UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[x] Quarterly Report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the period ended: August 31, 2002
[ ] Transition Report Pursuant to section 13 or 15(d) of the
Securities and 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
incorporation or organization Identification
No.)
150 Lucius Gordon Drive, Suite 215
West Henrietta, New York 14586
--------------------------------- ---------
(Address of principal executive offices) (Zip code)
(585) 214-2441
-----------------------
Issuer's telephone number
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.
[ X ] Yes [ ] No
State 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 8, 2002
Common Stock, $.005 par value 31,621,213
Transitional small Business Disclosure Format (Check One): Yes[ ] No[x]
1
INDEX
Page
Number
Independent Accountant's Report 3
Consolidated Balance Sheets, August 31, 2002 (Unaudited)
and February 28, 2002 4
Consolidated Statements of Operations, Three Months and Six
Months Ended August 31, 2002 and 2001 (Unaudited), and from
August 1, 1968 (Date of Inception) through August 31, 2002
(Unaudited) 5
Consolidated Statements of Cash Flows, Six Months Ended
August 31, 2002 and 2001 (Unaudited) and from August 1, 1968
(Date of Inception) through August 31, 2002 (Unaudited) 6
Notes to Consolidated Financial Statements 7
ITEM 2. Plan of Operation 9
PART II. OTHER INFORMATION 15
ITEM 1. Legal Proceedings 15
ITEM 2. Changes in Securities and Use of Proceeds 15
ITEM 3. Defaults Upon Senior Securities 15
ITEM 4. Submission of Matters to a Vote of Security Holders 15
ITEM 5. Other Information 16
ITEM 6. Exhibits and Reports on Form 8-K 16
a. Exhibits 16
b. Reports on Form 8-K 16
SIGNATURES 16
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
INDEPENDENT ACCOUNTANT'S REPORT
--------------------------------
To the Board of Directors
Biophan Technologies, Inc.
We have reviewed the accompanying consolidated balance sheet of Biophan
Technologies, Inc. and Subsidiaries as of August 31, 2002, and the related
consolidated statements of operations for the six-month and three-month
periods ended August 31, 2002 and 2001 and the consolidated statements of
cash flows for the six-month periods ended August 31, 2002 and 2001. These
financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, 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 consolidated financial statements for them
to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet as
of February 28, 2002, and the related consolidated statements of operations,
stockholders' equity, and cash flows for the year then ended (not presented
herein); and in our report dated April 5, 2002, except for Note 10 therein,
as to which the date was June 7, 2002, 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, 2002, is fairly stated, in all material respects, in relation to the
consolidated balance sheet from which it has been derived.
/s/GOLDSTEIN GOLUB KESSLER LLP
New York, New York
October 14, 2002
3
BIOPHAN TECHNOLOGIES, INC.
AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
August 31, 2002
(Unaudited) February 28, 2002
-------------------------------------------
ASSETS
Current Assets:
Cash and equivalents $ 123,131 $ 12,199
Marketable securities, at market value - 568,805
Prepaid expenses 170,012 91,819
-------------------------------------------
Total Current Assets 293,143 672,823
Fixed Assets, at cost, net 76,053 80,882
Other Assets:
Intellectual property rights 110,000 110,000
Security deposit 2,933 2,933
Deferred private equity placement costs 20,000 -
Deferred tax asset, net of valuation allowance of
$1,946,000 and $1,305,000 respectively - -
-------------------------------------------
132,933 112,933
-------------------------------------------
$ 502,129 $ 866,638
===========================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current Liabilities:
Accounts payable and accrued expenses $ 333,014 $ 129,040
Loan payable to shareholder 143,570
Payables to related party 650,000 500,000
Due to related parties 8,928 16,349
-------------------------------------------
Total Current Liabilities 1,135,512 645,389
Stockholders' Equity (Deficiency):
Common stock, $.005 par value
Authorized, 60,000,000 shares
Issued and outstanding, 31,062,713 shares 155,314 147,747
Additional paid-in capital 5,386,185 4,608,407
Deficit accumulated during the development stage (6,174,882) (4,534,905)
-------------------------------------------
(633,383) 221,249
-------------------------------------------
$ 502,129 $ 866,638
===========================================
See Notes to Consolidated Financial Statements.
4
BIOPHAN TECHNOLOGIES, INC.
AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
Period from August
Three Months Ended Six Months Ended 1, 1968 (date of
August 31, August 31, inception) to
2002 2001 2002 2001 August 31, 2002
------------------------------------------------------------------------
Operating expenses:
Salaries and related $ 175,914 $ 41,034 $ 347,127 $ 114,907 $ 868,617
Research and development 189,466 161,656 641,281 286,755 1,703,549
Professional fees 129,527 158,979 270,020 172,637 1,619,621
Write-down of intellectual property
rights - - - - 490,000
General and administrative 122,300 66,700 287,609 89,092 789,689
------------------------------------------------------------------------
Operating loss (617,207) (428,369) (1,546,037) (663,391) (5,471,476)
Other income(expense):
Interest income 93 4,633 16,701 5,670 44,381
Interest expense (161,260) (212,905) (171,560) (231,618) (725,103)
Other income 76,226 - 89,724 - 131,759
Other expense (10,473) (28,805) (10,473) (65,086)
------------------------------------------------------------------------
(84,941) (218,745) (93,940) (236,421) (614,049)
------------------------------------------------------------------------
Loss from continuing operations (702,148) (647,114) (1,639,977) (899,812) (6,085,525)
Loss from discontinued operations - - - - (89,357)
------------------------------------------------------------------------
Net loss $ (702,148) $ (647,114) $(1,639,977) $ (899,812) $(6,174,882)
========================================================================
Loss per common share $ (0.02) $ (0.03) $ (0.06) $ (0.03)
=======================================================
Weighted average shares outstanding 29,652,082 25,589,646 29,600,761 25,712,589
=======================================================
See Notes to Consolidated Financial Statements.
5
BIOPHAN TECHNOLOGIES, INC.
AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Period from August
Six Months Ended 1, 1968 (date of
August 31, inception) to
2002 2001 August 31, 2002
---------------------------------------------------
Cash flows - operating activities:
Net loss $ (1,639,977) $ (899,812) $ (6,174,882)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation 12,780 500 27,709
Amortization of interest on convertible note payable 150,000 - 150,000
Losses on marketable securities 28,805 10,473 66,948
Write-down of intellectual property rights - - 490,000
Amortization of discount on payable to
related party - 31,000 75,000
Issuance of common stock for services - - 101,108
Issuance of common stock for interest - 192,985 468,823
Grant of stock options for services 94,000 796,800
Expenses paid by stockholder - - 2,640
Changes in operating assets and liabilities:
Increase in prepaid expenses (78,193) (111,557) (170,012)
Increase in security deposits (2,933)
Increase in deferred equity placement costs (20,000) (20,000)
Increase(decrease) in accounts payable and
accrued expenses 203,974 (21,918) 319,683
Decrease in due to related parties (7,421) (124,909) (34,568)
---------------------------------------------------
(1,256,032) (923,238) (3,903,684)
---------------------------------------------------
Cash flows - investing activities:
Purchases of fixed assets (7,951) (13,593) (103,762)
Sales of marketable securities 540,000 - 917,270
Purchases of marketable securities - (849,097) (984,218)
---------------------------------------------------
532,049 (862,690) (170,710)
---------------------------------------------------
Cash flows - financing activities:
Proceeds of bridge loans 986,500 986,500
Loan from shareholder 143,570 - 143,570
Line of credit borrowing from related party 300,000 - 300,000
Net proceeds from sales of capital stock 391,345 1,337,059 2,767,455
---------------------------------------------------
834,915 2,323,559 4,197,525
---------------------------------------------------
Net increase in cash and cash equivalents 110,932 537,631 123,131
Cash and cash equivalents, beginning 12,199 172,092 -
---------------------------------------------------
Cash and cash equivalents, ending $ 123,131 $ 709,723 $ 123,131
===================================================
Supplemental schedule of noncash investing and
financing activities:
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 $ - $ - $ 986,500
==================================================
See Notes to Consolidated Financial Statements.
6
BIOPHAN TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2002
INTERIM FINANCIAL STATEMENTS:
The consolidated financial statements as of August 31, 2002 and for the three
and six months ended August 31, 2002 and 2001 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.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of Biophan
Technologies, Inc. ("Biophan") (formerly GreatBio Technologies, Inc.) and its
wholly owned subsidiaries, LTR Antisense Technology, Inc. ("Antisense") and
MRIC Drug Delivery Systems, LLC ("MRIC") (collectively referred to as the
"Company"). All significant intercompany accounts and transactions have been
eliminated in consolidation.
ORGANIZATIONAL HISTORY
The Company was incorporated under the laws of the State of Idaho on August
1, 1968. On January 12, 2000, the Company changed its domicile to Nevada by
merging into a Nevada corporation, and on July 19, 2001, changed its name to
Biophan Technologies, Inc. The Company's stock currently trades over-the-
counter under the symbol BIPH.OB. Our corporate headquarters are located at
150 Lucius Gordon Drive, Suite 215, West Henrietta, New York 14586; Tel.
(585) 214-2441; website: www.biophan.com.
On December 1, 2000, the Company acquired LTR Antisense Technology, Inc., a
New York corporation ("LTR"), from Biomed Solutions, LLC (formerly Biophan,
LLC), a New York limited liability company ("Biomed"), in a share for share
exchange. As a result of the exchange, LTR became a wholly owned subsidiary
of the Company. The exchange was consummated pursuant to and in accordance
with an Exchange Agreement, dated December 1, 2000 and amended as of June 8,
2001, by and among the Company, LTR and Biomed. LTR owns multiple patents for
proprietary HIV antisense gene therapy technology.
In connection with the exchange, the Company (i) issued an aggregate of
10,759,101 shares of common stock to Biomed in exchange for all the issued
shares of LTR and (ii) issued an aggregate of 10,759,101 shares of common
stock to a group of investors for $175,000. Also on December 1, 2000, the
Company acquired intellectual property rights, including a pending patent to
the MRI-compatible pacemaker technology from Biomed (the "Assignment"), for
future consideration of $500,000. The Assignment was consummated pursuant
to, and in accordance with, an Assignment and Security Agreement, dated
December 1, 2000 and amended as of June 8, 2001 by and between the Company and
Biomed.
7
PRINCIPAL BUSINESS ACTIVITIES
The Company is developing technologies that make biomedical devices safe for
use in an MRI (Magnetic Resonance Imaging) machine. Many biomedical devices
are prohibited for use in an MRI machine, including pacemakers, cardioverter-
defibrillators, neurostimulators, bladder control devices, insulin pumps with
wire connected sensors, pain control devices, interluminal imaging coils,
interventional catheters and guide wires, endoscopes, and others. The Company
plans to manufacture and market a temporary pacemaker and to supply sub-
system components and intellectual property licenses to manufacturers of
other biomedical devices.
The Company is developing technologies that impact several large, well
established segments of the biomedical industry. The Company is providing
solutions to MRI safety issues that prevent the use of numerous biomedical
devices in MRI machines.
The Company is in the development stage and is expected to remain so for at
least the next twelve months.
LOAN AGREEMENTS:
In June 2001, the Company entered into bridge loan agreements providing gross
proceeds of $986,500. Loans of $400,000 from one lender provided for a
maturity date of December 15, 2001 and interest payable by issuance of 100,000
shares of stock on the due date. As additional consideration, the noteholder
received 100,000 shares of stock and warrants to purchase an additional
100,000 shares at $1.00 per share. The noteholder had the right to convert
the principal amounts into stock at $.75 per share at any time prior to
maturity. The Company also received proceeds from a series of bridge loans
aggregating $586,500 upon the same general terms as above except that interest
was payable by issuance of 73,324 shares of stock at the maturity date of
October 29, 2001 (extended to November 29, 2001). All bridge lenders
exercised their conversion options on November 29, 2001, at which time the
Company issued 1,315,334 shares of common stock to convert the loans to
equity.
In June 2002, the Company signed a Loan Agreement with a shareholder
providing for borrowings of up to $400,000 with interest payable at 8% per
annum. Principal and accrued interest become due and payable on December 31,
2003. At August 31, 2002, $143,570 had been borrowed under this Agreement.
In June 2002, the Company executed a line-of-credit agreement (the "Line")
with Biomed that provided for borrowings up to $250,000. Interest accrues at
8% per annum. Upon execution of the Line, Biomed received warrants to
purchase 325,000 shares of restricted common stock at $1.00 per share. The
warrants were valued at approximately $234,000 which was recorded as a
discount against the Convertible Promissory Note (the "Note") supporting the
Line.
At issuance, the Note was convertible into shares of the Company's common
stock, at a price below the market value of such stock. The intrinsic value
of the beneficial conversion feature of the Note was recorded as an additional
discount, such that the full $250,000 issued was discounted, with a
corresponding increase to additional paid-in capital.
On August 19, 2002, the Line was increased by $100,000 and the expiration date
thereof was extended to August 19, 2003. The payment date of amounts borrowed
under the original Line was extended to December 1, 2002. In consideration
for the increase in the Line, Biomed received additional warrants to purchase
shares of restricted common stock at a price dependent on the Company's traded
market price, as defined. These warrants have no value.
8
The Company has drawn an additional $50,000 under the Line, which was also
fully discounted as a result of the beneficial conversion feature, which was
recorded as additional paid-in capital. At August 31, 2002, the Company has
borrowed $300,000 in aggregate under the Line.
As of August 31, 2002, three months' interest expense of $150,000 was recorded
by amortizing a portion of the $300,000 discount recorded by the Company under
the Line and related Note.
PRIVATE EQUITY PLACEMENTS:
In accordance with a Private Placement Memorandum dated July 2, 2001, the
Company offered to sell 3,000,000 shares of common stock, par value $.005 per
share, at $1.00 per share. Gross proceeds of $2,399,750 (net proceeds of
$2,188,332) were received.
Also, from July 2 through November 30, 2001, the Company issued 468,823
shares of common stock to bridge lenders as additional consideration. The
shares were valued at $1.00 per share, treated as interest expense for
accounting purposes, and resulted in adding $2,344 to capital stock and
$466,479 to additional paid-in capital.
During June 2002, the Company entered into a Stock Purchase Agreement with an
institutional investor whereby the Company agreed to sell up to $2,400,000 of
the Company's common stock. The minimum monthly sale of common stock under
the Agreement shall be $250,000. The agreement requires the Company to file
with the Securities and Exchange Commission ("SEC") a Registration Statement
covering the shares issuable under this agreement. The Company can begin
selling shares to the purchaser 20 days after the SEC declares the above-
mentioned Registration Statement effective. The Company has not as yet filed
for registration.
In July and August, 2002, the Company entered into finder's agreements for
the sale of restricted common stock to foreign investors pursuant to the
exemption from registration provided in Regulation S of the 1933 Securities
Act. During the quarter ended August 31, 2002, the Company issued a total of
1,513,274 shares of stock for aggregate net proceeds of $391,345 under these
agreements.
Effective August 22, 2002, the Company entered into a finder's agreement with
a domestic consulting firm providing for the sale of restricted shares of
common stock pursuant to Regulation D under the Securities Act. The finder
receives a cash fee of 10% plus stock equal to 3% valued at a purchase price
of $.35 per share. In September 2002, net cash proceeds of $103,500 were
received under this agreement.
Item 2. PLAN OF OPERATION
The following information should be read in conjunction with the consolidated
financial statements and notes thereto appearing elsewhere in this Form 10-
QSB. This Quarterly Report on Form 10-QSB contains certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933
and Section 21E of the Securities Exchange Act of 1934. Actual events or
results may differ materially from those projected in the forward-looking
statements as a result of a number of factors including those identified
herein and in the Company's Annual report on Form 10-KSB and other periodic
reports and filings with the Securities and Exchange Commission.
9
Overview
The Company continues in the development stage of its operations and is
expected to be in that mode for the foreseeable future. The Company's
primary mission is to develop and commercially exploit potentially significant
technologies for enabling cardiac pacemakers and other life sustaining
medical devices to be safe and compatible with magnetic resonance imaging
(MRI) and other equipment that generates powerful magnetic and radio frequency
signals.
Results of Operations
During the year-ago quarter ended August 31, 2001, the Company pursued the
development of its proprietary technology, realized no revenues and incurred
research and development expenses of $161,656 and other operating expenses of
$266,713 plus interest expense of $212,905. The net loss for the quarter was
$647,114, including $192,985 of non-cash charges for interest expense incurred
in connection with the payment of interest on bridge loans by issuance of
shares of common stock. The Company has remained in the development stage
through the quarter ended August 31, 2002 and has realized no operating
revenues.
During the quarter ended August 31, 2002, the Company pursued the development
of its proprietary technology, incurring research and development expenses of
$189,466 and other operating expenses of $427,741. The net loss for the
current quarter was $702,148, which includes non-cash charges of $194,000. Of
that amount, $44,000 is related to expensing options and $150,000 is related
to imputed interest expense on the Company's line of credit agreement.
During the six months ended August 31, 2002, the Company incurred a net loss
of $1,639,977 as compared with net loss of $899,812 for the six months ended
August 31, 2001. Research and development expenses were $641,281 and other
operating expenses were $904,756 for the six months ended August 31, 2002
as compared with $286,755 and $376,636 respectively, for the six months ended
August 31, 2001. The net loss for the six months ended August 31, 2002
included $244,000 of non-cash interest and options charges and the net loss
for the six months ended August 31, 2001 included $223,985 of non-cash
interest charges.
Research and Product Development Activities
The Company is developing technology to allow patients with biomedical devices
to safely undergo MRI diagnostics.
It is estimated that over 300,000 of the world's 5 million pacemaker
recipients are turned away from MRI scans every year, even though many need
them to detect and treat life threatening illnesses, such as tumors. The
Company is developing a temporary pacemaker which will allow someone with an
implanted pacemaker to safely undergo an MRI scan without the current risks
that resulted in the 1997 FDA contraindication for pacemakers and other
devices. While some organizations will take the risk of giving a pacemaker
or defibrillator patient an MRI scan, most do not for fear of the associated
liabilities, and the fact that the risks associated with such patients are
very difficult to reliably control.
The Company is developing a temporary pacemaker where we anticipate
significant consumables business as a temporary fiber-optic lead is needed for
each MRI procedure provided for a patient with an implanted pacemaker. The
Company plans to service other segments by supplying critical core components
and sub-systems and technology licenses to industry partners by market segment.
10
The Biophan solution for temporary pacing uses a fiber-optic lead to
stimulate the heart. It is used to ensure safe pacemaker operation during
the MRI procedure, without having to remove the patient's existing pacemaker
or lead. If a problem occurs during the procedure with the implanted
pacemaker, the temporary pacemaker takes over, ensuring the patient's heart is
paced until the problem is resolved. Even if the metal wire lead in the
implanted device heats up and scars the heart, one of the more worrisome
problems encountered, the temporary pacemaker can ensure safe pacing until
the pacemaker and/or lead is replaced, in the occasional instance where a
problem ensues.
The Company has announced that it has contracted for animal testing of its
prototype fiber-optic temporary pacemaker during the fourth quarter.
Greatbatch Enterprises, a firm headed up by Wilson Greatbatch, the inventor
of the world's first successfully implanted pacemaker, and his team of
engineers developed the prototype and are conducting the animal tests in
conjunction with a leading research university. After the animal tests are
completed, the Company plans to file an FDA application for human clinical
trials. Since the temporary pacemaker functions identically to existing
pacemakers, and will not pace the heart in any new way, but rather utilize an
MRI-safe material for delivering the pacing voltage to the heart, the FDA
approval process is expected to be a reasonably timely one that can
potentially allow us to offer the temporary pacemaker in the next twelve to
twenty-four months.
The fiber-optic based catheter that provides electrical power and pacing and
sensing the heart has been tested in an MRI machine and does not heat up as do
existing catheters that contain metal wires. The Company is exploring the use
of this technology with third parties, under license, for use in deep brain
stimulation applications, such as treating Parkinson's and epilepsy. The
fiber-optic cable provides much greater bandwidth for measuring brain
activity, and for allowing installation and subsequent evaluation of the
neurostimulating lead under MRI guidance. The Company has also received OEM
licensing interest from several companies wishing to use the fiber-optic lead
to power miniature MRI receiving coils, known as "interluminal coils," placed
in body cavities, close to tissue, to improve MRI image resolution, reduce
scan time, and enable quality images to be obtained with lower strength and
lower cost MRI machines. Today the wire leads used to power these coils have
the potential to heat up and injure the patient, and to pick up extraneous
electrical noise which degrades signal to noise ratio associated image
quality. The Company is anticipating one or more R&D contracts to help
finance the development of this technology platform.
The problem of making a defibrillator lead MRI-safe has also been addressed.
Patents are pending and a demonstration model has been built. Implanted
defibrillators deliver an 800 volt pulse directly to the heart when
tachycardia is detected. This is far too much power to be delivered via a
fiber-optic lead in an implanted or temporary device. The Company has
developed an MRI-safe solution for defibrillation by using a discontinuous
wire lead that enables the high voltage cardioversion-defibrillation pulse to
bridge the gaps in the lead while preventing lower voltage MRI induced
currents from bridging the gap and heating the lead. This innovation requires
no moving parts or logic to operate. It is the perfect companion solution to
a fiber-optic sensing and pacing lead, for temporary or implanted pacemakers.
The Company is conducting other research and has licensed in, on an exclusive
basis, several other technologies that hold promise for MRI safety in
different devices, including pacemakers. By doing so, the Company is
11
positioning itself to be the sole provider of MRI-safe solutions for the
biomedical device industry. These shielding and filtering initiatives are
showing promise in lab models. They include the use of carbon composite and
nanomagnetic particle technologies which have the potential to shield medical
devices from MRI interference. This specialized area of nanotechnology uses
nanoparticles that allow precision altering of the magnetic field in a non-
conductive material that exhibits unique properties due to the nano-scale size
and formulation of the coating. Because the coating can be generated by
technologies already in use in production scale, the technology can be adapted
by wire lead manufacturers.
The requirements of an effective MRI shielding solution are quite different
from the requirements of traditional electromagnetic interference (EMI)
shields. Traditional shielding technologies do not work in an MRI machine,
due to the very powerful magnetic fields utilized in MRI machines. Fiber-
optics are impervious to this energy. The nonmagnetic nanoparticles used in
our proprietary process appear to have properties which can be used to shield
metal wires inside the shielding. As a result of promising early indicators,
the Company has significantly stepped up its R&D efforts with these
nanomaterials, carbon composites, and RF filtering.
Certain industries, such as the pacemaker industry, have a significant
investment in metal wire leads that have been proven to perform reliably for
many years in the challenging environment inside a human heart, beating some
37 million times a year. It is clear that, if a method of shielding achieved
by adding a thin-film coating to the wire-based pacemaker lead were
available, the industry would rapidly adopt this, and the competitive
advantage of offering "an MRI-Safe Pacemaker" and/or defibrillator would be
worth a great deal to the major pacemaker manufacturers. We have conducted
preliminary modeling of the solutions with promising results.
In pursuit of this alternative solution, the Company has entered into
exclusive licenses to the patented technologies described above, and has
contracted with consultants in private industry and at the University of
Buffalo and Alfred University to conduct research to perfect these solutions.
Testing of these solutions in an MRI machine is expected to be conducted in
the fourth quarter.
The Company announced, in the quarter just ended, a license from Johns Hopkins
University for an issued patent for an MRI-Safe ECG and Pacemaker Lead. The
license is exclusive for implantable devices and also covers other market
segments. This is the only issued patent for MRI-safe pacing. This technology
provides a low-pass RF filter at the electrode tip in the heart, and at the
pacemaker device in the chest. This low-pass filter stops much of the energy
traveling to the electrode tip in the heart. It is this energy, traveling
along the metal wire lead, that causes heating and tissue scarring at the
electrode tip of the pacemaker. This heating and scarring can cause a
properly functioning pacemaker to stop sensing and/or pacing the heart hours
after the patient leaves the MRI suite. Subsequently, when the heart needs to
be paced, or defibrillated, the device may not function. The RF filter helps
minimize the heating effect. Used in conjunction with the Company's
proprietary shielding technologies, the problem can be significantly mitigated.
To further improve the chances for this approach to work, the Company has also
filed patents for reducing the energy output of an MRI machine, to minimize
the energy that causes lead heating. The combination of shielding, filtering,
and MRI output reduction holds great promise for solving the MRI heating
problem in pacemakers, defibrillators, and other medical devices.
12
The Company is considering licensing the photonic solution to one or more
companies and licensing the shielding solutions to other companies. Each
has its unique advantages and trade-offs, and has marketability across
numerous market segments (pacemakers, neurostimulators, drug pumps,
interventional devices, etc.)
Our aggressive patenting efforts help ensure that the Company will achieve
its objective of being the primary supplier of solutions for making all
biomedical devices MRI-safe.
The Company has filed 45 patents, in addition to the three exclusively
licensed patents from third parties. The Company believes it has substantial
patent coverage on the technologies needed to achieve MRI safety by either
the fiber-optic approach, or the filtering and shielding approach. The
Company has not previously publicly disclosed the existence of its shielding
and filtering solution, while it conducted negotiations for exclusive
licenses. We are very pleased with the positive response and prospective
licensing interest expressed by multiple organizations in the biomedical
device industry and their component suppliers.
When the Company's temporary pacemaker is ready for market, it expects to
sell devices to larger MRI centers who will then receive referral business
from patients needing MRIs in their surrounding area. Each patient will
require a one-time use fiber-optic temporary pacing lead. A single MRI center
using the temporary pacemaker device would acquire catheters from Biophan or a
distribution partner. It is this proprietary consumables business which
drives the revenue and profit potential for this product. By dealing with
cardiologists and electrophysiologists in larger MRI centers, we minimize the
degree of sales and marketing coverage we need to seed the market with
customers purchasing these proprietary, MRI-safe catheters. The Company plans
to enter this market directly, using sub-contracted manufacturing.
The Company employs ten direct employees and conducts much of its R&D and
prototype development through sub-contract arrangements with third parties.
Greatbatch Enterprises, owned and operated by pacemaker inventor Wilson
Greatbatch, has developed the fiber-optic prototype temporary pacemaker for
the company under contract, and has assigned the related patents to Biophan.
The Company is exploring manufacturing arrangements with FDA registered
biomedical device manufacturing companies with expertise in the field. These
manufacturers are capable of storing inventory and shipping product to third
parties. Wherever possible, the Company leverages the plant and staff
infrastructure of other companies, reducing the Company's burn rate and
overhead and leveraging on third-party experience and know-how. Greatbatch
Enterprises will continue to provide R&D and prototypes on a contract basis.
Wilson Greatbatch recently resigned from the scientific advisory board, as he
is winding down his day to day efforts. The Company believes that its
engineering and research staff and its sub-contracting relationships are more
than able to continue the R&D. Mr. Greatbatch's company has a team of
engineers who have worked with him on pacemaker projects for many years.
Further, the original working prototype of the fiber-optic pacemaker was
developed for the Company by Greatbatch Enterprises with the help of a fiber-
optic R&D company which is continuing to develop electro-optical innovations
and prototypes for the Company.
Shielding R&D is conducted for the Company by University of Buffalo and
Alfred University personnel. The Company enjoys a New York State matching
fund grant for its University of Buffalo R&D which covers 40% of the R&D
cost.
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The Company conducts its MRI machine testing in rented MRI facilities in
several cities.
The Company employs consultants as needed in the fields of MRI safety, MRI
physics, electrical engineering, photonics, thin-film coating, and other
disciplines. The Company's Vice Presidents of Research and Engineering each
have over twenty-five years experience in the development and manufacture of
biomedical devices and instrumentation. Stu MacDonald, our Vice President of
R&D was VP of Instrumentation R&D for a $1 billion Johnson & Johnson company
developing complex blood analytics and other devices; Jeff Helfer, our Vice
President of Engineering, served as Director of Engineering, Director of New
Business Development, and Director of Regulatory Affairs for Johnson &
Johnson. He also headed up several corporate level task forces responsible
for overhauling regulatory procedures and implementing improved product
development procedures. Both individuals have managed multi-disciplinary
teams of up to several hundred individuals responsible for all phases of new
product development, including applied research, product design, product
manufacturing, and post-launch product support, including the
commercialization of Class II and Class III medical devices.
The Company was at one time pursuing a patented antisense treatment for HIV,
but has discontinued this R&D effort to focus 100% on MRI safety. The Company
continues to hold two issued antisense patents, and is exploring licensing
and/or sale of these assets. These patents are held by LTR Antisense, a
wholly-owned subsidiary. The Company also has a subsidiary, MRIC Drug Delivery
Systems, LLC, which was established to facilitate spinning off the Company's
MRI-Safe insulin-pump technology.
The Company leases 4,000 square feet of space in West Henrietta, New York, a
suburb of Rochester.
Further information on the Company and its research can be found on the
Company's web site at http://www.biophan.com.
Liquidity and Capital Resources
During June 2002, the Company entered into a Stock Purchase Agreement with an
institutional investor whereby the Company agreed to sell up to $2,400,000 of
the Company's common stock. The minimum monthly sale of common stock under
the Agreement shall be $250,000. The agreement requires the Company to file
with the Securities and Exchange Commission ("SEC") a Registration Statement
covering the shares issuable under this agreement. The Company can begin
selling shares to the purchaser 20 days after the SEC declares the above-
mentioned Registration Statement effective. The Company has not yet filed
for registration.
In June 2002, the Company executed a line-of-credit agreement with Biomed
that provided for borrowings up to $250,000. Interest accrues 8% per annum.
Additionally, Biomed received warrants to purchase 325,000 shares of common
stock at $1.00 per share. This agreement also extended the due date of the
$500,000 due to Biomed under the Transfer Agreement by which certain
technology was transferred to the Company, to September 1, 2002 and, at the
option of Biomed, further extended to December 1, 2002. On August 19, 2002,
the line was increased by $100,000 and the expiration date of that amount was
set as August 19, 2003. In consideration of this, Biomed received additional
warrants and all warrants held by Biomed were priced and repriced to be
exercisable at the lowest of (i) the closing bid price on June 4, 2002; (ii)
the closing bid price on the date of exercise; or (iii) the lowest per share
purchase price paid by any third party between June 4, 2002 and the exercise
date. Biomed also has the option of converting amounts due on the same basis.
At August 31, 2002, $300,000 had been borrowed under the line of credit.
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Also in June 2002, the Company signed a Loan Agreement with a shareholder
providing for borrowings of up to $400,000 with interest payable at 8% per
annum. Principal and accrued interest become due and payable on December 31,
2003. To date, the Company has borrowed $143,570 under this Agreement.
Pursuant to offerings exempt from registration under Regulation S of the
Securities Act, the Company raised net proceeds of $391,345 during July and
August 2002.
Effective August 22, 2002, the Company entered into a finder's agreement with
a domestic consulting firm providing for the sale of restricted shares of
common stock pursuant to Regulation D under the Securities Act. The finder
receives a cash fee of 10% plus stock equal to 3% valued at a purchase price
of $.35 per share. In September 2002, net cash proceeds of $103,500 were
received under this agreement.
Management believes that the above-described financing arrangements will be
sufficient to fund the next twelve months of operations and beyond. The
proceeds will be applied to the ongoing R&D program for achieving MRI-safe
implantable cardiac pacemakers and other devices as well as to administrative
expenses.
Currently, the Company does not have a need for material capital expenditures
in the conduct of its research and product development activities.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
There are presently no material pending legal proceedings to which the
Company is a party or to which any of its property is subject and, to the best
of its knowledge, no such actions against the Company are contemplated or
threatened.
Item 2. Changes in Securities and Use of Proceeds
During the three-month period ended August 31, 2002, the Company issued a
total of 1,413,886 shares of its common stock for gross cash proceeds of
$403,330, less commissions and offering costs of $11,985. In connection with
these transactions, the Company also issued 99,388 shares of its common stock
as additional commission. The net proceeds from the sales were used by the
Company for general working capital.
All of the aforementioned shares were issued to a total of 33 nonaffiliated,
non-U.S. persons in offshore transactions exempt from registration under the
Securities Act of 1933 and the shares are deemed restricted securities. For
the issuance of these shares, the Company relied upon the exemption from
registration provided by Regulation S of the Securities Act.
Item 3. Defaults Upon Senior Securities
This Item is not applicable to the Company.
Item 4. Submission of Matters to a Vote of Security Holders
This Item is not applicable to the Company.
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Item 5. Other Information
This Item is not applicable to the Company.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
99.2 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
99.3 Certification pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002
99.4 Certification pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002
10.1 Extension of Line of Credit Agreement between the
Company and Biomed Solutions, LLC dated August 19,
2002
10.2 Amended Financial Accommodations Agreement between
the Company and Bellador (Labuan) Ltd.
(b) Reports on Form 8-K
There were no reports filed on Form 8-K during the three months
ended August 31, 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Company has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
BIOPHAN TECHNOLOGIES,INC.
(Registrant)
Date: October 15, 2002
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
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