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: November 30, 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 by check mark whether the registrant is a shell company (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 January 12, 2006- Common Stock, $.005 par value -
81,805,243 shares
INDEX
Page
Number
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements
Report of Independent Registered Public Accounting Firm 1
Condensed Consolidated Balance Sheets, November 30, 2005 (Unaudited)
and February 28, 2005 2
Condensed Consolidated Statements of Operations, Three Months and Nine Months
Ended November 30, 2005 and 2004 (Unaudited), and from August 1,
1968 (Date of Inception) through November 30, 2005 (Unaudited) 3
Condensed Consolidated Statements of Cash Flows, Nine Months Ended
November 30, 2005 and 2004 (Unaudited) and from August 1, 1968
(Date of Inception) through November 30, 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 13
ITEM 4. Controls and Procedures 13
PART II. OTHER INFORMATION 13
ITEM 1. Legal Proceedings 13
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 13
ITEM 3. Defaults Upon Senior Securities 13
ITEM 4. Submission of Matters to a Vote of Security Holders 13
ITEM 5. Other Information 13
ITEM 6. Exhibits 14
SIGNATURES 15
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 November 30,
2005, and the related condensed consolidated statements of operations for the
three-month and nine-month periods ended November 30, 2005 and 2004 and the
condensed consolidated statements of cash flows for the nine month periods ended
November 30, 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
December 28, 2005
1
BIOPHAN TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED BALANCE SHEETS
November 30, 2005 February 28, 2005
----------------- -----------------
ASSETS (Unaudited)
-----------
Current assets:
Cash and cash equivalents $ 2,587,376 $ 753,288
Stock subscription receivable -- 900,000
Due from related parties 86,836 220,959
Prepaid expenses 175,941 91,596
Other current assets 77,170 41,338
------------ ------------
Total current assets 2,927,323 2,007,181
Property and equipment, net 94,381 73,518
Other assets:
Intellectual property rights, net of amortization 956,809 997,738
Investment in and advances to Myotech, LLC 11,105,053 --
Investment in New Scale Technologies, Inc. 100,000 100,000
Security deposit 3,800 2,933
Deferred tax asset, net of valuation allowance of
$6,804,000 and $4,787,000, respectively -- --
------------ ------------
12,165,662 1,100,671
------------ ------------
$ 15,187,366 $ 3,181,370
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,640,646 $ 1,037,103
Note payable -- 200,000
Line of credit - related party 500,000 --
Deferred revenues 500,000 225,000
------------ ------------
Total current liabilities 2,640,646 1,462,103
Minority interest 26,523 --
Stockholders' equity:
Common stock $.005 par value
Authorized 125,000,000 shares
Issued and outstanding 81,683,243 and
74,317,832 shares, respectively 408,416 371,589
Stock subscription receivable -- (150,000)
Additional paid-in capital 41,405,072 18,982,952
Deficit accumulated during the
development stage (29,293,291) (17,485,274)
------------ ------------
12,520,197 1,719,267
------------ ------------
$ 15,187,366 $ 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 Nine Months Ended (date of
November 30, November 30, inception) to
------------ ------------ November 30,
2005 2004 2005 2004 2005
------------ ------------ ------------ ------------ ------------
Revenues:
Development payments $ 225,000 $ -- $ 225,000 $ -- $ 300,000
License fees 187,500 -- 250,000 -- 250,000
Operating revenue of
European subsidiary 54,435 -- 113,119 00 113,119
------------ ------------ ------------ ------------ ------------
466,935 -- 588,119 -- 663,119
Operating expenses:
Research and development 1,212,239 685,469 5,103,743 1,685,530 11,294,020
General and administrative 1,548,299 1,055,312 6,567,924 2,400,587 16,057,410
Write-down of intellectual
property rights -- -- -- -- 530,000
------------ ------------ ------------ ------------ ------------
2,760,538 1,740,781 11,671,667 4,086,117 27,881,430
------------ ------------ ------------ ------------ ------------
Operating loss (2,293,603) (1,740,781) (11,083,548) (4,086,117) (27,218,311)
Other income(expense):
Interest expense (243,332) -- (1,010,648) -- (2,741,571)
Interest income 48,922 2,555 60,638 8,539 119,085
Other income 113,312 33,534 225,541 118,656 701,949
Other expense -- -- -- -- (65,086)
------------ ------------ ------------ ------------ ------------
(81,098) 36,089 (724,469) 127,195 (1,985,623)
------------ ------------ ------------ ------------ ------------
Loss from continuing operations (2,374,701) (1,704,692) (11,808,017) (3,958,922) (29,203,934)
Loss from discontinued operations -- -- -- -- (89,357)
------------ ------------ ------------ ------------ ------------
Net loss $ (2,374,701) $ (1,704,692) $(11,808,017) $ (3,958,922) $(29,293,291)
============ ============ ============ ============ ============
Loss per common share - basic and diluted $ (0.03) $ (0.02) $ (0.16) $ (0.06)
============ ============ ============ ============
Weighted average shares outstanding 76,814,262 70,029,872 75,448,772 68,030,968
============ ============ ============ ============
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
Nine Months Ended August 1, 1968
November 30, (date of
------------ inception) to
2005 2004 November 30,
2005
------------ ------------ ------------
Cash flows used for operating activities:
Net loss $(11,808,017) $ (3,958,922) $(29,293,291)
Adjustments to reconcile net loss to net cash
used in operating activities:
Amortization of intellectual property rights 40,929 -- 40,929
Depreciation 30,882 20,825 123,075
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 958,160 -- 1,033,160
Issuance of common stock for services -- -- 369,108
Issuance of common stock for interest -- -- 468,823
Grant of stock options for services 4,644,202 110,000 6,598,002
Expenses paid by stockholder -- -- 2,640
Minority interest 26,523 -- 26,523
Changes in operating assets and liabilities:
(Increase) decrease in due from related parties 134,123 (348,740) (86,836)
(Increase) decrease in prepaid expenses (84,345) (36,013) (175,941)
(Increase) decrease in other assets (35,832) -- (35,832)
(Increase) decrease in security deposits (867) -- (3,800)
Increase (decrease) in accounts payable and
accrued expenses 603,544 143,957 1,250,092
Increase (decrease) in due to related parties -- -- (43,496)
Increase (decrease) in deferred revenues 275,000 225,000 500,000
------------ ------------ ------------
Net cash used in operating activities (5,194,687) (3,843,893) (17,545,937)
------------ ------------ ------------
Cash flows used for investing activities:
Purchases of property and equipment (53,250) (38,036) (217,939)
Sales of marketable securities -- 1,150,000 2,369,270
Purchase of investment -- (100,000) (100,000)
Investment in and advances to Myotech, LLC (766,585) -- (766,585)
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 (819,835) 1,011,964 (1,410,346)
------------ ------------ ------------
(CONTINUED ON FOLLOWING PAGE)
4
BIOPHAN TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
August 1, 1968
Nine Months Ended (date of
November 30, inception) to
2005 2004 November 30, 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 - related party (500,000) -- (572,500)
Repayment of note payable (200,000) -- (200,000)
Proceeds from sales of capital stock 6,050,000 1,655,000 16,263,849
Exercise of options 182,541 12,500 645,288
Exercise of warrants 20,707 811,300 1,142,451
Swing profits 295,362 306,720 696,087
Deferred equity placement costs -- (22,107) (112,536)
------------ ------------ ------------
Net cash provided by financing activities 7,848,610 2,763,413 21,543,659
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 1,834,088 (68,516) 2,587,376
Cash and cash equivalents, beginning 753,288 823,900 --
------------ ------------ ------------
Cash and cash equivalents, ending $ 2,587,376 $ 755,384 $ 2,587,376
============ ============ ============
Cash paid for interest $ 12,603 $ -- $ 12,603
============ ============ ============
Supplemental schedule of non-cash investing and financing activities:
Issuance of common stock for the acquisition of
a 35% interest in Myotech, LLC $ 10,338,468 $ -- $ 10,338,468
============ ============ ============
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
============ ============ ============
Common stock issued for subscription receivable $ -- $ 845,000 $ 1,895,000
============ ============ ============
See Notes to Condensed Consolidated Financial Statements.
5
BIOPHAN TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
November 30, 2005
INTERIM FINANCIAL STATEMENTS:
The condensed consolidated financial statements as of November 30, 2005 and for
the three months and nine months ended November 30, 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 is also
developing 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 November 30, Nine Months Ended November 30,
2005 2004 2005 2004
------------- ------------- ------------- -------------
Net loss - as reported $ (2,374,701) $ (1,704,692) $(11,808,017) $ (3,958,922)
Add: Stock-based employee compensation
expense included in reported net
loss, net of related tax effects 29,500 40,000 4,355,030 110,000
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax effects (220,466) (74,000) (6,279,291) (203,000)
------------ ------------ ------------ ------------
Net loss - pro forma $ (2,565,667) $ (1,738,692) $(13,732,278) $ (4,051,922)
============ ============ ============ ============
Basic and diluted loss
per share - as reported $ (.03) $ (.02) $ (.16) $ (.06)
============ ============ ============ ============
Basic and diluted loss
per share - pro forma $ (.03) $ (.02) $ (.18) $ (.06)
============ ============ ============ ============
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 nine months ended November 30, 2005, the non-cash charge to earnings for
stock options granted was $4,644,202 of which $4,244,280 is related to the
vesting, during the first and second quarters, of contingent 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.
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 November 30, 2005:
Prepaid conference fees $ 50,300
Prepaid insurance 37,516
Prepaid license fees to New Scale Technologies, Inc. - related company 25,000
Prepaid legal fees 30,000
Prepaid supplies 18,125
Prepaid royalties - related company 15,000
--------
$175,941
========
INVESTMENTS:
Effective November 30, 2005, we entered into a Securities Purchase Agreement for
the acquisition of an initial 35% interest in Myotech, LLC ("Myotech"), a New
York limited liability company, whereby we exchanged 4,923,080 shares of our
common stock, par value $.005, for 3,768,488 Class A (voting) units of Myotech.
Under the Securities Purchase Agreement, we will also purchase for cash
consideration of $2.225 million an additional 811,037 Class A units of Myotech
over a six-month period. We are obligated to issue the shares and fund the
investment amount, subject to certain conditions. This acquisition will be
accounted for under the equity method.
Further, at our discretion, we may purchase up to an additional 3,563,097 Class
A units of Myotech for aggregate cash consideration of $9.775 million upon
achievement of certain milestones satisfactory to Biophan measured over a
24-month period. Upon the consummation of these additional elective milestone
investments, we would hold a majority interest in Myotech.
LINE OF CREDIT AGREEMENT:
On May 27, 2005, we entered into an unsecured loan agreement with Biomed
Solutions LLC, a related company, whereby Biomed 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 August 31, 2006 and are convertible,
at Biomed's election 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 was amortized as additional interest expense over the term of the note
and has been fully amortized as of November 30, 2005. 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. On October 7, 2005, we repaid
$500,000 of principal and all accrued interest on the loan. During the quarter
ended November 30, 2005 amortization of the discount on the note resulted in a
non-cash interest expense of $229,137. The balance of borrowings on the line was
$500,000 at November 30, 2005.
In addition, Biomed Solutions, LLC, has committed to provide us with a $5
million credit facility at terms we believe to be competitive to comparable
transactions in the event such credit is needed.
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 manufactured by third party companies. We do not currently employ our
own manufacturing or distribution channels but rather rely on relationships with
sub-contractors and/or partner companies. We develop technology protected by
strong intellectual property targeted at specific markets within the medical
technology sector.
Company Business
We are a technology development company with a strong focus on solving
real-world technical challenges 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 develop
and patent multiple solutions for any given technology challenge. This is done
both to strengthen our position against competitors, and to be in a position to
offer multiple manufacturers alternative solutions, such as for MRI safety, or
stent visibility, as we introduce our technologies to the market.
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 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 developing, or have acquired:
o Technology to improve vascular stents so they can be imaged with MRI
to detect the presence of restenosis (blockage) after implantation;
o Technology to enable manufacture of an MR 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 MR 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;
o Technology to improve drug elution and drug delivery systems,
including providing "active release" using non-invasive or minimally
invasive activation; and
o An improved ventricular assist device (VAD).
Licensing and Joint Venture Strategy
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 required 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 payment was made on August 2, 2005 and will
be recognized as revenue over the next twelve months. Accordingly, one-quarter
of $750,000, or $187,500 was recorded as revenue in the current quarter ended
November 30, 2005.
9
In December, 2005, we received $250,000 for the first annual minimum payment
under our license. The agreement calls for milestone payments upon achievement
of significant project milestones, with some of these milestones in the
multi-million dollar range, and requires payment of royalties for products sold
incorporating our technologies. Boston Scientific has sublicensing rights to
certain technologies, sharing revenue with Biophan, and other product lines will
revert to Biophan in the event of non-performance. The agreement includes rights
to our technology for making pacemakers, defibrillators and neurostimulators
safe and image compatible for use with MRI. This agreement is available as an
Exhibit to our 10-Q for the quarter ended August 31, 2005, as amended on January
9, 2005.
Acquisition of Intellectual Assets
We currently have an overall estate of 213 patents, including 157 U.S. patents,
inclusive of those assigned and licensed, and including filed applications and
allowed and issued patents. Of these, 48 U.S. patents have issued. Additionally,
we have 56 international patents or applications in process.
We believe that a strong and broad intellectual property portfolio is vital to
our ability to achieve and maintain royalties and product sales to major
industrial partners across our product lines.
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.
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
$3.02, which represents 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. Funding under both agreements occurred on
August 2, 2005.
To ensure that we would have adequate cash on hand for pending activities, on
May 27, 2005, Biomed Solutions LLC, an affiliate of Biophan, agreed to provide
us 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. The independent board
members 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. On October 7, 2005, we repaid $500,000 of principal
plus all accrued interest on the outstanding loan. Biomed has extended the terms
of our repayment of the remaining $500,000.
10
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. We amended this
financial agreement on January 8, 2006 to clarify a minor ambiguity in the
agreement related to the closing dates. There are no warrants or fees associated
with this agreement. The financing requires the shares to be registered for
resale.
Effective November 30, 2005, we entered into a Securities Purchase Agreement
with Myotech, LLC to acquire a substantial minority interest in Myotech, LLC
with the right to acquire a controlling interest. The acquisition involved
approximately $11.1 million of newly issued shares of our common stock and cash
advances in exchange for Class A units in Myotech, LLC. The independent members
of our Board of Directors negotiated, recommended and approved all terms of this
transaction. Our Board of Directors, including the independent members,
determined that the transaction was in the best interests of Biophan and our
stockholders. In addition, the independent committee received a fairness opinion
from an NYSE-listed national investment banking firm stating that the
transaction was fair to our stockholders from a financial point of view. As a
result of the acquisition of a minority interest in Myotech, we recorded a
substantial increase in our net worth to $12.5 million from the previous
quarter's $4.5 million.
Our affiliate Biomed Solutions, LLC, has committed to provide us with a $5
million credit facility at terms we believe to be competitive to comparable
transactions. Biomed Solutions is headed by Biophan CEO Michael Weiner, who is
also a substantial beneficial owner of Biomed Solutions.
We believe that funding available under the 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:
(000's)
-------
Research and product development expenses, including $ 720,000 to fund Biophan
Europe research and development $ 3,700
Milestone investments in Myotech, LLC 5,400
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 5,500
-------
Total estimated cash requirements for next twelve months $14,600
=======
Results of Operations
The following comments discuss the significant factors affecting the
consolidated operating results, financial condition and liquidity and cash flows
of the Company for the three and nine-month periods ended November 30, 2005 as
compared to the three and nine-month periods ended November 30, 2004. These
comments should be read in conjunction with the Consolidated Financial
Statements of the Company and Notes thereto included in the Company's Form
10-KSB for the fiscal year ended February 28, 2004.
11
Three Months Ended November 30, 2005 Compared to Three Months Ended November 30,
2004
Revenue. Revenues were $0.467 million for the three months ended November 30,
2005 as compared to no revenues for the three months ended November 30, 2004.
The increase is due to development contract payments and license fees from
Boston Scientific Scimed, and operating revenues from our European subsidiary,
which consisted primarily of MRI-related research and development consulting
services to medical device manufacturers.
Research and Development. Research and development expenses increased by 77%, to
approximately $1.2 million for the 3 months ended November 30, 2005 from
approximately $0.685 million for the three months ended November 30, 2004 due
primarily to expenses for Biophan Europe, patent attorney fees and accelerated
efforts in obtaining license rights.
General and Administrative. General and administrative expenses increased by 47%
to approximately $1.55 million for the 3 months ended November 30, 2005 from
approximately $1.06 million for the three months ended November 30, 2004
primarily due to increases in publicity, legal and consulting fees, and
salaries.
Interest Expense. Interest expense of approximately $0.24 million pertained to
interest on borrowings under a line of credit extended from Biomed Solutions,
LLC. The details of this agreement are described under the heading "Line of
Credit Agreement."
Nine Months Ended November 30, 2005 Compared to Nine Months Ended November 30,
2004
Revenue. Revenues were $0.588 million for the nine months ended November 30,
2005 as compared to no revenues for the nine months ended November 30, 2004. The
increase is due to development contract payments and license fees from Boston
Scientific Scimed, and operating revenues from our European subsidiary, which
consisted primarily of MRI-related research and development consulting services
to medical device manufacturers.
Research and Development. Research and development expenses increased by 202% to
approximately $5.1 million for the 9 months ended November 30, 2005 from
approximately $1.7 million for the nine months ended November 30, 2004. due
primarily to accelerated efforts in obtaining license rights, expenses for
Biophan Europe, patent attorney fees, salaries, and additional compensation
expense in the first and second quarters related to the vesting of contingent
stock options.
General and Administrative. General and administrative expenses increased by
174% to $6.57 million for the 9 months ended November 30, 2005 from
approximately $2.40 million for the nine months ended November 30, 2004. The
increase in general and administrative expenses is primarily due to an increases
publicity and investor relations, legal and consulting fees, salaries, and
additional compensation expense in the first and second quarters related to the
vesting of contingent stock options during the first nine months of 2005 as
compared to last year.
Capital Resources
Our current strategic plan does not indicate a need for material capital
expenditures in the conduct of research and development activities.
We currently employ eighteen full-time individuals.
Forward Looking Statements
Forward looking statements in this Form 10-Q and in other documents incorporated
herein, as well as in oral statements made by the Company, statements that are
prefaced with the words "may," "will," "expect," "anticipate," "continue,"
"estimate," "project," "intend," "designed" and similar expressions, are
intended to identify forward-looking statements regarding events, conditions,
and financial trends that may affect the Company's future plans of operations,
business strategy, results of operations and financial position. These
statements are based on the Company's current expectations and estimates as to
prospective events and circumstances about which the Company can give no firm
assurance. Further, any forward-looking statement speaks only as of the date on
which such statement is made, and the Company undertakes no obligation to update
any forward-looking statement to reflect subsequent events or circumstances.
Forward-looking statements should not be relied upon as a prediction of actual
future financial condition or results. These forward-looking statements, like
any forward-looking statements, involve risks and uncertainties that could cause
actual results to differ materially from those projected or unanticipated.
12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Derivative Financial Instruments, Other Financial Instruments, and Derivative
Commodity Instruments.
As of November 30, 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. 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 November 30, 2005, foreign currency
translation gains were approximately $1,600 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 November
30, 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, except as noted below.
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.
The Company is pursuing legal claims against one of its former law firms and
certain of its attorneys. Review of the firm's work product and bills recently
revealed questions about the firm's billing practices and other activities. The
amount of potential damages has not yet been quantified. Also, the law firm has
asserted claims seeking payment of additional legal fees, which claims the
Company has denied. The litigation is in an early stage. While, as with any
legal proceedings, no assurance can be given as to ultimate outcome, management
believes that the outcome of the litigation will not have a material adverse
effect upon the Company's financial condition.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On November 30, 2005, we entered into a Securities Purchase Agreement with
Myotech, LLC, a New York limited liability corporation, whereby we issued to
Myotech 4,923,080 previously authorized but unissued shares of our common stock,
par value $.005 per share, in exchange for 3,768,488 Class A units of Myotech.
Our common stock was valued at $2.10 per share, and the Myotech units were
valued at $2.7434 per unit. The shares were issued in a private placement exempt
from the registration requirements of Section 5 of the Securities Act of 1933,
as amended (the "Act"), pursuant to the exemption set forth in Section 4(2)of
the Act . We did not receive any cash consideration for issuance of these shares
of common stock. No underwriters were involved in the placement of the common
stock. The shares are subject to the Rights Agreement entered into by and among
us, the Myotech members and Myotech, dated as of November 30, 2005.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable.
Item 6. Exhibits
13
Exhibit No. Exhibit Description Location
----------- ------------------- --------
4.1 Rights Agreement by and among Myotech, LLC Filed herewith
the Members of Myotech, LLC, and Biophan
Technologies, Inc.
4.2 First Amendment to Line of Credit Agreement
Between Biophan Technologies, Inc. and
Biomed Solutions, LLC Filed herewith
4.3 First Amendment to Convertible Promissory Note Filed herewith
10.1 Securities Purchase Agreement between Biophan Filed herewith
Technologies Inc. and Myotech, LLC., dated
November 30, 2005
10.2 Letter Agreement, Amendment and Waiver of Certain Filed herewith
Conditions to Closing, between Biophan Technologies
and Myotech, LLC, dated December 21, 2005
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
14
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: January 17, 2006
15