UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended: August 31, 2005
OR
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934
For the transition period from ________________ to __________________________
Commission File No. 0-26057
BIOPHAN TECHNOLOGIES, INC.
--------------------------
(Exact name of registrant as specified in its charter)
Nevada 82-0507874
--------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
150 Lucius Gordon Drive, Suite 215
West Henrietta, New York
14586
----------------------------------------
(Address of principal executive offices)
(Zip Code)
(585) 214-2441
----------------------------------------------------
(Registrant's telephone number, including area code)
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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Class outstanding as of October 14, 2005 - Common Stock, $.005 par value -
76,760,163 shares
INDEX
Page
Number
PART I FINANCIAL INFORMATION
ITEM 1 Financial Statements
Report of Independent Registered Public Accounting Firm 1
Condensed Consolidated Balance Sheets, August 31, 2005 (Unaudited)
and February 28, 2005 2
Condensed Consolidated Statements of Operations, Three Months and Six Months
Ended August 31, 2005 and 2004 (Unaudited), and from August 1,
1968 (Date of Inception) through August 31, 2005 (Unaudited) 3
Condensed Consolidated Statements of Cash Flows, Six Months Ended
August 31, 2005 and 2004 (Unaudited) and from August 1, 1968
(Date of Inception) through May 31, 2005 (Unaudited) 4
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 19
ITEM 4. Controls and Procedures 19
PART II. OTHER INFORMATION 19
ITEM 1. Legal Proceedings 19
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 19
ITEM 3. Defaults Upon Senior Securities 19
ITEM 4. Submission of Matters to a Vote of Security Holders 19
ITEM 5. Other Information 20
ITEM 6. Exhibits 20
SIGNATURES 21
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Biophan Technologies, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of
Biophan Technologies, Inc. and Subsidiaries (the "Company") as of August 31,
2005, and the related condensed consolidated statements of operations for the
three-month and six-month periods ended August 31, 2005 and 2004 and the
condensed consolidated statements of cash flows for the six month periods ended
August 31, 2005 and 2004. These interim financial statements are the
responsibility of the Company's management.
We conducted our reviews in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with standards
of the Public Company Accounting Oversight Board, the objective of which is the
expression of an opinion regarding the consolidated financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated interim financial statements
for them to be in conformity with accounting principles generally accepted in
the United States of America.
We have previously audited, in accordance with standards of the Public Company
Accounting Oversight Board, the consolidated balance sheet of Biophan
Technologies, Inc. and Subsidiaries as of February 28, 2005, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year then ended and the amounts included in the cumulative column in the
consolidated statements of operations and cash flows for the period from March
1, 2000 to February 28, 2005 (not presented herein). In our report dated April
6, 2005, except for Note 13 to the financial statements as to which the date was
May 27, 2005, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of February 28, 2005, is
fairly stated, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
GOLDSTEIN GOLUB KESSLER LLP
New York, New York
September 27, 2005
1
BIOPHAN TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED BALANCE SHEETS
August 31, 2005 February 28, 2005
--------------- -----------------
ASSETS (Unaudited)
-----------
Current assets:
Cash and cash equivalents $ 5,639,264 $ 753,288
Stock subscription receivable -- 900,000
Due from related parties 98,952 220,959
Prepaid expenses 272,123 91,596
Other current assets 61,148 41,338
------------ ------------
Total current assets 6,071,487 2,007,181
Property and equipment, net 86,333 73,518
Other assets:
Intellectual property rights, net of amortization 970,452 997,738
Investment 100,000 100,000
Security deposit 3,800 2,933
Deferred tax asset, net of valuation allowance of
$6,192,000 and $4,787,000, respectively -- --
------------ ------------
1,074,252 1,100,671
------------ ------------
$ 7,232,072 $ 3,181,370
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,020,882 $ 1,037,103
Note payable -- 200,000
Line of credit - related party, net of discount of $229,137 770,863 --
Deferred revenues 912,500 225,000
------------ ------------
Total current liabilities 2,704,245 1,462,103
Minority interest 43,443 --
Stockholders' equity:
Common stock $.005 par value
Authorized 125,000,000 shares
Issued and outstanding 76,760,163 and
74,317,832 shares, respectively 383,801 371,589
Stock subscription receivable -- (150,000)
Additional paid-in capital 31,019,174 18,982,952
Deficit accumulated during the
development stage (26,918,591) (17,485,274)
------------ ------------
4,484,384 1,719,267
------------ ------------
$ 7,232,072 $ 3,181,370
============ ============
See Notes to Condensed Consolidated Financial Statements.
2
BIOPHAN TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Period from
August 1,
1968
Three Months Ended Six Months Ended (date of
August 31, August 31, inception) to
---------- ---------- August 31,
2005 2004 2005 2004 2005
------------ ------------ ------------ ------------ ------------
Revenues:
Development payments $ -- $ -- $ -- $ -- $ 75,000
License fees 62,500 -- 62,500 -- 62,500
------------ ------------ ------------ ------------ ------------
62,500 -- 62,500 -- 137,500
Operating expenses:
Research and development 2,238,002 573,846 3,775,970 1,000,061 10,081,781
General and administrative 3,177,401 776,804 5,135,159 1,345,275 14,509,111
Write-down of intellectual
property rights -- -- -- -- 530,000
------------ ------------ ------------ ------------ ------------
5,415,403 1,350,650 8,911,129 2,345,336 25,120,892
------------ ------------ ------------ ------------ ------------
Operating loss (5,352,903) (1,350,650) (8,848,629) (2,345,336) (24,983,392)
Other income(expense):
Interest expense (767,316) -- (767,316) -- (2,498,239)
Interest income 8,966 5,126 11,716 5,984 70,162
Other income 87,775 43,319 170,913 85,122 647,321
Other expense -- -- -- -- (65,086)
------------ ------------ ------------ ------------ ------------
(670,575) 48,445 (584,687) 91,106 (1,845,842)
------------ ------------ ------------ ------------ ------------
Loss from continuing operations (6,023,478) (1,302,205) (9,443,316) (2,254,230) (26,829,234)
Loss from discontinued operations -- -- -- -- (89,357)
------------ ------------ ------------ ------------ ------------
Net loss $ (6,023,478) $ (1,302,205) $ (9,433,316) $ (2,254,230) $(26,918,591)
============ ============ ============ ============ ============
Loss per common share - basic and diluted $ (0.08) $ (0.02) $ (0.13) $ (0.03)
============ ============ ============ ============
Weighted average shares outstanding 75,129,518 67,665,026 74,773,448 67,042,379
============ ============ ============ ============
See Notes to Condensed Consolidated Financial Statements.
3
BIOPHAN TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Period from
Six Months Ended August 1, 1968
August 31, (date of
---------- inception) to
2005 2004 August 31, 2005
------------ ------------ ------------
Cash flows used for operating activities:
Net loss $ (9,433,316) $ (2,254,230) $(26,918,591)
Adjustments to reconcile net loss to net cash
used in operating activities:
Amortization of intellectual property rights 27,286 -- 27,286
Depreciation 19,477 11,993 111,670
Loss on disposal of equipment 1,505 -- 1,505
Realized and unrealized losses on marketable securities -- -- 66,948
Accrued interest on note converted to common stock 19,506 -- 31,504
Amortization of interest on convertible notes payable -- -- 1,050,950
Write-down of intellectual property rights -- -- 530,000
Amortization of discount on payable to related party 729,023 -- 804,023
Issuance of common stock for services -- -- 369,108
Issuance of common stock for interest -- -- 468,823
Grant of stock options for services 4,572,157 70,000 6,525,957
Expenses paid by stockholder -- -- 2,640
Minority interest 43,443 -- 43,443
Changes in operating assets and liabilities:
(Increase) decrease in due from related parties 122,007 (169,361) (98,952)
(Increase) decrease in prepaid expenses (180,527) (48,887) (272,123)
(Increase) decrease in other assets (19,810) -- (19,810)
(Increase) decrease in security deposits (867) -- (3,800)
Increase (decrease) in accounts payable and
accrued expenses (16,221) 16,709 630,328
Increase (decrease) in due to related parties -- -- (43,496)
Increase (decrease) in deferred revenues 687,500 225,000 912,500
------------ ------------ ------------
Net cash used in operating activities (3,428,837) (2,148,776) (15,780,087)
------------ ------------ ------------
Cash flows used for investing activities:
Purchases of property and equipment (33,797) (28,539) (198,486)
Sales of marketable securities -- 720,000 2,369,270
Purchase of investment -- (100,000) (100,000)
Cash paid for acquisition of Biophan Europe,
net of cash received of $107,956 -- -- (258,874)
Purchases of marketable securities -- -- (2,436,218)
------------ ------------ ------------
Net cash provided by (used in) investing activities (33,797) 591,461 (624,308)
------------ ------------ ------------
(CONTINUED ON FOLLOWING PAGE)
4
BIOPHAN TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
August 1, 1968
Six Months Ended (date of
August 31, inception) to
2005 2004 August 31, 2005
------------ ------------ ------------
Cash flows provided by financing activities:
Proceeds of bridge loans -- -- 986,500
Loan from stockholder -- -- 143,570
Proceeds from line of credit borrowing - related party 2,000,000 -- 2,550,950
Line of credit payments -- -- (72,500)
Repayment of note payable (200,000) -- (200,000)
Proceeds from sales of capital stock 6,050,000 100,000 16,263,849
Exercise of options 182,541 -- 645,288
Exercise of warrants 20,707 788,900 1,142,451
Swing profits 295,362 26,689 696,087
Deferred equity placement costs -- (22,107) (112,536)
------------ ------------ ------------
Net cash provided by financing activities 8,348,610 893,482 22,043,659
------------ ------------ ------------
Net increase (decrease) in cash and equivalents 4,885,976 (663,833) 5,639,264
Cash and cash equivalents, beginning 753,288 823,900 --
------------ ------------ ------------
Cash and cash equivalents, ending $ 5,639,264 $ 160,067 $ 5,639,264
============ ============ ============
Supplemental schedule of non-cash investing and
financing activities:
Allocation of proceeds from line of credit - related party
to beneficial conversion feature and warrants $ 958,160 $ -- $ 958,160
============ ============ ============
Issuance of common stock upon conversion of related party loans $ 1,000,000 $ -- $ 1,978,450
============ ============ ============
Liabilities assumed in conjunction with acquisition of a 51%
interest in Biophan Europe and certain intellectual property rights $ -- $ -- $ 178,384
============ ============ ============
Intellectual property acquired through issuance of
capital stock and assumption of related party payable $ -- $ -- $ 175,000
============ ============ ============
Acquisition of intellectual property $ -- $ -- $ 425,000
============ ============ ============
Issuance of common stock upon conversion of bridge loans $ -- $ -- $ 1,142,068
============ ============ ============
See Notes to Condensed Consolidated Financial Statements.
5
BIOPHAN TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2005
INTERIM FINANCIAL STATEMENTS:
The condensed consolidated financial statements as of August 31, 2005 and for
the three months and six months ended August 31, 2005 and 2004 are unaudited.
However, in the opinion of management of the Company, these financial statements
reflect all adjustments, consisting solely of normal recurring adjustments,
necessary to present fairly the financial position and results of operations for
such interim periods. The results of operations for the interim periods
presented are not necessarily indicative of the results to be obtained for a
full year. These unaudited condensed consolidated financial statements should be
read in conjunction with the audited consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-KSB for the fiscal
year ended February 28, 2005.
BASIS OF CONSOLIDATION:
The consolidated financial statements include the accounts of Biophan
Technologies, Inc. ("Biophan"), its wholly owned subsidiaries, LTR Antisense
Technology, Inc.("Antisense")and Nanolution, LLC, formerly MRIC Drug Delivery
Systems, LLC, ("Nanolution"), and its majority owned subsidiaries Biophan Europe
GmbH ("Biophan Europe"), formerly aMRIs GmbH, and TE Bio LLC ("TE Bio"),
collectively referred to as the "Company". All significant intercompany accounts
and transactions have been eliminated in consolidation.
COMPANY HISTORY:
The Company was incorporated under the laws of the State of Idaho on August 1,
1968 and on January 12, 2000, changed its domicile to Nevada by merging into a
Nevada corporation, and on July 19, 2001, changed its name to Biophan
Technologies, Inc. >From the inception of the current line of business on
December 1, 2000, the Company has not generated any material revenues.
Therefore, the Company is in the development stage and will remain so until the
realization of significant revenues. The Company's ability to continue in
business is dependent upon obtaining sufficient financing or attaining future
profitable operations.
PRINCIPAL BUSINESS ACTIVITIES:
The primary mission is to develop and commercially exploit technologies for
improving the performance, and as a result, the competitiveness of biomedical
devices manufactured by third party companies. The Company possesses
technologies for enabling biomedical devices, both implantable and those used in
diagnostic and interventional procedures, to be safe (do not harm the patient or
physician) and compatible (allow effective imaging of the device and its
surrounding tissue) with MRI (magnetic resonance imaging). The Company has also
developed technologies for improving MRI contrast agents; for improved drug
elution and drug delivery systems, including an MRI safe and image compatible
ceramic motor; a system for generating power for implantable devices from body
heat, and a series of implantable devices including an MRI-visible vena cava
filter.
ACCOUNTING FOR STOCK OPTIONS:
The Company has elected to apply Accounting Principles Board ("APB") Opinion No.
25, Accounting for Stock Issued to Employees, and related interpretations in
accounting for its stock options issued to employees (intrinsic value) and has
adopted the disclosure-only provisions of Statement of Financial Accounting
Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation. Had the
Company elected to recognize compensation cost based on the fair value of the
options granted at the grant date as prescribed by SFAS No. 123, the Company's
net loss and loss per common share would have been as follows:
6
Three Months Ended August 31, Six Months Ended August 31,
2005 2004 2005 2004
------------ ------------ ------------ ------------
Net loss - as reported $ (6,023,478) $ (1,302,205) $ (9,433,316) $ (2,254,230)
Add: Stock-based employee compensation
expense included in reported net
loss, net of related tax effects 2,986,530 40,000 4,325,530 70,000
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax effects (3,904,417) (67,000) (6,059,454) (129,000)
------------ ------------ ------------ ------------
Net loss - pro forma $ (6,941,365) $ (1,329,205) $(11,167,240) $ (2,313,230)
============ ============ ============ ============
Basic and diluted loss
per share - as reported $ (.08) $ (.02) $ (.13) $ (.03)
============ ============ ============ ============
Basic and diluted loss
per share - pro forma $ (.09) $ (.02) $ (.15) $ (.03)
============ ============ ============ ============
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payment" ("SFAS No. 123R"), which replaces SFAS No. 123 and supersedes APB No.
25. SFAS No. 123R requires that the compensation cost relating to share-based
payment transactions be recognized in financial statements based on alternative
fair value models. The share-based compensation cost will be measured based on
the fair value of the equity or liability instruments issued. Per APB No. 25,
compensation expense was recognized only to the extent the fair value of common
stock exceeded the stock option exercise price at the measurement date. In
addition, the pro forma disclosures previously permitted under SFAS No. 123 no
longer will be an alternative to financial statement recognition. SFAS No. 123R
also requires the benefits of tax deductions in excess of recognized
compensation cost to be reported as a financing cash flow rather than as an
operating cash flow as required under current literature. Under the effective
date provisions included in SFAS No. 123R, the Company would have been required
to implement SFAS No. 123R as of the first interim or annual period that begins
after June 15, 2005. On April 14, 2005, the SEC delayed the effective date which
allows companies to implement SFAS No. 123R at the beginning of the first fiscal
year after June 15, 2005, which would be March 1, 2006 for the Company. The
Company is evaluating the requirements of SFAS No. 123R and expects that the
adoption will have a material impact on the consolidated results of operations
and earnings per share similar to the current pro-forma disclosures under SFAS
No. 123, as per above.
For the three months ended August 31, 2005, the Company incurred a non-cash
charge to earnings of $3,110,075 for the grants of stock options for services
and the vesting of contingent options. Of this amount, $2,957,030 is related to
options previously granted to executive officers and non-employee directors that
vested on a contingent basis upon the achievement of specified performance-based
milestones. These particular options, because they are not "fixed and
determinable", do not qualify under the accounting rules for "disclosure only"
treatment and accordingly, must be expensed for any intrinsic value at the time
and to the extent that they vest. The calculated amounts resulted in a non-cash
charge in the statement of operations and an offsetting credit to additional
paid-in capital.
For the six months ended August 31, 2005, the non-cash charge to earnings for
stock options granted was $4,572,157 of which $4,244,280 is related to the
vesting of contingent options.
RECLASSIFICATION
For comparative purposes, certain amounts in the accompanying statement of
operations for fiscal 2005 have been reclassified to conform to the presentation
used for fiscal 2006. These reclassifications had no effect on previously
reported results of operations or accumulated deficit.
7
REVENUE RECOGNITION:
The Company earns and recognizes revenue under development agreements when the
phase of the agreement to which amounts relate is completed and the Company has
no further performance obligation. Completion is determined by the attainment of
specified milestones including a written progress report. Advance fees received
on such agreements are deferred until recognized.
The Company recognizes initial license fees over the term of the related
agreement. Revenue related to a performance milestone is recognized upon the
achievement of the milestone, as defined in the respective agreements.
PREPAID EXPENSES:
Prepaid expenses comprise the following at August 31, 2005:
Prepaid conference fees $ 65,400
Prepaid insurance 52,798
Prepaid license fees to New Scale Technologies, Inc. - related company 50,000
Prepaid investor relations fees 37,500
Prepaid legal fees 30,000
Prepaid supplies 18,125
Prepaid royalties - related company 15,000
Prepaid consulting fee 3,300
--------
$272,123
LINE OF CREDIT AGREEMENT:
On May 27, 2005, the Company entered into an unsecured loan agreement with
Biomed Solutions LLC, a related company, whereby Biomed has agreed to provide a
line of credit facility of up to $2 million. Borrowings under the line bear
interest at 8% per annum, are payable on demand after November 27, 2005 and are
convertible into the Company's common stock at 90% of the average closing price
for the 20 trading days preceding the date of borrowings under the line. In June
2005, the Company borrowed the entire $2 million under the line in two separate
draws of $1 million each and, in accordance with the agreement, Biomed received
warrants to purchase 500,000 shares of the Company's common stock at an exercise
price of 110% of the average closing price for the 20 trading days preceding the
date of execution of the credit agreement. The Company recorded a discount on
the borrowings of $958,160 due to the beneficial conversion feature of the note
as well as for the value of the warrants. The discount is being amortized as
additional interest expense over the term of the note. On August 31, 2005,
Biomed elected to convert $1 million of the note plus accrued interest into
480,899 shares of common stock at which time, the remaining discount related to
the $1 million portion of the loan was fully expensed. Amortization of the
discount on the note resulted in a non-cash interest expense of $729,023 during
the quarter ended August 31, 2005.
CHANGES IN EQUITY:
During the quarter ended August 31, 2005, a total of 154,074 shares of common
stock were issued upon exercise of options and warrants at prices ranging from
$.16 to $1.00. Proceeds of $90,707 were received increasing the capital stock
account by $770 and additional paid-in capital by $89,937.
Additional paid-in capital was also increased by $3,110,075 of expense related
to stock option grants for services and vesting of contingent options. Of this
amount, $2,957,030 is related to options previously granted to executive
officers and non-employee directors that vested during the period upon the
achievement of specified milestones. Additional paid-in capital was increased
further by the discount for the beneficial conversion feature of the Line of
Credit Agreement with Biomed Solutions, LLC and related warrants granted in the
amount of $958,160.
On August 2, 2005, in connection with the Investment Agreement dated June 30,
2005 with Boston Scientific Scimed, Inc., 1,653,193 shares of common stock were
issued for cash consideration of $5,000,000, increasing the capital stock
account by $8,266 and additional paid-in capital by $4,991,734.
On August 31, 2005, Biomed Solutions, LLC elected to convert $1,000,000 of a
$2,000,000 Convertible Note plus accrued interest of $19,506 into 480,899 shares
of common stock, increasing the capital stock account by $2,405 and additional
paid-in capital by $1,017,101.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
Our primary mission is to develop and commercially exploit technologies for
improving the performance, and the corresponding competitiveness, of biomedical
devices and pharmaceutical compounds manufactured by third party companies. We
do not employ our own manufacturing or distribution channels but rather rely on
that of partner companies. We develop technology protected by strong
intellectual property targeted at specific markets within the medical technology
sector.
Our management team includes former executives from Johnson & Johnson and
Angiotech who have been involved in all the aspects of the biomedical device
business, including new business development, product engineering, research and
product development, project management, regulatory affairs, sales and
marketing, and intellectual property development.
We are affiliated with world renowned scientists and engineers, including
relationships with consultants, academia, and large and small companies. While
we currently employ only sixteen direct employees, our extended enterprise
includes approximately fifty professionals with expertise in all of the critical
areas needed to provide a turnkey solution to a customer. We are developing our
biothermal power system with the NASA Ames Center for Nanotechnology. We have
licensed certain of our technology to Boston Scientific Scimed, Inc. and have
received a $5 million equity investment from them as well.
We have, or are developing, enhanced technology for the following products /
market sectors:
Pacemakers, implantable cardio-defibrillators
Neurostimulators
Stents
Vena Cava Filters
Heart Valve
Cardiovascular Technologies
Guidewires and catheters
Drug pumps
Drug delivery systems
Power systems (batteries)
Others
Our capabilities include making these devices both safe for use with MRI (many
medical devices are contraindicated for use with MRI) and image compatible with
MRI (many devices have imaging problems with MRI). We are also developing
improved contrast agents for use with MRI. We also offer an MRI safe and image
compatible motor for drug pumps and robotic applications. For implantable
devices that rely on battery power, we are developing longer lasting power
systems that harness waste body heat instead of relying on chemicals for power
generation, as in conventional batteries.
Company Business
We are a technology development company with a strong market focus on solving
real-world technical challenges and limitations facing the medical device
industry. When selecting a market opportunity to address, we generate a wide
range of potential technical solutions. Each of the technical solutions that we
pursue is strongly protected by intellectual property to ensure that we have the
capability of effectively marketing our technologies. Whenever possible, we
attempt to create and patent multiple solutions for any given technology
challenge.
Our multiple solutions for stent imaging and for pacemaker safety are examples
of this approach. These solutions allow us to offer potential licensees an
opportunity for a sustainable competitive product advantage. This makes it much
more attractive for the manufacturer to make the necessary investments in
product development, regulatory approvals, and marketing, as well as pay
appropriate compensation for access to our technology.
This approach has resulted in the development of a range of core technologies,
and our presence in a number of different but related segments of the medical
device market. We are aggressive in our development and defense of our
intellectual property assets and have an intellectual property portfolio several
times the size of many comparable sized companies.
Over the past several quarters, we have been acquiring and developing:
o Technology to improve vascular stents so they can be imaged with MRI
to detect the presence of restenosis (blockage) after implantation;
9
o Technology to enable an MRI image compatible vena cava, which allows
MR imaging of blood clots that may be present and therefore pose a
risk to removal of the device;
o Technology to enhance the MRI safety and MRI image compatibility of
pacemakers, cardio-defibrillators, neurostimulators, pain control
devices, pumps, and virtually any implanted or interventional device
which has elongated metal leads or metal components;
o Technologies to enable improved MRI contrast agents;
o Market opportunities for our MRI safe and image compatible ceramic
motor, the Squiggle(TM) motor;
o A system for generating power for implantable devices from body
heat, in cooperation with NASA; and
o Technology to improve drug elution and drug delivery systems,
including providing "active release" using non-invasive or minimally
invasive activation.
Over the past five years, our work in these technology areas, including
development and accumulation of intellectual property, has allowed us to
demonstrate working solutions for many of the critical MRI safety and imaging
limitations associated with both implantable and interventional medical devices.
Over $12 billion worth of medical devices ship each year with these technical
limitations. We are continually demonstrating these solutions with medical
device manufacturers and are at various stages of discussion on the deployment
of these solutions into existing and new generations of medical devices.
Products and Technologies
Stents and Vena Cava Filters
Stents are one of the fastest growing technologies in the medical device arena.
Drug eluting stents have been extremely successful in the market as a result of
their ability to reduce restenosis that can occur after a stent is placed.
Diagnosing restenosis currently requires an interventional medical procedure,
which is usually done under fluoroscopy, combined with the administration of
contrast agents, which can result in an allergic reaction. These procedures
allow determination of stent blockage, but require an invasive procedure to
image within the stent.
Currently marketed stents cannot be effectively imaged non-invasively using MRI
due to a blockage of signals caused by the Faraday Cage effect, in which the
stent blocks transmission of radio frequency (RF) fields necessary for imaging
with MRI. Biophan is working to implement a number of technologies to address
this problem by modifying the stent design, by adding a secondary structure or
by applying a coating to the stent.
Biophan has, through both internal development and acquisition, acquired a broad
range of issued and pending patents protecting these technologies. We have
recently acquired the exclusive license for patents covering the use of resonant
circuits to image medical devices and another which covers resonant circuits
used on products that are "collapsible", such as stents. Other technical
solutions include the use of thin film and thick film coatings to overcome the
Faraday Cage effect, and material and design constraints to enable the
construction of a stent that is transparent to MR imaging.
These technology solutions are also applicable to other medical devices,
including vena cava filters, heart valves and many other types of implantable
devices.
Pacemakers, Defibrillators and Neurostimulators
We have successfully demonstrated effective solutions for making devices safe
for use with MRI, which apply to a number of devices which currently are
contraindicated for use with MRI, such as pacemakers, implantable defibrillators
and neurostimulators, and some types of guidewires and catheters. Many of these
devices can experience unsafe heating in an MRI field, and can experience
induced voltages which also present a safety concern. Today, approximately 3
million people have devices that cause them to be denied access to MRI when
needed, due to safety concerns and FDA contraindications. Our technologies are
designed to enable the manufacture of devices that are safe for use with MRI, in
order to eliminate the need to deny future device recipients access to MRI.
Additionally, there is an evolving multi-billion dollar field of medicine known
as minimally invasive surgery, which uses devices such as guidewires and
catheters to perform many procedures that previously required very invasive
surgery. Many procedures are now done in catheter labs equipped with X-ray or
fluoroscopy for imaging and guiding the procedures. X-ray and fluoroscopy do not
offer the advantages of soft tissue visualization nor the absence of ionizing
radiation provided by MRI. Currently, the combined problems of device safety and
image compatibility of these devices in MRI have limited the use of MRI in this
rapidly growing area of medicine.
10
The desire and need for MRI is demonstrated by the advent of combined
interventional labs, which integrate X-ray devices for guiding devices into the
body, and MRI machines for evaluating progress and observing tissue and results.
For the past five years, Biophan has been actively engaged in solving the
complex problems associated with device safety and image compatibility with MRI.
With our solutions, the industry will have the opportunity to manufacture
devices that can be used with MRI, obviating the need for combined
interventional labs.
Biophan has multiple solutions for resolving the heating of devices under MRI,
including pacemaker leads, defibrillator leads and neurostimulator leads (such
as the deep brain stimulation systems used for the treatment of Parkinson's and
epilepsy). These solutions include an RF filter, licensed from Johns Hopkins
exclusively for implantable devices, which can reduce or eliminate lead heating.
Additionally, we have patented the use of "anti-antenna" geometries which alter
the way the devices are made to resolve the MRI safety limitations. Together,
these solutions allow the manufacture of an MRI safe lead and device.
Since the issue of some of our patents in this area, we have publicly disclosed
our solutions and have demonstrated the success of our approach to prospective
customers and industry experts. We have begun manufacturing experimental
prototypes of devices modified using our solutions, which we believe will prove
to be very cost effective for device manufacturers to implement.
We recently received an issued U.S. patent, 6,829,509, for anti-antenna
geometries. We believe that this patent, combined with Johns Hopkins' U.S.
patent 5,217,010, for which we hold an exclusive license, provides us a very
strong intellectual property position in the emergence of MRI safe devices.
These patents apply to many devices which incorporate long wire leads, such as
pacemakers, defibrillators, deep brain stimulators, pain management devices, and
others.
We recently filed nine continuations to our U.S. patent 6,829,509, applying this
innovation to other devices such as stents, guidewires and catheters. These
technologies address a large segment of the medical device market worldwide. We
have in the past declined offers for licenses for pacemaker safety which did not
provide satisfactory financial terms.
Interventional Guidewires and Catheters
In addition to improving the safety of devices such as pacemakers and
neurostimulators, the large markets for interventional guidewires and catheters
are limited by both safety and image compatibility issues with MRI. The MRI
safety limitations can be addressed using the same technologies used for
pacemakers and neurostimulators, while image compatibility can be addressed by
other technologies that we have developed and acquired.
One technology that we employ involves thin film nanomagnetic particle coatings,
developed by Nanoset, LLC in collaboration with Biophan. We have produced MRI
images showing an aluminum rod, otherwise invisible under MRI, but seen clearly
when an appropriate nanomagnetic coating is applied. An alternative approach,
using a miniature resonant circuit applied to a catheter, makes it easy to track
devices under MRI. These images are available on our website at www.biophan.com.
This capability is part of the suite of technologies that can help make MRI a
viable solution for interventional diagnostics and surgery. These technologies
are covered by both issued and pending patents possessed exclusively by Biophan
for the medical device market.
Cardiac Assist Devices
We have recently announced the formation of a cardiovascular device division, to
support the development of novel devices in this rapidly growing market sector.
In addition, we announced a Letter of Intent with MYOTECH, LLC to acquire
exclusive sales and distribution rights for MYOTECH's MYO-VAD(TM) technology.
This Letter of Intent also provides us the opportunity to acquire a minority
equity position in MYOTECH, with the option to acquire a controlling position
over time.
The MYO-VAD technology is a novel cardiac assist device that provides full
systolic and diastolic support of both the left and right ventricle to enable
patients with heart failure to continue with full cardiac output. In addition,
the MYO-VAD design is totally non-blood contacting and can be installed in three
minutes, both of which provide significant enhancement when compared to existing
VAD technology.
MRI Contrast Agents
Nanoset, our technology partner, and Biophan are developing a "particle tuning"
technology for making a novel MRI contrast agent capable of providing multiple
MRI signatures. This novel material could be attached to different recognition
molecules, permitting improved specificity and multiple functionality as
compared with existing agents. This work is still in the early stages, but the
market for MRI contrast agents is currently approaching $1 billion and is
expected to grow with the expansion of MRI diagnostics. Our intent is to partner
with other companies and to license the technology to a partner or partners with
established distribution channels.
11
Biothermal Power Source
We acquired a 51% interest in TE Bio, LLC, a company developing implantable
power systems that generate electricity from heat created by the human body, and
not by electrochemical means as with traditional batteries. Our feasibility
studies and modeling indicate that the amount of energy needed to power devices
such as pacemakers can be generated in an appropriate form factor. Further
development may yield sufficient power for neurostimulators, small drug pumps
and biosensors, or to continuously charge a battery for devices such as
implantable defibrillators. We are working with NASA and several companies to
develop this technology.
Drug Delivery Technologies
As part of our research into nanomagnetic thin film particle coatings for
medical devices, we have initiated a parallel program to develop methods of
"tuning" the particles and coatings for specific responses to externally applied
magnetic fields. Working with Nanoset, we are developing the capability of
reloading the drug within a coated device such as a stent by attaching
nanomagnetic particles to a drug molecule to guide it to a device such as a
stent and to cause the drug to enter the coating for future drug release. By
attaching the nanomagnetic particle to a drug molecule, the drug can be made
non-active, in that it will not bind to tissue until released from the
nanomagnetic particle.
This innovation has broad applications in drug delivery and drug coatings.
During 2004, Nanoset and Biophan filed an extensive patent application on
methods of "active" drug elution and improvements on drug targeting and drug
delivery.
Additional technical information, audio-visual presentations, white papers and
access to many of our issued and pending patents can be found on our website at
www.biophan.com.
Sales and Marketing
The Company's business model consists of developing technologies and licensing
these technologies and/or providing critical components to medical device
manufacturers. We anticipate that products incorporating our technologies will
be developed through collaboration with external companies or partners, and sold
through companies with existing distribution channels. Our business plan
consists of entering into licensing and R&D agreements with our
development/marketing partners, generating revenue through license fees,
milestone payments, annual minimum royalty payments and royalties on sales of
products as well as, for certain applications, providing critical components.
We anticipate licensing income in advance of product sales to tie up rights for
each market segment and then ongoing royalties once these products are in the
market. Potential revenue streams above any negotiated minimum license payments
would likely commence six to nine months following approval by the FDA for
product shipments. However, a typical transaction may include upfront license
fees, milestone payments, and annual minimums.
Markets
The global market for medical devices that could benefit from our technology
related to operating safely and effectively in an MRI environment was
approximately U.S.$5 billion in the year 2002 and is growing annually by 15%.
The market for devices that have imaging compatibility problems is in addition
to the market opportunity for devices with safety limitations. We estimate the
market for devices which have imaging limitations to be an additional U.S.$5
billion or greater. These devices include implantable artificial hips, knees,
bones, and other prosthetics, including stents, shunts, screws, wires, and
shanks.
We anticipate that we will license our technology to one or more development
partners who would be responsible for developing commercial products, obtaining
necessary approvals, manufacturing, marketing and distributing the products. Our
research for development partners is global; however, we can not presently
identify or predict the precise target markets, distribution methods or other
marketing efforts of our potential development partners.
The potential market for additional technologies which we have under development
is even larger. The total estimated market for drug delivery technologies is
estimated to be U.S.$40 billion and the market for MRI contrast agents currently
stands at several hundred million dollars. The market for implantable batteries
is $500 million.
Licensing and Joint Venture Strategy
Our strategy is to license our technologies to companies, segmented by
technology and market. In some cases, we may also offer critical components,
coating machines, and other capabilities needed to put our innovations into
practice. Our licensing strategy is to segment the market as finely as possible
to maximize the royalty revenue achievable by our technology. Our upfront
negotiations with each customer determine royalty rates for each market segment.
Royalty rates are dependent upon the strength of our patent coverage, the
strength of the market advantage provided by our technology, the availability of
other technology options to solve a particular problem, as well as whether we
grant an exclusive or non-exclusive license. We believe it is very important to
demonstrate the value that we add to the product, and how that added value will
improve our customer's position in the market, to achieve an acceptable royalty
rate.
12
In situations where we possess several solutions to a problem, we expect that
the customer will wish to evaluate all of our technology options to determine
which is the best solution and whether or not it should license all of our
solutions. Those that are not licensed exclusively might be picked up by a
competitor, who can then claim a comparable advantage. Broader license grants
and stronger intellectual property positions can result in higher royalty rates.
To ensure the highest possible royalty rates, resulting in the best long term
benefit to our shareholders, we have aggressively patented and acquired
technology solutions in the multiple markets in which we are active. For each
company with whom we enter into discussions, we identify which market segments
they are interested in and which technologies they wish to license.
The degree of exclusivity is also a key parameter in determining achievable
license terms; however, the decision to license exclusively or non-exclusively
is dependent upon multiple factors. In some markets, such as the pacemaker
market, we have elected not to pursue an exclusive license and instead to pursue
multiple manufacturers as potential licensees. We believe that all pacemakers
should be made to operate safely with MRI equipment, and it is our intent to
eventually provide a license to all pacemaker manufacturers. Ultimately, our
strategy related to exclusive versus non-exclusive licensing will be determined
by market segment, and will be dependent upon market need, market fragmentation,
competitive advantage, market position and financial incentives offered by the
potential licensees. For example, while giving one company a non-exclusive
license, there remains the possibility for a second company to negotiate a
"co-exclusive" license.
Boston Scientific License
On June 30, 2005, we entered into a licensing agreement with Boston Scientific
Scimed, Inc. The agreement provides Boston Scientific with the right to use
Biophan's MRI safety and image compatibility technology and other technologies
in a broad range of exclusive and non-exclusive product areas at royalty rates
of 3% to 5%. The exclusive product area includes vascular implants and the
non-exclusive product area covers a broad array of medical devices. Boston
Scientific has the right to sub-license the exclusive product areas to third
parties, with Biophan and Boston Scientific to share all proceeds from these
parties. The agreement also provides for milestone payments to Biophan for
specific product areas which may be as high as several million dollars per
product. In addition, the agreement requires Boston Scientific to make an
initial upfront payment to Biophan of $750,000 (which will not be an offset to
future earned royalties); make annual minimum royalty and substantial annual
earned royalty payments; and receive a right of first negotiation on new
technologies acquired by Biophan in the fields of MRI safety and image
compatibility. The initial $750,000 was made on August 2, 2005 and will be
recognized as revenue over the next twelve months. Accordingly, one-twelfth of
$750,000, or $62,500 was recorded as revenue in the current quarter ended August
31, 2005.
In addition to the license agreement, Boston Scientific entered into an
agreement to invest $5 million in Biophan at a price per share of $3.02. The
investment is based on a stock price of Biophan, plus a 10% premium, calculated
using the average closing price of Biophan shares during the 30-day period prior
to the date of funding. This funding took place on August 2, 2005.
Strategic Relationships
Leveraging strategic relationships is vital to our mission. These relationships
help us validate our technology and also develop potential sales channels. We
have entered into non-disclosure agreements with a number of major manufacturers
of implanted biomedical and related devices. We are discussing with these
companies potential strategic relationships that may include joint development
projects and licensing agreements.
The transaction with Boston Scientific has provided a validation for our
technology that has resulted in increased interest and activity with other
manufacturers. It is our goal to one day see all biomedical devices become MRI
safe and image compatible, and we feel that the Boston Scientific agreement
facilitates this goal.
We previously declined two offers from a major pacemaker manufacturer for an
exclusive license to one of its patents, which our management and board of
directors felt was not equitable.
In June 2004, we acquired a 51% interest in TE Bio LLC, a company developing an
implantable biothermal battery using body heat gradients to power medical
devices such as pacemakers, defibrillators, and drug pumps. The biothermal
battery technology is based on a patented innovation in the utilization of
thermoelectric materials, using nanoscale-based, thin-film materials to convert
thermal energy produced naturally by the human body into electrical energy. The
resulting power can be used to "trickle charge" batteries for medium-power
devices such as defibrillators, or directly power low-energy devices like
pacemakers. It is enabled by nanotechnology which provides the ability to put
thousands and thousands of small semi-conductor nodes that convert heat to
electricity in a space about the size of one or two postage stamps. Biophan is
committed to contribute $300,000 annually for a three-year period, and marketing
and management support to TE Bio, in exchange for Biophan's 51% interest. TE Bio
was founded by Biomed Solutions, LLC, an affiliate and the company from which
Biophan spun out in December 2000. The independent board members of Biophan
evaluated the technology and authorized the acquisition, after conclusion of a
third party feasibility study. NASA is now completing building a special reactor
for depositing nanomaterial on a thin-film substrate to test materials being
developed for this project.
13
Also in June 2004, we announced that we had acquired from New Scale
Technologies, Inc. the exclusive worldwide distribution rights for the medical
market for New Scale's ceramic Squiggle(TM) motor, including the multi-billion
dollar drug delivery market. Developed to meet the growing demand for high
precision, low cost actuation devices, the motor is currently on the market
generating revenues and is available for OEM integration today. The motor uses
no metal wire windings (one of the primary causes of image interference under
MRI), is capable of both linear and rotational movement, and can move forward
and backwards several inches at nanometer increments, thereby providing a
controllable drug release environment.
As part of the exclusive distribution agreement, Biophan will provide sales and
marketing to the medical device industry on behalf of New Scale and has also
made a $100,000 investment in the company for a 10% interest. The motor offers
several advantages for driving drug pumps, and other medical applications. Using
only four parts (other motors can have as many as 100 parts), it provides a
unique combination of high reliability, flexibility, and power consumption
advantages. By using ceramic components and no windings, it is very compatible
with MRI imaging. The motor also has applications in MRI robotics and
cryogenics. The device is being evaluated by several device manufacturers for a
variety of MRI-related applications.
This product also fits in with our strategic plan to be a provider of
proprietary new technologies to our OEM customers and prospects. While we
continue to offer solutions that will one day enable all biomedical devices to
be MRI-safe and image compatible, we have expanded our focus to provide
additional, proprietary innovations to our customers. We continue to maintain an
ongoing and in-depth dialogue with both research and development and business
development executives at many of the largest manufacturers of biomedical device
companies. This interaction gives us a broad view of the short- and long-term
needs of these companies for support of both their current and future product
lines.
We share gross profit equally with New Scale Technologies, the inventor and
manufacturer of the ceramic motor. Biophan provides sales and marketing, and a
$25,000 quarterly advance, reconcilable against current year sales, to New
Scale, which enables New Scale to further develop unique capabilities for the
medical market. The motor is already on the market for non-medical applications
and evaluation units are being sold to customers around the world. The motor is
currently under review by several biomedical device manufacturers of drug pumps
and other devices.
On February 24, 2005, we acquired a 51% ownership interest in aMRIs GmbH (later
renamed Biophan Europe), a leading German-based developer of MRI-safe and
image-compatible technology solutions and biomedical devices. In connection with
that acquisition, we also acquired the exclusive license to fifteen issued and
pending patents covering imaging of devices such as stents and other vascular
implants, significantly expanding the Company's intellectual property portfolio.
The purchase of the subsidiary and the patents was made for total consideration
of $927,330 consisting of cash, a promissory note and restricted stock.
The acquisition provides Biophan with innovative products, technologies, and
scientific expertise that extend Biophan's intellectual property portfolio of
medical solutions in the fast-growing marketplace of products and procedures
that are compatible with Magnetic Resonance Imaging (MRI).
Following the acquisition, Michael Friebe, Ph.D., was elected to our Board of
Directors and serves as Chief Executive Officer of Biophan Europe. Andreas
Melzer, M.D. joined our Scientific Advisory Board and serves as Biophan Europe's
Research Physician and Chief Research Officer leading many of our medical device
developments.
Dr. Friebe is a scientist and entrepreneur trained in MRI related physics at the
University of California at San Francisco, one of the world's leading biomedical
research centers, and at the University of Witten in Germany. He later started
and then sold NEUROMED AG, later renamed UMS NEUROMED after being acquired by
United Medical Systems (UMS), a publicly-traded German company. Dr. Friebe is a
well-regarded radiology/cardiology oriented entrepreneur with an extensive
business and customer network.
Dr. Melzer is a professor of applied biomedical engineering, Director and
Chairman of the Board at the Institute for Medical Technologies and Management
in Medicine INSITE med. at the University of Applied Sciences in Gelsenkirchen,
Germany. He also holds a clinical position as part-time staff radiologist at the
Department of Diagnostic and Interventional Radiology at St. Mary's Hospital
Buer in Gelsenkirchen, Germany. Dr. Melzer has over 15 years of experience in
the development of medical technology for laparo-endoscopic surgery,
interventional radiology, Interventional and Intraoperative MRI and MR
compatible Robotics, surgical instrumentation, and Nitinol devices. He has
co-invented and patented some of the most exciting and important innovations in
imaging of medical devices under MRI and he continues to develop and invent. As
a practicing physician in radiology, Dr. Melzer has a unique understanding of
the needs of patients, the medical device community, the physicians conducting
procedures under MRI, and the scientific solutions that are possible. He has
co-invented more than 30 patents and has authored over 150 publications.
Additionally, Dr. Melzer is engaged as co-organizer, chairman, and invited
speaker of various medical conferences and is a board member of several medical
societies, as well as professional committees.
14
Among the Biophan Europe technology assets are an MRI-visible catheter marker,
an MRI-visible stent, a vena cava filter which is in late-stage development, and
a series of MRI-visible medical devices in development. The Company's management
and research staff provide world-class intellectual expertise in the field of
MRI compatibility, and have been awarded several grants from government agencies
to develop its next-generation biomedical technology for MRI. Biophan Europe and
its principals have contractual and consulting agreements with many of the
world's leading biomedical device and MRI machine manufacturers.
Based on discussions underway with several biomedical device manufacturers, and
MRI manufacturers, both in the U.S. and overseas, we plan to expand the use of
the technologies we have developed to make a wider range of devices compatible
with MRI. These technologies reduce radio frequency interference, heating, and
induced voltages. Since the beginning of fiscal 2005, we have expanded our
development and partnering activities related to these technologies to include
guidewires, stents, drug pumps, biopsy needles and other prosthetic and surgical
tool devices, where the lack of MRI compatibility negatively impacts
investigational and diagnostic procedures.
Discussions with these device manufacturers indicate a need for, and an interest
in, solutions to additional problems based on our technology. We previously used
both surrogate devices (such as copper rings) and actual manufactured
implantable products in a gel phantom to demonstrate our ability to accurately
image devices and their interior spaces in a manner that could not be done
previously. The Biophan Europe technology builds extensively on our base and
provides an additional ten years of expertise.
Additionally, as part of the Biophan Europe acquisition, we will have access to
additional research grants which will enable us to further demonstrate the
effectiveness of our products and capabilities. Moreover, we will increase the
scope of products in discussion for prospective licensing agreements, in
addition to licensing discussions underway between Biophan Europe and certain
device manufacturers.
Acquisition of Intellectual Assets
We currently have an overall estate of 156 U.S. patents, inclusive of those
assigned and licensed, and including filed applications and allowed and issued
patents. Additionally, we have 46 international patents or applications in
process.
The technologies allowing visualization of implants have been developed at
Biophan, and with technology partners under exclusive license, including aMRIs
Patents GmbH in Germany (via an exclusive license); Aachen Resonance in Germany
(via an exclusive license); and Nanoset, LLC in the U.S. (via an exclusive
license). The patents include those licensed from Nanoset, LLC. Nanoset's
technology can be used to reduce image artifacts caused by implantable and
interventional medical devices.
The patents total also includes those licensed as part of the Biophan Europe
acquisition whereby we obtained worldwide exclusive rights to a significant
patent portfolio totaling fifteen issued and pending patents covering critical
capabilities needed by the medical industry as the use of MRI interventional
medicine and MRI diagnostics for examination of stents and other implants
becomes standard medical procedure.
On an ongoing basis, we are aggressively pursuing internal research and
development projects, as well as sourcing leading-edge providers of related
technologies. We are currently reviewing several cardiovascular technologies
which we feel have potential for exclusive licensing in, and subsequent product
development and licensing out. Intellectual property, such as technology
solutions and patents, may be developed internally, through joint ventures,
licensed in, or purchased. To ensure the continuing value of our intellectual
assets, we intend to aggressively defend our patents and licensed technology,
both domestically and abroad.
Research and Development
Over the past year we have been developing:
o A series of implantable devices including an MRI visible vena cava
filter and MRI visible stents;
o Market opportunities for an MRI safe and image compatible ceramic
motor;
o Additional technologies for improving MRI contrast agents;
o Technology to improve drug elution and drug delivery systems; and
o A system for generating power for implantable devices from body
heat.
We have successfully demonstrated effective solutions for making devices which
use long metal wire leads, such as pacemakers, defibrillators, neurostimulators,
et al, safe for use with MRI. Our solutions address the problems of device
heating in pacemakers, defibrillators, and neurostimulators. Today,
approximately 3 million people have devices that cause them to be denied access
to MRI when needed, due to safety concerns and regulatory (FDA and other)
contraindications. We believe that if manufacturers of these devices incorporate
our solutions into their products, they can be made safe for use with MRI.
15
For the past five years, has been actively engaged in solving the complex
problems associated with device safety and imaging under MRI. With the advent of
our solutions, the industry has the opportunity to develop MRI safe and image
compatible devices that can be used with MRI.
To manage the growing R&D and customer interactions in the MRI technology
business and the biothermal business, we have expanded our staff to support
these projects. John Lanzafame, an experienced medical device executive, joined
Biophan in September 2004 as President of Biophan's Nanolution subsidiary and as
Vice President of Business Development. Mr. Lanzafame has 15 years experience in
the medical device industry, most recently as President of STS Biopolymers, a
company specializing in customized surfaces, including drug eluting coatings for
stents and indwelling catheters. STS Biopolymers was acquired in late 2003 by
Angiotech Pharmaceuticals, which licensed the use of paclitaxel on stents to
Boston Scientific. Mr. Lanzafame has experience in drug delivery, product
development and sales and marketing, and has brought this breadth of experience
both to our Nanolution drug delivery division, as well as to expand sales and
marketing of our other Biophan technologies.
We have retained additional technical consultants to augment our staff's
research and development efforts on the MRI safety and compatibility project and
the biothermal battery project. Approximately 50 professionals, both full time
and part time, now constitute the Biophan scientific and engineering
organization.
We conduct our thin film coating research and development at Alfred University,
in coordination with Nanoset, LLC. To facilitate this, we have helped Alfred
construct a clean room facility to be used for our coating experiments and
sample preparation.
Dr. Frank Shellock, a recognized leader in MRI safety testing, joined the
Biophan Scientific Advisory Board, has conducted testing and research with
Biophan' scientists and has co-authored a paper on MRI lead heating of pacing
leads with Robert Gray of Biophan. The paper was accepted and presented at the
Radiological Society of North America (RSNA) Conference Proceedings in Chicago
in November, 2004.
Part of our strategic initiative for the current fiscal year will include
expanding our technology offerings to the companies with whom we are already in
discussions or collaborating. These arrangements may include payments for R&D,
licensing, equipment and materials purchases, milestone payments, as well as
possible strategic investments.
Our business plan does not include funding for FDA approvals. Rather, our
strategy is to supply solutions to the major biomedical device manufacturers,
who will incorporate our technology into their existing and future product
lines. It will be the responsibility of these manufacturers to apply for and
receive FDA approval of their products. Since our technologies are made of known
biocompatible, non-toxic materials, and since we do not change the method by
which the devices conduct diagnostic and/or therapeutic functionality, we
anticipate reasonable timeframes for our customers to obtain FDA approvals of
devices that add our capability for safety and/or image enhancements.
Investor Relations
We expend a great deal of effort to keep our shareholders informed, and to bring
Biophan to the attention of new shareholders, institutional investors, and
potential strategic partners. Additionally, our efforts at widespread press
exposure have helped elevate the issue of MRI safety to national prominence, and
have helped increase the awareness of Biophan as an innovative small public
company. The over-the-counter market is generally not supported by the nation's
broker-dealer network, and it is essential for us to be visible so that
prospective shareholders can hear about us and review our public filings,
website, and company investor materials.
Additionally, because we provide technical solutions to several complex
limitations of medical devices, we find that attending conferences and issuing
press releases produces over time a wealth of information that we can then point
to, when a shareholder has a question, and stay in full compliance with the full
disclosure requirements of the SEC's regulations. Our high visibility and
healthy trading volume have brought several institutional investors into the
Company, a trend we expect to continue as we move forward with our plans to list
on a major U.S. stock exchange.
Liquidity
On June 30, 2005, we executed a definitive equity investment agreement and a
technology license with Boston Scientific Scimed. The equity transaction
consists of the purchase of Biophan common stock totaling $5 million, priced at
a 10% premium over the average of the closing price for the 30 calendar-day
period prior to the closing. The technology license includes an upfront payment
of $750,000 and annual maintenance fees, in addition to royalties and milestone
payments. At the request of Boston Scientific, the balance of the details are
being kept confidential. Funding under both agreements occurred on August 2,
2005. The cash proceeds from these transactions combined with other financing
will enable us to list on a major stock exchange within the current fiscal year.
16
To ensure that the Company has adequate cash on hand for operations, Biomed
Solutions LLC, an affiliate of Biophan managed by Biophan CEO Michael Weiner,
agreed to provide Biophan with a line of credit facility of up to $2 million.
Borrowings under the line bear interest at 8% per annum and are convertible at
90% of the average closing price for the 20 trading days preceding the date of
the borrowing. In June 2005, the full $2 million was loaned and Biomed received
warrant coverage of 500,000 shares priced at 110% of the average closing price
for the 20 trading days preceding the date of execution of the credit agreement.
Ross Kenzie, a director of Biophan, is also a director of Biomed Solutions, LLC.
The independent board of Biophan negotiated and approved this credit facility.
The terms of this credit facility are considered to be better than are available
from commercial lending sources. On August 31, 2005, Biomed elected to convert
$1 million of the outstanding loan, plus accrued interest to date, into 480,899
shares of our common stock.
Biomed Solutions is a Company which invests in early stage companies and
projects with promising intellectual property advantage. Biomed Solutions was
the owner of HIV Antisense LLC, which merged with Biophan (then known as
GreatBio), and Biomed Solutions was the source of the acquisition of the MRI
Safety technology acquired by Biophan in 2000 and the 51% interest in TE-Bio,
the developer of the Biothermal battery technology acquired by Biophan in 2004.
On May 27, 2005, we cancelled a previous financing agreement and entered into a
new agreement executed with SBI Brightline XI, LLC providing a $30 million fixed
price financing for 10,000,000 shares at an average price of $3 per share, if we
take the full facility, and with a range from $2 a share to $4 a share, which
must be taken in sequential tranches of 1 million shares each. There are no
warrants or fees associated with this agreement. The financing requires the
shares to be registered for sale.
On September 13, 2005, we entered into a Letter of Intent with MYOTECH, LLC to
acquire a substantial minority interest in MYOTECH with the right to acquire a
controlling interest. The acquisition will involve a yet undisclosed combination
of stock and cash in exchange for ownership units in MYOTECH. This proposed
transaction represents a major step in establishing our new Cardiovascular
Division in order to take advantage of the projected high growth in the
cardiovascular device market. We intend to direct all future MYOTECH programs
for the development, regulatory approval, and marketing of MYOTECH's MYO-VAD(TM)
cardiac assist technology. This relationship will enable MYOTECH to accelerate
the development of all of its proprietary cardiac assist technologies for
introduction into the fast-growing $28 billion worldwide market opportunity for
cardiac devices. We will also assist MYOTECH in achieving significant licensing
and strategic relationships with leading medical device manufacturers.
We believe that this revised SBI stock purchase agreement, the Biomed line of
credit, and the Boston Scientific investment will provide the Company with
adequate working capital resources for the upcoming 12 months of operations
including the ability to fund, as needed, potential additional acquisitions and
expansion of operations.
Our estimate of our cash requirements for the next twelve months is as follows:
Research and product development expenses, including $ 500,000 to fund Biophan
Europe research and development $ 3,983,860
General and administrative expenses, including administrative salaries
and benefits, sales and marketing, program management,
office expenses, rent expense, legal and accounting,
publicity, and investor relations 4,540,698
-----------
Total estimated cash requirements for next twelve months $ 8,524,558
===========
Results of Operations
The results of our operations for the three months ended August 31, 2005
reflects a net loss of $6,023,478. This amount includes non-cash charges of
$3,110,075 for the grant of stock options for services and for options
previously granted to executive officers and non-employee directors that vested
on a contingent basis upon the achievement of specified performance-based
milestones. These particular options, because they are not "fixed and
determinable", do not qualify under the accounting rules for "disclosure only"
treatment and accordingly, must be expensed for any intrinsic value at the time
and to the extent that they vest. The calculated amounts resulted in a non-cash
charge in the statement of operations and an offsetting credit to additional
paid-in capital.
For the six months ended August 31, 2005, we incurred a net loss of $9,433,316
which includes non-cash charge to earnings of $4,572,157 for the grants of stock
options for services and the vesting of contingent options as explained above.
The actual net cash used in operations for the period was $3,428,837 compared
with $2,148,776 for the six months ended August 31, 2004.
Capital Resources
Our current strategic plan does not indicate a need for material capital
expenditures in the conduct of research and development activities.
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We currently employ sixteen full-time individuals.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(a) Derivative Financial Instruments, Other Financial Instruments, and
Derivative Commodity Instruments. As of August 31, 2005, the Company did not
participate in any derivative financial instruments, or other financial and
commodity instruments for which fair value disclosure would be required under
SFAS No. 107. All of the Company's investments are considered cash equivalents
and consist of money market accounts. Accordingly, the Company has no
quantitative information concerning the market risk of participating in such
investments. (b) Primary Market Risk Exposures The Company's primary market risk
exposures are in the areas of interest rate risk and foreign currency exchange
rate risk. The Company's investment portfolio of cash equivalents is subject to
interest rate fluctuations, but the Company believes this risk is immaterial due
to the short-term nature of these investments. For the three months ended August
31, 2005, foreign currency translation gains were approximately $4,500 as a
result of consolidating the Company's foreign subsidiaries. During the period,
the Company did not engage in any foreign currency hedging activities.
ITEM 4. CONTROLS AND PROCEDURES
Based on their evaluation as of the end of the period covered by this quarterly
report on Form 10-Q, our principal executive officer and principal financial
officer, with the participation and assistance of our management, concluded that
our disclosure controls and procedures, as defined in Rule 13a-15(e) promulgated
under the Securities Exchange Act of 1934, were effective in design and
operation. There have been no changes in our system of internal control over
financial reporting in connection with the evaluation by our principal executive
officer and principal financial officer during our fiscal quarter ended August
31, 2005 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are not a party to any material legal proceedings and there are no material
legal proceedings pending with respect to our property. We are not aware of any
legal proceedings contemplated by any governmental authorities involving either
us or our property. None of our directors, officers or affiliates is an adverse
party in any legal proceedings involving us or our subsidiaries, or has an
interest in any proceeding which is adverse to us or our subsidiaries.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On May 27, 2005, we entered into a line of credit agreement with Biomed
Solutions, LLC, an affiliated company for borrowings of up to $2 million with
interest at 8% per annum. The agreement provides for the issuance of up to
500,000 warrants based on actual borrowings and convertibility at the lender's
election into shares of our common stock. The warrants and any shares issued
upon exercise of warrants or any election to convert outstanding debt is exempt
from registration pursuant to Sections 3(a) 9 and 4(2) of the Securities Act.
During the quarter ended August 31, 2005, we borrowed $2 million under the
agreement and on August 31, 2005, Biomed elected to convert $1 million of the
outstanding debt and accrued interest thereon into 480,899 shares of our common
stock.
On August 2, 2005, in connection with the Investment Agreement dated June 30,
2005 with Boston Scientific Scimed, Inc., we issued 1,653,193 shares of our
common stock to Boston Scientific Scimed for cash consideration of $5,000,000.
The issuances to Biomed and Boston Scientific Scimed were made in reliance on
the exemption from registration contained in Section 4(2) of the Securities Act
of 1933, inasmuch as neither issuance involved a public offering.
Item 3. Defaults Upon Senior Securities
Not applicable.
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Item 4. Submission of Matters to a Vote of Security Holders
On Wednesday, July 27, 2005, pursuant to proper notice to stockholders, the
Company held its Annual Meeting of Stockholders in Fairport, New York. At the
Meeting, the following directors were elected, by the indicated vote, to serve
as directors until the next Annual Meeting of Stockholders or until their
successors are elected and qualified.
Nominee For Withhold
------------------------------------------------------------
Michael L. Weiner 55,575,662 344,055
Guenter H. Jaensch 55,767,592 152,125
Steven Katz 55,493,302 426,415
Ross B. Kenzie 55,744,239 175,478
Robert S. Bramson 55,470,407 449,310
Michael H. Friebe 55,583,262 336,455
A proposal was made to amend and restate the Company's 2001 Stock Option Plan.
The proposal carried by a vote of 15,327,830 for, 1,158,103 against and 149,282
abstaining.
A proposal to approve certain stock option grants to non-employee directors
under the 2001 Stock Option Plan was approved by a vote of 15,064,471for,
1,284,522 against and 286,222 abstaining.
Lastly, stockholders ratified the appointment of Goldstein Golub Kessler, LLP,
as the Company's independent registered public accounting firm for the fiscal
year ending February 28, 2006 by a vote of 55,621,201 for, 232,590 against and
65,926 abstaining.
Item 5. Other Information
Not applicable.
Item 6. Exhibits
Exhibit No. Exhibit Description Location
----------- ------------------- --------
4.1 Termination of Stock Purchase Agreement between Incorporated by reference to Exhibit
Biophan and SBI Brightline Consulting, LLC 4.20 to our Annual report on Form
10-KSB for the year ended February 28,
2005
4.2 Stock Purchase Agreement dated May 27, 2005 Incorporated by reference to Exhibit
between Biophan and SBI Brightline XI, LLC 4.21 to our Annual report on Form
10-KSB for the year ended February 28,
2005
4.3 Convertible Promissory Note of Biophan payable to Incorporated by reference to Exhibit
the order of Biomed Solutions, LLC dated May 27, 4.22 to our Annual report on Form
2005 10-KSB for the year ended February 28,
2005
4.4 Stock Purchase Warrant issued to Biomed Solutions, Incorporated by reference to Exhibit
LLC dated May 27, 2005 4.23 to our Annual report on Form
10-KSB for the year ended February 28,
2005
4.5 Investment Agreement dated June 30, 2005 between Filed herewith
Biophan and Boston Scientific Scimed, Inc.
10.1 Line of Credit Agreement dated May 27, 2005 Incorporated by reference to Exhibit
between Biophan and Biomed Solutions, LLC 10.50 to our Annual report on Form
10-KSB for the year ended February 28,
2005
10.2 License Agreement dated June 30, 2005 between Filed herewith
Biophan and Boston Scientific Scimed, Inc. (filed
in redacted form pursuant to a request for
confidential treatment filed separately with the
Securities and Exchange Commission)
31.1 Certification of C.E.O. pursuant to Rule 13a-14(a) Filed herewith
31.2 Certification of C.F.O. pursuant to Rule 13a-14(a) Filed herewith
32.1 Certification of C.E.O. pursuant to Rule Filed herewith
13a-14(b) and 18 U.S.C. Section 1350
32.2 Certification of C.F.O. pursuant to Rule 13a-14(b) Filed herewith
and 18 U.S.C. Section 1350
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BIOPHAN TECHNOLOGIES, INC.
(Registrant)
By: /s/ Michael L. Weiner
----------------------------------------
Name: Michael L. Weiner,
Title: Chief Executive Officer
By: /s/ Robert J. Wood
----------------------------------------
Name: Robert J. Wood
Title: Chief Financial Officer, Treasurer and Secretary
(Principal Financial Officer and Principal Accounting Officer)
Date: October 17, 2005
20