is
to design this system to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles in the
United States of America.
The Company's internal control over financial reporting includes those
policies and procedures that:
1. pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of
the assets of the Company;
2. provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with GAAP, and that receipts and expenditures of the
Company are being made only in accordance with authorizations of
management and directors of the Company; and
3. provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the
Company's assets that could have a material effect on the
financial statements.
35
A material weakness is a significant deficiency, or combination of
significant deficiencies, in internal controls over financial reporting such
that there is a reasonable possibility that a material misstatement of the
annual or interim financial statements will not be prevented or detected on a
timely basis. Management performed an assessment of the effectiveness of the
Company's internal control over financial reporting as of August 31, 2007,
utilizing the criteria described in the "Internal Control -- Integrated
Framework" issued by the Committee of Sponsoring Organizations of the Treadway
Commission ("COSO"). The objective of this assessment was to determine whether
the Company's internal control over financial reporting was effective as of such
date. In its assessment of the effectiveness of internal control over financial
reporting as of August 31, 2007, management concluded that our disclosure
controls and procedures are effective to ensure that information required to be
disclosed by us in reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and forms.
Changes in Internal Control Over Financial Reporting
There have been no changes in the Company's internal control over
financial reporting that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
Limitations on the Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief
Financial Officer, does not expect that our disclosure controls or our internal
controls will prevent or detect all errors and all fraud. A control system, no
matter how well designed and operated, can provide only reasonable, not
absolute, assurance that the control system's objectives will be met. Further,
the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within the Company have been detected. These inherent
limitations include the realities that judgments in decision-making can be
faulty, and that breakdowns can occur because of simple error or mistake.
Controls can also be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of the controls. The
design of any system of controls is based in part upon certain assumptions about
the likelihood of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential future
conditions. Over time, controls may become inadequate because of changes in
conditions or deterioration in the degree of compliance with associated policies
or procedures. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.
ITEM 9B. OTHER INFORMATION
---------------------------
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
---------------------------------------------------------------
Information required by this item is incorporated by reference from the
information in the Company's definitive Proxy Statement to be filed for the 2008
Annual Meeting of Stockholders.
36
ITEM 11. EXECUTIVE COMPENSATION
-------------------------------
Information required by this item is incorporated by reference from the
information in the Company's definitive Proxy Statement to be filed for the 2008
Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
-----------------------------------------------------------------------
Information required by this item is incorporated by reference from the
information in the Company's definitive Proxy Statement to be filed for the 2008
Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
---------------------------------------------------------------------
INDEPENDENCE
------------
The information required by this item is incorporated by reference from
the information in the Company's definitive Proxy Statement to be filed for the
2008 Annual Meeting of Stockholders.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
-----------------------------------------------
Information required by this item is incorporated by reference from the
information in the Company's definitive Proxy Statement to be filed for the 2008
Annual Meeting of Stockholders.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
---------------------------------------------------
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.
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.
37
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.
21.1 Subsidiary List. Incorporated by reference to Exhibit 21.1 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.
38
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 14, 2007 By: /s/ Hyrum A. Mead
------------------------------------------
Hyrum A. Mead
President and Member of the Board of
Directors
(principal executive officer)
Date: November 14, 2007 By: /s/ Dennis P. Gauger
------------------------------------------
Dennis P. Gauger
Chief Financial Officer (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 14, 2007 By: /s/ Paul F. Turner
------------------------------------------
Paul F. Turner
Chairman of the Board, Senior Vice President
and Chief Technology Officer
Date: November 14, 2007 By: /s/ Hyrum A. Mead
------------------------------------------
Hyrum A. Mead
President and Member of the Board of
Directors (principal executive officer)
Date: November 14, 2007 By: /s/ Gerhard W. Sennewald
------------------------------------------
Dr. Gerhard W. Sennewald
Member of the Board of Directors
Date: November 14, 2007 By: /s/ Steven G. Stewart
------------------------------------------
Steven G. Stewart
Member of the Board of Directors
Date: November 14, 2007 By: /s/ Michael Nobel
------------------------------------------
Dr. Michael Nobel
Member of the Board of Directors
Date: November 14, 2007 By: /s/ Douglas P. Boyd
------------------------------------------
Dr. Douglas P. Boyd
Member of the Board of Directors
39
BSD MEDICAL CORPORATION
Index to Financial Statements
Report of Independent Registered Public Accounting
Firm on Internal Control Over Financial Reporting F-2
Report of Independent Registered Public Accounting
Firm F-4
Balance Sheets F-5
Statements of Operations F-6
Statements of Stockholders' Equity F-7
Statements of Cash Flows F-8
Notes to Financial Statements F-9
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON
INTERNAL CONTROL OVER FINANCIAL REPORTING
The Board of Directors and Stockholders
BSD Medical Corporation
We have audited the internal control of BSD Medical Corporation (the Company)
over financial reporting as of August 31, 2007, based on criteria established in
Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). The Company's
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting included in the accompanying Management's
Report on Internal Control over Financial Reporting. Our responsibility is to
express an opinion on the Company's internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with U.S. generally accepted accounting principles. A company's internal control
over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with U.S. generally
accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition
of the company's assets that could have a material effect on the financial
statements. Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of August 31, 2007, based on the
COSO criteria.
F-2
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the balance sheets of the Company as
of August 31, 2007 and 2006, and the related statements of operations,
stockholders' equity, and cash flows for each of the years in the three-year
period ended August 31, 2007, and our report dated November 13, 2007 expressed
an unqualified opinion thereon.
/s/ Tanner LC
Salt Lake City, Utah
November 13, 2007
F-3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
of BSD Medical Corporation
We have audited the accompanying balance sheets of BSD Medical Corporation as of
August 31, 2007 and 2006, and the related statements of operations,
stockholders' equity and cash flows for each of the years in the three-year
period ended August 31, 2007. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of BSD Medical Corporation as of
August 31, 2007 and 2006, and the results of its operations and its cash flows
for each of the years in the three-year period ended August 31, 2007, in
conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of BSD Medical
Corporation's internal control over financial reporting as of August 31, 2007,
based on criteria established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated November 13, 2007 expressed an unqualified opinion thereon.
/s/ TANNER LC
Salt Lake City, Utah
November 13, 2007
F-4
BSD MEDICAL CORPORATION
Balance Sheets
August 31,
ASSETS 2007 2006
-------------- ---------------
Current assets:
Cash and cash equivalents $ 416,540 $ 2,179,094
Investments 19,090,118 22,556,106
Accounts receivable, net of allowance
for doubtful accounts of $20,000 203,267 1,186,800
Related party trade accounts receivable 488,200 261,543
Income tax receivable 1,759,995 -
Inventories, net 1,510,067 1,366,264
Deferred tax asset 387,000 176,000
Other current assets 127,003 120,277
-------------- ---------------
Total current assets 23,982,190 27,846,084
Property and equipment, net 271,077 303,034
Patent, net 19,373 21,250
Deferred tax asset 69,000 2,000
Note receivable - 137,500
-------------- ---------------
$ 24,341,640 $ 28,309,868
============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 235,676 $ 365,396
Accrued liabilities 633,090 445,113
Customer deposits 214,638 100,000
Income taxes payable - 1,539,946
Deferred revenue - current portion 26,115 17,912
-------------- ---------------
Total current liabilities 1,109,519 2,468,367
Deferred revenue - net of current portion 48,333 217,500
-------------- ---------------
Total liabilities 1,157,852 2,685,867
-------------- ---------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value;
10,000,000 shares authorized,
no shares issued and outstanding - -
Common stock; $.001 par value,
40,000,000 shares authorized,
21,297,446 and 21,023,668 shares
issued 21,298 21,024
Additional paid-in capital 26,373,637 25,452,231
Deferred compensation - (247,700)
Treasury stock, 24,331 shares at cost (234) (234)
Other comprehensive loss (360,760) (99,362)
Retained earnings (deficit) (2,850,153) 498,042
-------------- ---------------
Total stockholders' equity 23,183,788 25,624,001
-------------- ---------------
$ 24,341,640 $ 28,309,868
============== ===============
See accompanying notes to financial statements
F-5
BSD MEDICAL CORPORATION
Statements of Operations
Years Ended August 31,
2007 2006 2005
------------- -------------- ---------------
Revenues:
Sales $ 1,449,054 $ 2,209,316 $ 1,033,632
Sales to related parties 1,385,332 689,086 987,472
------------- -------------- ---------------
Total revenues 2,834,386 2,898,402 2,021,104
------------- -------------- ---------------
Operating costs and expenses:
Cost of sales 766,040 1,399,426 675,130
Cost of related party sales 815,522 317,214 644,980
Research and development 1,875,147 1,251,956 859,614
Selling, general and
administrative 5,762,217 5,028,957 2,135,076
------------- -------------- ---------------
Total operating costs
and expenses 9,218,926 7,997,553 4,314,800
------------- -------------- ---------------
Loss from operations (6,384,540) (5,099,151) (2,293,696)
------------- -------------- ---------------
Other income (expense):
Gain on sale of equity
interest 202,223 18,016,272 6,551,087
Interest income 1,133,125 1,301,341 362,462
Other (164,003) 240,034 4,839
------------- -------------- ---------------
Total other income
(expense) 1,171,345 19,557,647 6,918,388
------------- -------------- ---------------
Income (loss) before income
taxes (5,213,195) 14,458,496 4,624,692
Income tax (provision) benefit 1,865,000 (5,209,000) (1,303,000)
------------- -------------- ---------------
Net income (loss) $ (3,348,195) $ 9,249,496 $ 3,321,692
============= ============== ===============
Income (loss) per common share:
Basic $ (0.16) $ 0.45 $ 0.16
============= ============== ===============
Diluted $ (0.16) $ 0.42 $ 0.15
============= ============== ===============
Weighted average number of
shares outstanding:
Basic 21,125,000 20,766,000 20,198,000
Diluted 21,125,000 22,174,000 21,453,000
See accompanying notes to financial statements
F-6
BSD MEDICAL CORPORATION
Statements of Stockholders' Equity
Years Ended August 31, 2007, 2006 and 2005
Other
Compre-
Common Stock Additional Deferred Treasury Stock hensive Retained
------------------- Paid-in Compen- -------------- Income Earnings
Shares Amount Capital sation Shares Amount (Loss) (Deficit) Total
---------- -------- ------------ ---------- ------- ------ ---------- ------------- ------------
Balance, September 1, 2004 19,945,982 $ 19,946 $ 23,201,020 $ (27,808) 24,331 $ (234) $ - $ (12,073,146) $ 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 - - 96,500 - - - - - 96,500
services
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) 24,331 (234) 36,939 (8,751,454) 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) 24,331 (234) (99,362) 498,042 25,624,001
Close out deferred
compensation - - (247,700) 247,700 - - - - -
Common stock issued for:
Cash 195,933 196 229,511 - - - - - 229,707
Services 10,288 10 59,990 - - - - - 60,000
Cashless option exercises 67,557 68 (68) - - - - - -
Stock-based compensation - - 832,224 - - - - - 832,224
Income tax benefit from
exercise of stock options - - 47,449 - - - - - 47,449
Increase in other
comprehensive loss, net of
income tax - - - - - - (261,398) - (261,398)
benefit
Net loss - - - - - - - (3,348,195) (3,348,195)
---------- -------- ------------ ---------- ------- ------ ---------- ------------- ------------
Balance, August 31, 2007 21,297,446 $ 21,298 $ 26,373,637 $ - 24,331 $ (234) $ (360,760) $ (2,850,153) $ 23,183,788
========== ======== ============ ========== ======= ====== ========== ============= ============
See accompanying notes to financial statements
F-7
BSD MEDICAL CORPORATION
Statements of Cash Flows
Years Ended August 31,
2007 2006 2005
------------- -------------- ---------------
Cash flows from operating
activities:
Net income (loss) $ (3,348,195) $ 9,249,496 $ 3,321,692
Adjustments to reconcile
net income (loss) to net
cash used in operating
activities:
Provision for doubtful
accounts - (22,500) 42,500
Depreciation and
amortization 97,849 86,860 76,991
Gain on sale of equity
interest (202,223) (18,016,272) (6,551,087)
Loss (gain) on disposition
of property 2,597 - (1,050)
Amortization of deferred
compensation - 88,050 9,508
Stock issued for services 60,000 48,471 141,500
Stock-based compensation 832,224 - -
Decrease (increase) in:
Receivables 894,376 (922,163) (286,876)
Note receivable - (137,500) -
Income tax receivable (1,752,492) - -
Inventories (143,803) (231,911) (393,937)
Deferred tax asset (66,000) (74,000) 725,000
Other current assets (6,726) 12,464 (81,675)
Increase (decrease) in:
Accounts payable (129,720) 252,583 13,682
Accrued liabilities 187,977 296,737 (175,539)
Customer deposits 114,638 - -
Income taxes payable (1,500,000) 2,271,469 513,704
Deferred revenue (160,964) 228,084 (39,895)
Deferred tax liability - (13,000) (38,000)
------------- -------------- ---------------
Net cash used in operating
activities (5,120,462) (6,883,132) (2,723,482)
------------- -------------- ---------------
Cash flows from investing
activities:
Proceeds from sale equity
interest 202,223 18,016,272 6,551,087
Sale (purchase) of
investments 2,992,590 (10,073,884) (12,581,584)
Purchase of property and
equipment (66,612) (213,172) (110,856)
Proceeds from sale of
property and equipment - - 1,050
------------- -------------- ---------------
Net cash provided by (used
in) investing activities 3,128,201 7,729,216 (6,140,303)
------------- -------------- ---------------
Cash flows from financing
activities:
Proceeds from the sale of
common stock 229,707 424,336 75,305
------------- -------------- ---------------
Net increase (decrease) in
cash and cash equivalents (1,762,554) 1,270,420 (8,788,480)
Cash and cash equivalents,
beginning of year 2,179,094 908,674 9,697,154
------------- -------------- ---------------
Cash and cash equivalents,
end of year $ 416,540 $ 2,179,094 $ 908,674
============= ============== ===============
See accompanying notes to financial statements
F-8
BSD MEDICAL CORPORATION
Notes to Financial Statements
Note 1: Organization and Significant Accounting Policies
Organization - BSD Medical Corporation (the Company) was incorporated
in the State of Delaware on July 3, 1986. The Company develops, produces,
markets, and services systems used for the treatment of cancer and other
diseases. These systems are sold worldwide. The Company's operations are
considered to comprise one business segment.
Cash and Cash Equivalents - Cash and cash equivalents consist of cash
and investments with original maturities to the Company of three months or less.
Investments - Investments with scheduled maturities greater than three
months, but not greater than one year, are recorded as short-term investments.
Management classified these investments at August 31, 2007 and 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, net of income taxes. 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.
Inventories - Parts and supplies inventories are stated at the lower of
cost or market. Cost is determined using the average cost method.
Work-in-process and finished goods are stated at the lower of the accumulated
manufacturing costs or market. 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, 2007 and 2006.
Property and Equipment - Property and equipment are stated at cost less
accumulated depreciation. Depreciation is 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.
F-9
Maintenance and repairs are charged to costs and expenses as incurred.
The cost and accumulated depreciation of property and equipment sold or
otherwise retired are removed from the accounts and any related gain or loss on
disposition is reflected in net income or loss for the period.
Patents - Patents are carried at cost and are being amortized over 17
years.
Warranty Reserve - The Company provides limited warranties to its
customers for products sold. Estimated future warranty obligations are accrued
each period. As of August 31, 2007 and 2006, the accrued warranty reserve was
$30,614 and $31,000, respectively. During the fiscal years ended August 31,
2007, 2006, and 2005, total warranty expense was $38,519, $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 1,795,853, 1,809,051 and 2,122,934 shares of
common stock at prices ranging from $0.37 to $5.76, $0.37 to $5.76, and $0.10 to
$2.54 per share were outstanding at August 31, 2007, 2006 and 2005,
respectively.
The shares used in the computation of the Company's basic and diluted
earnings per share are reconciled as follows:
Years Ended August 31,
2007 2006 2005
------------------------------------
Weighted average number of
shares outstanding - basic 21,125,000 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 21,125,000 22,174,000 21,453,000
========== ========== ==========
F-10
Stock-Based Compensation - Effective September 1, 2006, the Company
adopted the fair value recognition provisions of Statement of Financial
Accounting Standards (SFAS) No. 123(R), Share Based Payments, using the modified
prospective application method. Under this transition method, the Company
recorded compensation expense on a straight-line basis of $832,224 for the year
ended August 31, 2007 for: (a) the vesting of options granted prior to September
1, 2006 (based on the grant-date fair value estimated using the Black-Scholes
option-pricing model and previously presented in the pro-forma footnote
disclosures), and (b) stock-based awards granted subsequent to August 31, 2006
(based on the grant-date fair value estimated using the Black-Scholes option
pricing model). In accordance with the modified prospective application method,
results for the years ended August 31, 2006 and 2005 have not been restated.
Prior to the fiscal year ended August 31, 2007, the Company accounted
for stock options granted to employees under the recognition and measurement
principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and
related Interpretations, and adopted the disclosure-only provisions of SFAS No.
123, Accounting for Stock-Based Compensation. Accordingly, compensation costs
are recognized in the financial statements for the years ended August 31, 2006
and 2005 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 $ 0.45 $ 0.16
================================
Basic - pro forma $ 0.41 $ 0.14
================================
Diluted - as reported $ 0.42 $ 0.15
Diluted - pro forma $ 0.39 $ 0.13
================================
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, providing manufacturing services, providing training,
and service support contracts. Product sales were $2,520,818, $ 2,706,214 and
$1,844,321 for the years ended August 31, 2007, 2006 and 2005, respectively.
Service and other revenues were $313,568, $192,188 and $176,783 for the years
ended August 31, 2007, 2006 and 2005, respectively.
F-11
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.
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.
Concentration of Credit Risk - Financial instruments that potentially
subject the Company to concentration of credit risk consists primarily of trade
receivables. In the normal course of business, the Company provides credit terms
to its 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.
Advertising and Promotion - Advertising and promotion costs, which are
principally included in sales expenses, are expensed as incurred. Advertising
and promotion expense was approximately $331,000, $758,000 and $103,000 for the
years ended August 31, 2007, 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.
F-12
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 years have been
reclassified to conform with the current year presentation.
Note 2: Detail of Certain Balance Sheet Accounts
Details of certain balance sheet accounts are as follows:
August 31,
Accounts receivable: 2007 2006
--------------------------------
Trade receivables - non-related party $ 113,493 $ 1,076,006
Other receivables 6,638 8,000
Accrued interest receivable 103,136 122,794
Allowance for doubtful accounts (20,000) (20,000)
--------------------------------
$ 203,267 $ 1,186,800
================================
August 31,
Inventories: 2007 2006
--------------------------------
Parts and supplies $ 835,498 $ 711,552
Work-in-process 610,846 641,608
Finished goods 103,723 53,104
Reserve for obsolete
inventory (40,000) (40,000)
--------------------------------
$ 1,510,067 $ 1,366,264
================================
August 31,
Accrued liabilities: 2007 2006
--------------------------------
Accrued vacation $ 260,229 $ 192,203
Accrued taxes payable 46,842 60,311
Accrued bonuses 115,000 -
Other accrued liabilities 211,019 192,599
--------------------------------
$ 633,090 $ 445,113
================================
F-13
Note 3: Investments
As of August 31, 2007 and 2006, investments consisted primarily of
mutual funds, and were all considered available-for-sale securities. As of
August 31, 2007, investments had a cost, determined on a specific identification
method, of $19,662,878, fair value of $19,090,118 and unrealized losses of
$572,760. 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. No realized gains or
losses on investments were recorded in the years ended August 31, 2007, 2006 and
2005.
Note 4: Property and Equipment
Property and equipment consists of the following:
August 31,
2007 2006
--------------------------------
Equipment $ 962,162 $ 997,053
Furniture and fixtures 298,576 298,597
Leasehold improvement 17,420 17,420
--------------------------------
1,278,158 1,313,070
Less accumulated depreciation (1,007,081) (1,010,036)
--------------------------------
$ 271,077 $ 303,034
================================
Depreciation expense for the years ended August 31, 2007, 2006 and 2005
totaled $95,971 $84,982, and $75,113, respectively.
Note 5: 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, 2007, 2006, and 2005. For each of the
next five years, amortization expense relating to the patent is expected to be
$1,878 per year.
Note 6: Note Receivable
During the year ended August 31, 2006, the Company 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, as of August 31, 2006, this amount was recorded
as non-current and interest imputed on the amount calculated at market rates.
Revenue for this long-term portion of the agreement had been deferred. The
Company wrote off the note against deferred revenue during the year ended August
31, 2007.
F-14
Note 7: Operating Lease
The Company renewed its building lease in November of 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. The Company has an option to purchase the building for
$1,000,000 upon 60 days notice for six years beginning December 5, 1997.
Thereafter, the purchase price increases by $50,000 each year, and the option
expires at the end of the tenth year. See Note 18.
Future minimum payments are $15,619 for the year ending August 31,
2008.
Annual rent expense on this operating lease for the years ended August
31, 2007, 2006 and 2005 amounted to $93,032, $89,393, and $86,400, respectively.
Note 8: Deferred Revenue
The Company has entered into certain service contracts 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, 2007 and 2006, the Company had $74,448 and $235,412 of
deferred revenue, respectively.
Note 9: Major Customers and Foreign Sales
The Company had the following customer revenue concentrations:
Years Ended August 31,
2007 2006 2005
------------------------------------------------
Customer A 48.88% 23.77% 48.55%
Customer B * 45.48% 29.84%
Customer C * 10.38% *
*Sales to customers were less than 10%.
Export sales were $1,787,363, $2,413,807 and $1,595,050 in fiscal years
2007, 2006 and 2005, respectively.
During fiscal year 2007, export sales to Switzerland were approximately
44% of total sales. During fiscal year 2006, export sales to China, Switzerland
and Poland were approximately 45%, 21% and 10% of total sales, respectively.
During fiscal year 2005, export sales to Switzerland and China were
approximately 45% and 30% of total sales, respectively.
F-15
Note 10: Income Taxes
The components of the income tax (provision) benefit are as follows:
Years Ended August 31,
2007 2006 2005
------------------------------------------------
Current:
Federal $ 1,653,000 $ (4,606,000) $ (452,000)
State 146,000 (690,000) (164,000)
------------------------------------------------
1,799,000 (5,296,000) (616,000)
------------------------------------------------
Deferred:
Federal 66,000 87,000 (687,000)
------------------------------------------------
$ 1,865,000 $ (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,
2007 2006 2005
------------------------------------------------
Income tax (provision)
benefit at federal
statutory rate $ 1,772,000 $ (5,393,000) $ (1,711,000)
Stock-based compensation (233,000) - -
State income taxes, net
of federal benefit 96,000 - -
Research and development
credit 160,000 190,000 76,000
Change in estimate of use
of net operating loss
carryforwards - - 284,000
Other 70,000 (6,000) 48,000
------------------------------------------------
$ 1,865,000 $ (5,209,000) $ (1,303,000)
================================================
Deferred tax assets (liabilities) are comprised of the following:
August 31,
2007 2006
--------------------------------
Current Asset:
Accruals and reserves $ 129,000 $ 96,000
Deferred revenue 28,000 80,000
Inventories 18,000 -
Unrealized loss on investments 212,000 -
--------------------------------
$ 387,000 $ 176,000
================================
Long-Term Asset:
Deferred compensation $ 112,000 $ 57,000
Depreciation and amortization (43,000) (55,000)
--------------------------------
$ 69,000 $ 2,000
================================
F-16
Note 11: Stock-Based Compensation
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, as amended, provides for the granting
of options for an aggregate of 2,677,300 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 equal to 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.
Effective September 1, 2006, the Company adopted SFAS No. 123 (R),
Share-Based Payment, which requires the measurement and recognition of
compensation expense for all share-based payment awards made to employees and
directors including employee stock options. In accordance with this standard,
the Company recognizes the compensation cost of all share-based awards on a
straight-line basis over the requisite service period for the number of awards
that are expected to vest. Prior to September 1, 2006, the Company accounted for
those plans under the recognition and measurement provisions of APB Opinion No.
25, and related Interpretations, as permitted by SFAS No. 123.
The Company's financial statements as of August 31, 2007 and for the
year ended August 31, 2007 reflect the impact of the implementation of SFAS
123(R). The Company adopted SFAS 123(R) using the modified prospective
transition method, which requires that compensation expense be recognized during
the year ended August 31, 2007 equal to: (a) amortization related to the
compensation cost for all share-based payments granted prior to, but not yet
vested as of September 1, 2006, based on the grant date fair value estimated in
accordance with the original provisions of Statement 123, and (b) amortization
related to compensation cost for all share-based payments granted subsequent to
September 1, 2006, based on the grant-date fair value estimated in accordance
with the provisions of SFAS 123(R). Results for prior years have not been
restated.
The adoption of SFAS 123(R) had a significant impact on the Company's
results of operations. The Company's statement of operations for the year ended
August 31, 2007 includes stock-based compensation expense from stock options in
selling, general and administrative expenses of $832,224.
During the year ended August 31, 2007, the Company granted 120,000
options to its directors, with one fifth vesting each year for the next five
years and 155,000 options to its employees with one third vesting each year for
the next three years. These grants account for $82,638 of the stock-based
compensation expense for the year ended August 31, 2007.
Unrecognized stock-based compensation expense expected to be recognized
over the estimated weighted-average amortization period of 1.58 years is
approximately $1,544,000 at August 31, 2007.
F-17
The weighted-average assumptions used in the Black-Scholes valuation
model for equity awards with time-based vesting provisions are shown below:
Years Ended August 31,
2007 2006 2005
------------------------------------------------
Expected volatility 65.16% 74.41% 79.38%
Expected forfeiture rate 0% 0% 0%
Expected dividends 0% 0% 0%
Expected term 5.7 Years 4.89 Years 10.0 Years
Risk-free interest rate 4.67% 4.33% 4.46%
The expected volatility rate was estimated based on the four-year
historical volatility of the Company's common stock. The expected term was
estimated based on historical experience of stock option exercise. The risk-free
interest rate is the rate provided by the U.S. Treasury for Daily Treasury Yield
Curve Rates commonly referred to as "Constant Maturity Treasury" rate in effect
at the time of grant with a remaining term equal to the expected option term.
A summary of the time-based stock option awards as of August 31, 2007,
and changes during the year then ended, is as follows:
Weighted-
Average
Weighted- Remaining
Average Contract Aggregate
Exercise Term Intrinsic
Stock Option Awards Shares Price (Years) Value
Outstanding at August 31, 2006 1,809,051 $ 1.72
Granted 275,000 4.97
Exercised (278,198) 1.09
Forfeited or expired (10,000) 1.20
---------------------
Outstanding at August 31, 2007 1,795,853 $ 2.31 6.74
================================================
Exercisable at August 31, 2007 1,343,591 $ 1.46 5.94 $ 8,748,864
================================================
The weighted-average grant-date fair value of stock options granted
during the year ended August 31, 2007 was $3.08.
Upon adoption of SFAS No. 123 (R) effective September 1, 2006, the
Company reclassified the balance of deferred compensation of $247,700 to
additional paid-in capital.
Note 12: Related Party Transactions
During the years ended August 31, 2007, 2006, and 2005, the Company had
sales of $1,385,332, $689,086 and $987,472, respectively, to an entity
controlled by a significant stockholder and member of the Board of Directors.
These related party transactions represent 49%, 24% and 49% of total sales for
each respective year.
F-18
At August 31, 2007 and 2006, receivables include $488,200 and $261,543,
respectively, from this entity.
Note 13: Supplemental Cash Flow Information
Actual amounts paid for interest and income taxes are as follows:
Years Ended August 31,
2007 2006 2005
------------------------------------------------
Interest expense $ - $ - $ -
================================================
Income taxes $ 1,798,676 $ 2,576,605 $ 351,354
================================================
During the year ended August 31, 2007, the Company
o Recorded an increase in additional paid in capital of $47,449 and
corresponding decrease to income taxes payable related to the tax
benefit from the exercise of stock options.
o Increased other comprehensive loss by $261,398, decreased
investments by $473,398 and increased short-term deferred tax
asset by $212,000.
o Transferred deferred compensation of $247,700 to additional
paid-in capital.
o Decreased income taxes payable and decreased income tax receivable
by $39,946.
o Increased common stock and decreased additional paid-in capital by
$68.
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
Note 14: Commitments and Contingencies
The Company has an employment agreement with the President of the
Company. The agreement provides that the President's salary will be based upon a
reasonable mutual agreement. The agreement provides that if the President is
involuntarily terminated, he 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
the President prior to termination and an additional amount equal to all bonuses
received by the President during the 12-month period preceding termination. The
agreement also requires the Company to vest any options granted to the President
for the purchase of the Company's common stock, allowing a 90-day period for him
to exercise those options. The President's agreement includes a non-competition
covenant prohibiting him from competing with the Company for one year following
his termination.
The Company also has an employment agreement with the Chairman of the
Board, Senior Vice President and Chief Technical Officer. The agreement provides
that the Chairman's salary will be based upon a reasonable mutual agreement. The
agreement also provides that if the Chairman'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. The one-year severance pay shall be equal to the Chairman's regular
salary for the 12-month period immediately prior to the termination. The
agreement also requires the Company to pay Mr. Turner for any accrued, unused
vacation and bonuses at the time of termination. The Chairman's agreement
includes a non-competition covenant prohibiting him from competing with the
Company for one year following his termination. The Company may continue the
non-competition period for up to four additional years by notifying the Chairman
in writing and by continuing the severance payments for the additional years
during which the non-competition period is extended.
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. Accrued royalties were $1,120 and $3,500 as of
August 31, 2007 and 2006, respectively. Royalty expense amounted to $5,445,
$6,180 and $4,710 for the years ended August 31, 2007, 2006 and 2005,
respectively.
Note 15: Fair Value of Financial Instruments
None of the Company's financial instruments are held for trading
purposes. The Company estimates that the fair value of all financial instruments
at August 31, 2007 and 2006 does not differ materially from the aggregate
carrying values of its financial instruments recorded in the accompanying
balance sheets. 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
Note 16: Sale of Equity Interest
The Company held an equity interest in TherMatrx, Inc. ("TherMatrx")
until July 15, 2004. On July 15, 2004, TherMatrx 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 a
total payout, including contingency payments, of approximately $33.5 million.
In April 2007, the Company received an additional $202,223 in proceeds
from the sale of TherMatrx.
Note 17: Recent Accounting Pronouncements
In July 2006, the FASB issued FASB Interpretation (FIN) 48, Accounting
for Uncertainty in Income Taxes. FIN 48 clarifies the accounting for uncertainty
in income taxes recognized in financial statements in accordance with Statement
of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes.
This Interpretation prescribes a recognition threshold and measurement attribute
for the financial statement recognition and measurement of a tax position taken
or expected to be taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. The Company is currently evaluating the
impact this Interpretation will have on its financial statements. This
Interpretation will be effective in the Company's financial statements for the
fiscal year beginning September 1, 2007.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option
for Financial Assets and Financial Liabilities - Including an Amendment of FASB
Statement No. 115. This statement permits entities to choose to measure many
financial instruments and certain other items at fair value. Most of the
provisions of SFAS No. 159 apply only to entities that elect the fair value
option. However, the amendment to SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities, applies to all entities with
available-for-sale and trading securities. SFAS No. 159 is effective as of the
beginning of an entity's first fiscal year that begins after November 15, 2007.
Early adoption is permitted as of the beginning of a fiscal year that begins on
or before November 15, 2007, provided the entity also elects to apply the
provision of SFAS No. 157, Fair Value Measurements. The adoption of this
statement is not expected to have a material effect on the Company's financial
statements.
In September 2006, the FASB issued SFAS Statement No. 158, Employers'
Accounting for Defined Benefit Pension and Other Postretirement Plans. This new
standard will require employers to fully recognize the obligations associated
with single-employer defined benefit pension, retiree healthcare and other
postretirement plans in their financial statements. The Company adopted SFAS No.
158 on September 1, 2007, with no material impact on the financial statements of
the Company since the Company currently does not sponsor the defined benefit
pension or postretirement plans within the scope of the standard.
In September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements. SFAS No. 157 defines fair value, establishes a framework for
measuring fair value, and requires enhanced disclosures about fair value
measurements. SFAS No. 157 requires companies to disclose the fair value of
F-21
their financial instruments according to a fair value hierarchy as defined in
the standard. Additionally, companies are required to provide enhanced
disclosure regarding financial instruments in one of the categories, including a
reconciliation of the beginning and ending balances separately for each major
category of assets and liabilities. SFAS No. 157 is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years. The Company believes that the
adoption of SFAS No. 157 will not have a material impact on its financial
statements.
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing
of Financial Assets, to simplify accounting for separately recognized servicing
assets and servicing liabilities. SFAS No. 156 amends SFAS No. 140, Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities. Additionally, SFAS No. 156 applies to all separately recognized
servicing assets and liabilities acquired or issued after the beginning of an
entity's fiscal year that begins after September 15, 2006, although early
adoption is permitted. The Company does not expect the adoption of this new
standard to have a material impact on its financial position, results of
operations or cash flows.
In February 2006, the FASB issued SFAS No. 155, Accounting for Certain
Hybrid Instruments, which amends SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, and SFAS No. 140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No.
155 allows financial instruments that have embedded derivatives to be accounted
for as a whole (eliminating the need to bifurcate the derivative from its host)
if the holder elects to account for the whole instrument on a fair value basis.
SFAS No. 155 also clarifies and amends certain other provisions of SFAS No. 133
and SFAS No. 140. This statement is effective for all financial instruments
acquired or issued in financial years beginning after September 15, 2006. The
Company does not expect the adoption of this new standard to have a material
impact on its financial position, results of operations or cash flows.
On December 21, 2006, the FASB issued FASB Staff Position (FSP)
Emerging Issues Task Force (EITF) 00-19-2, Accounting for Registration Payment
Arrangements, which requires an issuer to account for a contingent obligation to
transfer consideration under a registration payment arrangement in accordance
with FASB Statement No. 5, Accounting for Contingencies, and FASB Interpretation
14, Reasonable Estimation of the Amount of Loss. Registration payment
arrangements are frequently entered into in connection with issuance of
unregistered financial instruments, such as equity shares or warrants. A
registration payment arrangement contingently obligates the issuer to make
future payments or otherwise transfer consideration to another party if the
issuer fails to file a registration statement with the SEC for the resale of
specified financial instruments or fails to have the registration statement
declared effective within a specific period. The FSP requires issuers to make
certain disclosures for each registration payment arrangement or group of
similar arrangements. The FSP is effective immediately for registration payment
arrangements and financial instruments entered into or modified after the FSP's
issuance date. For previously issued registration payment arrangements and
financial instruments subject to those arrangements, the FSP is effective for
financial statements issued for fiscal years beginning after December 15, 2006.
To the extent that the Company enters into financing arrangements in the future
that include registration payment arrangements, the future application of this
FSP may have a material effect on its financial condition and results of
operations.
In June 2006, the FASB ratified EITF, No. 06-3, How Taxes Collected
from Customers and Remitted to Governmental Authorities Should Be Presented in
the Income Statement (That Is, Gross versus Net Presentation). EITF No. 06-3
requires that, for interim and annual reporting periods beginning after December
15, 2006, the Company disclose its policy related to the presentation of sales
taxes and similar assessments related to our revenue transactions. Early
adoption is permitted. The Company presents revenue net of sales taxes and any
similar assessments. EITF No. 06-3 had no effect on the Company's financial
position and results of operations.
F-22
EITF No. 07-3, Accounting for Nonrefundable Advance Payments for Goods
or Services Received for Use in Future Research and Development Activities, was
issued in June 2007. The EITF reached a consensus that nonrefundable payments
for goods and services that will be used or rendered for future research and
development activities should be deferred and capitalized. Such amounts should
be recognized as an expense as the related goods are delivered and the related
services are performed. Entities should continue to evaluate whether they expect
the goods to be delivered or services to be rendered. If the entity does not
expect the goods to be delivered or services to be rendered, the capitalized
advance payment should be charged to expense. This pronouncement is effective
for financial statements issued for fiscal years beginning after December 15,
2007 (the Company's fiscal year beginning September 1, 2008) and interim periods
within those fiscal years. Earlier application is not permitted. Entities are
required to report the effects of applying this pronouncement prospectively for
new contracts entered into on or after the effective date of this pronouncement.
The Company currently is not a party to research and development arrangements
that include nonrefundable advance payments. To the extent that the Company
enters into research and development arrangements in the future that include
nonrefundable advance payments, the future application of this pronouncement may
have a material effect on its financial condition and results of operations.
Note 18: Subsequent Events
When the lease on the Company's office, production and research
facilities (Note 7) expired in November of 2007, the Company exercised its
option to purchase the building for a purchase price of $1,200,000.
F-23
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