U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10 - QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended November 30, 1996.
Commission file number 0-10783
BSD MEDICAL CORPORATION
DELAWARE 75-1590407
(State of Incorporation) (IRS Employer Identification Number)
2188 West 2200 South
Salt Lake City, Utah 84119
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (801) 972-5555
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding as of February 27, 1997
Common stock, $.01 Par Value 16,176,980
Transitional Small Business Disclosure Format (Check one): Yes[ ] No[X]
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BSD MEDICAL CORPORATION
Condensed Consolidated Balance Sheets
(Unaudited)
Assets Nov. 30, Aug. 31,
1996 1996
_________ _________
Current assets:
Cash and cash equivalents $ 535,279 $ 381,746
Receivables:
Trade accounts, net of allowance for doubtful 137,271 130,175
receivables of $10,000
Related party, net of allowance for doubtful 23,054 23,054
receivables of $26,200
Other, net of allowance for doubtful receivables - 500,000
of $20,494
_________ _________
Total net receivables 160,325 653,229
_________ _________
Inventories:
Raw materials 150,339 223,139
Work-in-process 318,891 233,856
Finished goods 74,102 74,071
_________ _________
Total inventories 543,332 531,066
_________ _________
Prepaid expenses and other assets 25,900 34,975
_________ _________
Total current assets 1,264,836 1,601,016
_________ _________
Property and equipment:
Furniture and fixtures 297,743 297,743
Equipment 519,249 473,099
Building, net of reserve for potential impairment 233,766 233,766
of $181,534 _________ _________
Total property and equipment 1,050,758 1,004,608
Less accumulated depreciation and amortization 757,873 752,205
_________ _________
Net property and equipment 292,885 252,403
_________ _________
Long-term receivables 106,820 106,820
Other assets, at cost, less accumulated
amortization of $199,961 at Nov. 30, 1996 and 62,771 67,742
$194,990 at Aug. 31, 1996 _________ _________
$1,727,311 $2,027,981
========= =========
See accompanying notes to financial statements.
<PAGE>
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable $ 11,624 $ 17,250
Current installments of obligation under
capital lease 35,394 46,554
Current installments of obligation under
long-term debt 19,579 25,817
Accounts payable 128,050 89,230
Accrued payroll and commissions 48,090 74,060
Customer deposits 53,227 141,871
Warranty reserves 30,367 36,524
Accrued expenses 90,390 107,490
Current income tax payable 70,000 70,000
_________ _________
Total current liabilities 486,721 608,796
Obligation under capital lease, excluding current 106,370 106,370
installments
Obligation under long-term debt, excluding current 64,162 64,162
installments
Deferred revenue 186,771 186,771
Related party deferred revenue 335,141 335,141
_________ _________
Total liabilities 1,179,165 1,301,240
Stockholders' equity:
Preferred stock, $1.00 par value; authorized
10,000,000 shares; none issued and outstanding
(liquidation value $100 per share) - -
Common stock, $.01 par value; authorized
20,000,000 shares; issued and outstanding
16,176,980 shares 161,770 161,770
Additional paid-in capital 20,430,243 20,341,418
Accumulated deficit (19,243,799)(18,912,164)
Common stock in treasury 67,428 shares, at cost (14,867) (14,867)
Deferred compensation (785,201) (849,416)
_________ _________
Net stockholders' equity 548,146 726,741
Commitments and contingencies _________ _________
$1,727,311 $ 2,027,981
========= =========
<PAGE>
BSD MEDICAL CORPORATION
Condensed Consolidated Statements of Operations
(Unaudited)
Quarters ended November 30, 1996 and 1995
Nov. 30 Nov. 30
1996 1995
__________ __________
Product sales $ 73,051 $ 111,689
Grant and license revenue 118,666 107,708
__________ __________
Total revenues 191,717 219,397
Costs and expenses: __________ __________
Cost of product sales 93,565 101,499
Research and development 99,035 82,926
Selling, general, and administrative 334,761 110,202
__________ __________
Total costs and expenses 527,361 294,627
__________ __________
Operating income (loss) (335,644) (75,230)
Other income (expense):
Interest income 5,735 194
Gain on settlement of accounts payable 4,738 -
Interest expense (6,764) (1,201)
Other, net 301 32,600
Total other income 4,010 31,592
Net income (loss) (331,634) (43,638)
Net income (loss) per common and common
equivalent share $ (.02) (.0004)
Weighted average number of shares outstanding 17,297,067 17,188,102
See accompanying notes to financial statements.
<PAGE>
BSD MEDICAL CORPORATION
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Quarters ended November 30, 1996 and 1995
Increase (Decrease) in Cash and Cash Equivalents Nov. 30 Nov. 30
________________________________________________ 1996 1995
_________ _________
Cash flows from operating activities:
Net income (loss) $ (331,634) (43,638)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 163,678 8,733
Gain on settlement of accounts payables (4,738) -
Changes in assets and liabilities:
Receivables 492,905 33,430
Inventories (12,266) 14,489
Prepaid expenses and other assets 9,075 8,250
Accounts payable 43,558 (23,635)
Accrued payroll and commissions (25,970) 19,161
Customer deposits (88,644) 88,060
Warranty reserves (6,155) (4,525)
Accrued expenses (17,100) (48,917)
_________ _________
Net cash provided by operating activities 222,709 51,408
_________ _________
Cash used in investing activities - additions to
property, plant, and equipment (46,150) (2,414)
_________ _________
Cash flows from financing activities:
Net proceeds from (payments on) short-term
notes payable (5,626) (21,584)
Principal payments on capital lease obligation (11,160) (7,086)
Principal payments on long-term debt obligation (6,239) 32,217
_________ _________
Net cash used in financing activities (23,025) 3,547
_________ _________
Increase in cash and cash equivalents $ 153,533 52,541
Cash and cash equivalents, beginning of period 381,746 46,124
_________ _________
Cash and cash equivalents, end of period $ 535,279 98,665
========= =========
Supplemental Disclosure of Cash Flow Information
________________________________________________
Cash paid during the period for interest $6,764 1,201
<PAGE>
BSD MEDICAL CORPORATION
Notes to Condensed Consolidated Financial Statements
Note 1. Basis of Presentation
The Condensed Consolidated Balance Sheet as of November 30,
1996, and the Condensed Consolidated Statements of Operations and
the Condensed Consolidated Statements of Cash Flow for the
quarters ended November 30, 1996, and November 30, 1995, have
been prepared by the Company without audit. In the opinion of
management, all adjustments to the books and accounts (which
include only normal recurring adjustments) necessary to present
fairly the financial position, results of operations, and changes
in financial position of the Company as of November 30, 1996,
have been made.
Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted.
The results of operations for the period ended November 30, 1996,
are not necessarily indicative of the results to be expected for
the full year.
Note 2. Net Income (Loss) Per Common Share
Net loss per common share for the quarters ended November 30,
1996, and November 30, 1995, are based on the weighted average
number of shares outstanding during the respective periods.
Note 3. Federal Income Taxes
No provision has been made for income tax expense in the
November 30, 1996, financial statements because of the
utilization of operating loss carry forwards.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
Total assets decreased from $2,027,981 at August 31, 1996, to
$1,727,311 at November 30, 1996, a decrease of $300,670, or
14.83%, due to the following factors. Operating expenses
increased because of an increase in overhead, purchases, and
personnel required to build, ship, and support new product lines
(specifically to complete the Company's current backlog of
unfilled orders of $1,225,141) and to support the efforts on the
Small Business Innovation Research (SBIR) grant project funded by
the National Cancer Insitutute (NCI). Receivables at November
30, 1996, decreased due to receipt of $500,000, included as a
receivable at August 31, 1996, which was offset by an increase in
cash at November 30, 1996. Cash was increased by $153,533, an
increase of 40.22%, primarily caused by funds received from a
patent license agreement, and current liabilities were decreased
(see below).
Trade accounts receivable increased $7,096, a slight increase
of 5.45%, caused by periodic business fluctuations. Total
inventories increased by $12,267, a slight increase of 2.31%, due
to periodic business fluctuations.
Total current liabilities decreased by $122,075, a decrease of
20.05%. The decrease was primarily caused by decreases in
customer deposits, accrued payroll and commissions, and accrued
expenses.
The Company has historically expended more cash in the course of
its business than it has generated from operations and has had to
rely primarily upon cash provided by private placements of its
equity securities to meet cash requirements. However, BSD has not
had an outside capital infusion since 1989. Even though the
market for BSD's cancer hyperthermia equipment has been severely
adversely impacted as a result of factors discussed in the fiscal
1996 10-KSB, the Company anticipates a change to stable
profitability in the future (see Part II, Item 6, Management
Discussion and Current Status of Financial Condition, 1996 10-
KSB).
The Company's current backlog of unfilled customer orders as of
November 30, 1996, was $1,225,141. A $335,000 deposit has already
been collected by the Company for this backlog. The Company also
has long term receivables for field service contracts, as of
November 30, 1996, of $106,820.
Fluctuations in Operating Results
Due to risks associated with international operations,
budgeting considerations of the Company's customers, the nature
of the medical capital equipment market, the inability of the
Company to predict the timing of various approvals required from
the Food and Drug Administration and other governmental agencies,
the relatively large per unit sales prices of the Company's
products, the typical fluctuations in the mix of orders for
different systems and system configurations, the limited unit
sales volumes, the Company's limited cash resources, changes in
Medicare and other third-party reimbursement policies,
competition, and other factors, the Company's sales and operating
results historically have varied (and will likely continue to
vary) greatly on a quarter-to-quarter and year-to-year basis.
For these and other reasons, the results of operations for a
particular fiscal period may not be indicative of results to be
expected for any other period.
Results of Operations:
Three Months ended November 30, 1996
Net Sales for the three months ended November 30, 1996,
decreased by $38,638, a decrease of 34.59% as compared with the
three months ended November 30, 1995, due to typical periodic
fluctuations in sales (see Fluctuations in Operating Results
above).
Gross profit decreased from $10,190 in the quarter ended
November 30, 1995, to a loss of $20,514 in the quarter ended
November 30, 1996, as a result of an increase in production costs
required to build, ship, and support new product lines
(specifically to complete the Company's current backlog of
unfilled orders of $1,225,141).
Selling, General and Administrative Expenses increased by
$224,559, an increase of 203.77%, as compared with the
corresponding three months in the previous year. The increase
was primarily caused by the vesting of options issued to
employees and non-employees to purchase shares of the Company's
common stock (which have been recorded as deferred compensation
and amortized over the vesting period of the options), as well as
some increase in operating expenses.
Research and Development Expenses increased by $16,109, an
increase of 19.43%. The increase was caused by higher personnel
costs required to support the efforts on the Research and
Development SBIR grant project funded by NCI and the
aforementioned vesting of options issued to employees to purchase
shares of the Company's common stock.
Total Operating Expenses increased by $232,734, an increase of
78.99%, as compared with the corresponding three months in the
previous fiscal year. This increase was primarily caused by the
vesting of options issued to employees to purchase shares of the
Company's common stock and the aforementioned increase in
production costs.
The Operating Loss for the three months ended November 30,
1996, increased by $260,414, an increase of 346.16%, as compared
with the corresponding three months in the previous fiscal year.
This increase was primarily caused by the aforementioned options
issued to employees to purchase shares of the Company's common
stock as well as an increase in overhead, purchases, and
personnel required to build, ship, and support new product lines
(specifically to complete the Company's current backlog of
unfilled orders of $1,225,141).
Interest Expense in the three months ended November 30, 1996,
was $6,764, as compared with the $1,201 of Interest Expense in
the three months ended November 30, 1995. The increase was
caused by typical periodic business fluctuations.
The Net Loss of $331,634 for the quarter ending November 30,
1996, was an increase of $287,996, as compared with the net loss
of $43,638 for the quarter ending November 30, 1995, an increase
of 659.97%. The primary reason for this increase was the
aforementioned vesting of options issued to employees to purchase
shares of the Company's common stock as well as the
aforementioned increases in production costs.
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
In order to provide a new financial structure for growth, BSD
has retained Ambient Capital Group, Inc., to identify, provide,
and evaluate suitable financing arrangements for the Company.
Ambient has also been retained to obtain a private round of
financing which will allow BSD to accelerate product approvals
from the FDA and increase marketing efforts. The agreement with
Ambient, dated November 26, 1996, was for 12 months, is
cancelable after 6 months, and included the issuance of warrants
for BSD common stock to Ambient Capital.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed as part of this report:
Exhibit Description
Number
_______________________________________________________________
10 Terms of Engagement between BSD Medical Corporation and
Ambient Capital dated November 26, 1996.
27 Financial Data Schedule.
b) Reports on Form 8-K -- During the quarter, no reports on Form
8-K were filed by the Company.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, BSD Medical Corporation, the registrant, has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
BSD MEDICAL CORPORATION
Date: February 27, 1997 by: /s/ Paul F. Turner
Paul F. Turner
Chairman of the Board, Acting President,
and Senior Vice President of Research
BSD MEDICAL CORPORATION ("BSD")
TERMS OF ENGAGEMENT
BUILDING A NEW FINANCIAL STRUCTURE FOR GROWTH
REVISED NOVEMBER 21, 1996
FINANCIAL ADVISOR
Ambient Capital Group, Inc. ("Ambient")
ROLE
Financial Advisor to BSD to perform the following:
Phase I - Pre-Capital Raising Evaluation & Review of
Alternatives (4 to 6 weeks)
1.Complete due diligence of BSD from internal and external
viewpoints including review of technology, competing
companies and modalities. This review will be in the
context of specifically addressing the immediate and
longer term capital needs of the various elements of the
business.
2.Take the lead and coordinate all aspects of the
preparation of the appropriate documents for raising
capital. Specific end products developed in close
association with management for Phase I will include:
a. An Information Memorandum which could be modified
for a variety of capital raising approaches such as
bridge financing, private placement with domestic or
foreign investors, or corporate partner transactions.
b. A set of "Road Show" type slides suitable for
gaining the interest of potential investors and capital
intermediary participants in initial presentations. (A
somewhat fuller set of horizontal "flip chart" type
slides may also be created to be a stand-alone piece
that can be easily digested by investors and
intermediaries.)
c. Ambient will also provide input into the Company's
Revised Business Plan as it may impact future financing
efforts and as otherwise requested.
3.Identify a broad range of alternative financial
strategies which may be suitable financing alternatives
for BSD. These could include: bridge financing, private
placement, secondary stock offering, joint venture on
potential "service side" of the business, corporate
partner transactions, rights offering and other
approaches. However, as of the signing of this agreement,
Ambient's exclusive rights to represent BSD shall be
limited as discussed in "Exclusivity."
4.Research and evaluate each identified financial option
relative to capital market possibilities and stated or
logical potential investment interests of U.S. and
foreign private investing groups and operating companies.
5.Review the findings of Phase I evaluation with BSD top
management and, as required, its Board of Directors, with
a view specifically towards the desirability and
feasibility of each option, including costs, timing and
likely success.
6.Assist management and, as appropriate, the Board in
selecting the best alternative(s) to pursue.
Phase II - Capital Raising and Implementation of Selected
Alternatives-Typical Activities (To begin immediately upon
the completion of Phase I.)
1.Identify and approach investors, appropriate
intermediaries and other sources of capital consistent
with the alternative(s) selected.
2.Assist potential investors and other sources of capital
with their due diligence; begin preliminary negotiations
of terms.
3.Obtain preliminary commitments from capital sources (or
proceed with offering in case of a public transaction).
4.Focus efforts on the best alternatives as they proceed to
advanced due diligence.
5.Assist management and its counsel in negotiating
commitments, underwriting agreements, agreements in
principle, and similar documents.
6.Assist in negotiation of definitive agreements, formal
due diligence and closing of transaction(s).
EXCLUSIVITY
With the signing of this agreement, Ambient shall become the
Company's exclusive financial advisor for private equity
financings only. Ambient may only obtain exclusivity for
other types of financings or transactions by mutual written
agreement. However, BSD must inform Ambient of its
intentions to be "in the market" with any other capital
raising efforts and Ambient and the Company agree to consult
with each other so that Ambient's capital raising efforts
are not undermined by the Company's alternative efforts.
Ambient will not be expected to take any actions to pursue
financing or transaction options for which it does not have
exclusivity.
TERM
12 months, cancelable after six months of Phase II with 30
days written notice by either Ambient or BSD. BSD may also
cancel Ambient's exclusivity after five months from the
signing of this agreement if it believes that Ambient is not
making reasonable efforts to secure financing proposals.
However, BSD agrees to consult with Ambient in advance of
such action to see if the situation can be resolved without
a cancellation of Ambient's contract or its exclusivity.
If Ambient is successful in raising at least $3 million of
financing for BSD during the initial 12 month term, or
completing another transaction which provides equivalent
value to BSD, then Ambient will have rights of first refusal
for an additional 18 month period to arrange additional BSD
equity financings which involve BSD stock or are convertible
into BSD stock. It is understood that Ambient's rights of
first refusal shall not extend to joint ventures, corporate
partners or similar investments unless these transactions
are specifically introduced by Ambient or completed through
Ambient at the Company's request. The Company shall also in
this circumstance take actions to see that Ambient is
involved at the compensation otherwise described in this
agreement if a subsequent public offering of the Company's
stock is completed during the 18 month period.
All contacts and financial sources identified and introduced
by Ambient shall be protected for a period of 12 months
after the termination or expiration of the engagement should
a financing, investment, or merger or acquisition
transaction occur with any of them. However, funding sources
which qualify for such success fees should only be those
introduced by or completed through Ambient within 12 months
of such termination or expiration.
FEES AND EXPENSES
Retainer Fees:
Phase I: $10,000 due and payable upon the signing of this
agreement. Ambient shall also receive, at no cost, warrants
for unregistered common stock in the Company equal to 1.5%
of the total outstanding common stock, exercisable at a
strike price of $0.20 per share and valid for five years
from the date this agreement is signed. Ambient agrees to
own and hold these shares in accordance with relevant
securities laws. BSD will grant Ambient "piggy back" rights
with respect to registering the underlying common shares if
registration is completed on new shares .
Beginning with the start of Phase II, a retainer of $6,000
per month, payable in advance for a maximum of four months.
Success Fees:
Ambient shall receive additional cash fees and equity
interests contingent upon the completion of transactions
which either qualify as Ambient exclusive transactions or
which result in non Ambient exclusive transactions from
parties introduced to BSD by Ambient (see also
"Exclusivity"):
1.Senior secured debt (including lease or equipment type
financing)-- 2.0% of principal amount of fund raised.
2.Mezzanine type subordinated debt -- 4.5% of principal
amount of funds raised.
3.Private equity -- 8.0% of the principal raised or
committed by institutional, private investors and other
similar private funding sources in direct equity
investments but excluding any private equity funding
which includes manufacturing, sales or distribution of
BSD's products, joint ventures, "corporate partner" or
similar "strategic investments" unless Ambient introduces
the investing party to this type of transaction with BSD
or this transaction is completed through Ambient at BSD's
written request and Ambient's agreement to such request.
4.Public equity -- Ambient shall receive a sum equal to 20%
of the gross spread and other consideration paid to
underwriters in a secondary public offering. For example,
if the underwriters require a gross spread (underwriting
commission) of 8%, then Ambient shall receive 1.6% plus
20% of any other consideration such as an unallocated
cash expense pool. In these situations, it is common for
Ambient to receive some or all of this compensation from
the underwriters, reducing the cost to BSD.
5.Sale of more than 50% of BSD equity, and/or similar
merger or business combination involving an operating
company or companies: 8.0% of the first $5 million in
enterprise value of each of these transactions, 3.0% of
amounts between $5 and $10 million, and 2.0% of all
amounts between $10 million and $15 million, 1.0% on all
amounts thereafter. (Note: For the purpose of this
engagement, "enterprise value" shall be computed as the
dollar value of equity invested and face value of debt
created or assumed as part of each transaction.)
The cash portion of the success fee will be reduced by one-
half of all retainers paid by BSD. The success fees only
shall be reduced by 50% for any transaction involving Asset
Management ZUG in Switzerland.
For all transactions which involve a sale of equity in BSD
to third parties, Ambient shall also receive warrants for
common stock in BSD equal to 10%, on a fully-diluted basis,
of the equity percentage of BSD sold on the completion of
these transactions which either qualify as Ambient exclusive
transactions or which result from non Ambient exclusive
transactions from parties introduced to BSD by Ambient. (See
"Exclusivity.") The warrants will have an exercise price
equal to the same price per share as paid by the investor
and will be valid for five years from the date the financing
is closed. (Thus, if a transaction is arranged which results
in a sale of 30% of the Company's outstanding shares, then
Ambient shall receive warrants for an additional 3% equity
interest in the Company.)
Ambient shall cooperate with other agents and may separately
compensate such agents from Ambient's fees if it determines
that this is in the best interests of Ambient and the
Company.
EXPENSES/OTHER
Reimbursement of all reasonable out-of-pocket expenses
(including fees and disbursements of legal counsel, if
required), with prior approval of significant travel-related
expenses. Customary indemnification normally accorded
investment banking firms in similar situations from losses,
claims or damages resulting from Ambient's services.
(Indemnification will be subject to a separate
indemnification agreement.)
Within 15 days of the signing of this engagement agreement,
BSD will deposit with Ambient $2,500 to be applied towards
Ambient's out-of-pocket expenses. BSD may be required to
make additional advance expense deposits if and when the
initial expense deposit has been used. Any unused expense
deposits shall be refunded to BSD. BSD and Ambient will
agree on the need and likely costs of separate counsel for
Ambient before such counsel is retained (e.g., for
specialized securities issues). Ambient shall use reasonable
efforts to control expenses and shall inform the Company of
planned individual expenditures of more than $750 (e.g. for
travel) for the Company's reasonable pre-approval of the
general amount and purpose of the expense. Ambient shall
provide a detailed reporting of expenses on a monthly basis.
BSD is under no obligation to complete a transaction
recommended by the Ambient. BSD's Board of Directors retains
its right to accept or reject any financing offer brought to
it by Ambient or any other source of financing. BSD will
have no further obligation to Ambient other than that
outlined in the Retainers Fees section if it rejects all
financing proposals.
AGREED TO AND ACCEPTED
BSD MEDICAL CORPORATION
By: /s/ Paul F. Turner November 26, 1996
Paul F. Turner Date
Chairman of the Board, Acting President,
and Sr. Vice President of Research
AMBIENT CAPITAL GROUP INC.
By: /s/ Gary M. Post November 26, 1996
Gary M. Post Date
Managing Director
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<PERIOD-END> NOV-30-1996
<CASH> 535,279
<SECURITIES> 0
<RECEIVABLES> 196,525
<ALLOWANCES> (36,200)
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0
0
<COMMON> 161,770
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<SALES> 73,051
<TOTAL-REVENUES> 191,717
<CGS> 93,565
<TOTAL-COSTS> 527,361
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<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,764
<INCOME-PRETAX> (331,634)
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