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: May 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.
incorporation or organization) Employer Identification No.)
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 July 14, 2005 - Common Stock, $.005 par value -
74,602,213 shares
1
INDEX
Page
Number
PART I. FINANCIAL INFORMATION 4-10
ITEM I. Financial Statements 4-10
Report of Independent Registered Public
Accounting Firm 3
Condensed Consolidated Balance Sheets,
May 31, 2005(Unaudited) and
February 28, 2005 4
Condensed Consolidated Statements of
Operations, Three Months Ended
May 31, 2005 and 2004 (Unaudited), and from
August 1, 1968 (Date of Inception) through
May 31, 2005 (Unaudited) 5
Condensed Consolidated Statements of Cash
Flows, Three Months Ended
May 31, 2005 and 2004 (Unaudited) and
from August 1, 1968 (Date of Inception)
through May 31, 2005 (Unaudited) 6-7
Notes to Condensed Consolidated
Financial Statements 8
ITEM 2. Plan of Operation 11-20
ITEM 3. Quantitative and Qualitative Disclosures About
Market Risk 21
ITEm 4. Controls and Procedures 21
PART II. OTHER INFORMATION 21-23
ITEM 1. Legal Proceedings 21
ITEM 2. Unregistered Sales of Securities and Use of Proceeds 22
ITEM 3. Defaults Upon Senior Securities 23
ITEM 4. Submission of Matters to a Vote of Security Holders 24
ITEM 5. Other Information 22
ITEM 6. Exhibits 22
SIGNATURES 23
2
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 May 31, 2005,
and the related condensed consolidated statements of operations and cash flows
for the three-month periods ended May 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' deficiency, 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 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
July 7, 2005
3
BIOPHAN TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED BALANCE SHEETS
May 31, 2005
------------
ASSETS (Unaudited) February 28, 2005
----------- -----------------
Current Assets:
Cash $ 236,975 $ 753,288
Stock subscription receivable 150,000 900,000
Due from related parties 191,053 220,959
Prepaid expenses 75,757 91,596
Other current assets 35,428 41,338
------------ ------------
Total current assets 689,213 2,007,181
Property and Equipment, net 85,856 73,518
Other Assets:
Intellectual property rights, net of amortization 984,095 997,738
Investment 100,000 100,000
Security deposit 3,800 2,933
Deferred tax asset, net of valuation
allowance of $5,438,000 and $4,787,000, respectively -- --
------------ ------------
1,087,895 1,100,671
------------ ------------
$ 1,862,964 $ 3,181,370
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 1,032,058 $ 1,037,103
Note payable 200,000 200,000
Deferred revenues 225,000 225,000
------------ ------------
Total current liabilities 1,457,058 1,462,103
Minority Interest 76,493 --
Stockholders' Equity :
Common stock, $.005 par value
Authorized, 125,000,000 shares
Issued and outstanding, 74,471,997 and
74,317,832 shares, respectively 372,360 371,589
Stock subscription receivable -- (150,000)
Additional paid-in capital 20,852,166 18,982,952
Deficit accumulated during the
development stage (20,895,113) (17,485,274)
------------ ------------
329,413 1,719,267
------------ ------------
$ 1,862,964 $ 3,181,370
============ =============
See Notes to Condensed Consolidated Financial Statements.
4
BIOPHAN TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Period from
August 1, 1968
(date of
Three Months Ended inception) to
May 31, 2005 May 31, 2004 May 31, 2005
------------ ------------ ------------
Revenues:
Development payments $ -- $ -- $ 75,000
Operating expenses:
Research and development 1,537,968 560,919 7,843,779
General and administrative 1,957,758 433,767 11,331,710
Write-down of intellectual property rights -- -- 530,000
------------ ------------ ------------
3,495,726 994,686 19,705,489
------------ ------------ ------------
Operating loss (3,495,726) (994,686) (19,630,489)
Other income(expense):
Interest expense -- -- (1,730,923)
Interest income 2,749 858 61,196
Other income 83,138 41,803 559,546
Other expense -- -- (65,086)
------------ ------------ ------------
85,887 42,661 (1,175,267)
------------ ------------ ------------
Loss from continuing operations (3,409,839) (952,025) (20,805,756)
Loss from discontinued operations -- -- (89,357)
------------ ------------ ------------
Net loss $ (3,409,839) $ (952,025) $(20,895,113)
============ ============ ============
Loss per common share $ (0.05) $ (0.01)
============ ============
Weighted average shares outstanding 74,417,378 66,419,732
============ ============
See Notes to Condensed Consolidated Financial Statements.
5
BIOPHAN TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Period from
August 1, 1968
(date of
Three Months Ended inception)
May 31, to
2005 2004 May 31, 2005
----------- ----------- -----------
Cash flows from operating activities:
Net loss $(3,409,839) (952,025) $ (20,895,113)
Adjustments to reconcile net loss to net cash
used in operating activities:
Amortization of patents 13,643 -- 13,643
Depreciation 9,412 5,509 101,605
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 -- -- 11,998
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 -- -- 75,000
Issuance of common stock for services -- -- 369,108
Issuance of common stock for interest -- -- 468,823
Grant of stock options for services 174,832 30,000 2,128,632
Vesting of contingent options 1,287,250 -- 1,287,250
Expenses paid by stockholder -- -- 2,640
Minority interest 76,493 -- 76,493
Changes in operating assets and liabilities:
(Increase)decrease in advances receivable -- (87,457) --
(Increase)decrease in due from related parties 29,906 (2,627) (191,053)
(Increase)decrease in prepaid expenses 15,839 -- (75,757)
(Increase)decrease in other assets 5,910 -- 5,910
Increase in security deposits (867) -- (3,800)
Increase(decrease) in accounts payable and accrued expenses (5,045) (8,779) 641,503
Increase(decrease) in due to related parties -- -- (43,496)
Increase in deferred revenues -- -- 225,000
----------- ----------- -----------
Net cash used in operating activities (1,800,961) (1,015,379) (14,152,211)
----------- ----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (23,255) (9,030) (187,944)
Sales of marketable securities -- -- 2,369,270
Purchase of investment -- -- (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 used in investing activities (23,255) (9,030) (613,766)
----------- ----------- -----------
6
BIOPHAN TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Period from
August 1, 1968
Three Months Ended (date of
May 31, inception) to
2005 2004 May 31, 2005
----------------- ---------------- ------------
Cash flows from financing activities:
Proceeds of bridge loans -- -- 986,500
Loan from stockholder -- -- 143,570
Line of credit borrowing from related party -- -- 550,950
Line of credit payments -- -- (72,500)
Net proceeds from sales of capital stock 900,000 -- 11,113,849
Proceeds from exercise of options 112,541 -- 575,288
Proceeds from exercise of warrants -- 391,800 1,121,744
Short swing profits 295,362 -- 696,087
Equity placement costs -- (22,106) (112,536)
----------------- ---------------- ------------
Net cash provided by financing activities 1,307,903 369,694 15,005,952
----------------- ---------------- ------------
Net increase(decrease) in cash and cash equivalents (516,313) (654,715) 236,975
Cash and cash equivalents, beginning 753,288 823,900 --
----------------- ---------------- ------------
Cash and cash equivalents, ending $ 236,975 $ 169,185 $ 236,975
================= ================ ============
Supplemental schedule of noncash investing and financing activities:
Common stock issued for subscription receivable $ -- $ -- $ 1,050,000
================= ================ ============
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
================= ================ ============
Issuance of common stock upon conversion
of related party loans $ -- $ -- $ 978,450
================= ================ ============
See Notes to Condensed Consolidated Financial Statements.
7
BIOPHAN TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
May 31, 2005
INTERIM FINANCIAL STATEMENTS:
The condensed consolidated financial statements as of May 31, 2005 and for the
three months ended May 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:
8
Three months ended May 31, 2005 2004
----------- -----------
Net loss - as reported $(3,409,839) $ (952,025)
Add: Stock-based employee compensation
expense included in reported net loss,
net of related tax effects 1,339,000 30,000
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax effects (2,155,000) (62,000)
----------- -----------
Net loss - pro forma $(4,225,839) $ (984,025)
=========== ============
Basic and diluted loss
per share - as reported $ (.05) $ (.01)
Basic and diluted loss =========== ============
per share - pro forma $ (.06) $ (.01)
=========== ============
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.
During the current quarter ended May 31, 2005, the Company incurred a non-cash
charge to earnings of $1,462,082 for the grants of stock options for services
and vesting of contingent options. Of this amount, $1,287,250 is related to
options previously granted to executive officers that vested on a contingent
basis upon the achievement of a specified performance - based milestone. 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.
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.
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 will bear
interest at 8% per annum 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 has taken down the entire
$2 million under the line and additionally, 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 will record a discount on the notes of approximately $550,000 due to the
beneficial conversion feature of the note as well as for the value of the
warrants. The discount will be amortized as additional interest expense over the
term of the note which is payable on demand after November 27, 2005.
9
CHANGES IN EQUITY:
During the quarter ended May 31, 2005, a total of 154,165 shares of common stock
were issued upon exercise of options at prices ranging from $.50 to $1.00.
Proceeds of $112,541 were received increasing the capital stock account by $771
and additional paid-in capital by $111,770.
Additional paid-in capital was also increased by $1,462,082 of expense related
to stock option grants for services and vesting of contingent options . Of this
amount, $1,287,250 is related to options previously granted to executive
officers that vested during the period upon the achievement of a specified
milestone.
Additional paid-in capital was further increased by $295,362 of profits from a
related company owed pursuant the "short swing profit" rules of the Securities
and Exchange Act of 1934.
On May 27, 2005, the previous financing agreement the Company had with SBI
Brightline Consulting, LLC was cancelled and a new agreement was executed with
SBI Brightline XI, LLC. The new agreement provides a $30 million fixed price
financing for up to 10,000,000 shares at prices ranging from $2 to $4 a share.
The sales of stock must be taken in sequential tranches of 1 million shares each
and the financing requires the shares to be registered for sale. There are no
resets, warrants, finder's fees or commissions associated with this financing
transaction.
10
ITEM 2. PLAN OF OPERATION
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 distribution but rather rely on that of the larger
biomedical device manufacturers. We build strong intellectual property "patent
thickets" around vertically oriented 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
development, regulatory affairs, sales and marketing, device coatings, project
management, intellectual property, and much more.
We identify product capabilities and technological needs that are unfilled or
inadequately addressed and develop internally and acquire proprietary,
advantaged solutions. We build comprehensive, defendable intellectual property
portfolios around each of the areas we target and generally command a
significant overall advantage with important blocking patents in each category.
We are affiliated with world renowned scientists and engineers in each of the
areas in which we operate, including relationships with consultants, academia,
and large and small companies. While we currently employ only twelve direct
employees, our extended enterprise includes nearly fifty professionals with
expertise in all of the critical areas needed to provide a turnkey solution to a
customer to deploy in their product lines. Our development partners include
universities, small and large companies, and others. We are developing our
biothermal power system with the NASA Ames Center for Nanotechnology. We have a
joint development agreement with Boston Scientific for making devices MRI Safe
and Image Compatible which has led to a license agreement and investment
described further on in this report.
The following are the vertical market sectors we have, or are developing
enhancing technology for:
Pacemakers, implantable cardio-defibrillators
Neurostimulators
Stents
Vena Cava Filters
Guidewires and catheters
Drug pumps
Drug delivery systems
Power systems (batteries)
Others
Our capabilities include making these devices safe for use with MRI (many
medical devices are contraindicated for use with MRI), image compatible with MRI
(many devices have imaging problems with MRI). We are also developing improved
contrast agents for use with MRI, and methods for improving the imaging of
vulnerable plaque under MRI. We also offer an MRI safe and image compatible
motor for drug pumps and robotic applications. For devices that rely on battery
power, we are developing longer lasting power systems powered by body heat
versus chemicals.
Company Business
The Company is a technology development company with a strong market focus. We
solve real-world technical challenges and limitations facing the medical device
industry and, when selecting a specific market opportunity to address, generate
a wide range of potential technical solutions. Each of the technical solutions
that we pursue is protected by intellectual property to ensure that solutions
have the capability of being effectively marketed by the Company. 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 large manufacturers an
opportunity for a sustainable competitive product advantage, making 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 to the Company for access to the technology.
This approach has resulted in the development of a range of core technologies
within the Company, and our presence in a number of different, but closely
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.
11
Over the past quarterly period, 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;
o Technology to enable an MRI visible 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 improve 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 and contract
negotiation 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 and most profitable 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 dyes, which can result in an allergic reaction. These
procedures allow determination of stent blockage, but they do not permit imaging
inside 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 has developed a series of solutions to this problem by
modifying the stent structure, by adding a secondary structure or by applying a
coating to the stent. In either case, the modification should not affect the
physical performance of the stent but will permit imaging of the stent interior.
Biophan has, through both internal development and acquisition, acquired a broad
range of issued and pending patents protecting these technologies, including
thin film and thick film coatings that generate a resonant circuit to overcome
the Faraday Cage effect. 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. 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, defibrillators and
neurostimulators, guidewires and catheters. Many of these devices can experience
unsafe heating in an MRI field, and can experience induced voltages which also
presents 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.
12
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.
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.
These new operating theaters require the patients to be moved back and forth on
a conveyor belt-like system between the imaging devices and represents an
expensive and inconvenient solution to the limitations of today's devices. 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). One solution is an RF filter, licensed from Johns Hopkins exclusively
for implantable devices, which can resolve lead heating. Additionally,
"anti-antenna" geometry modifications in these devices, patented by the Company,
alter the way the devices are made to resolve the safety problems associated
with these devices. Together, these solutions allow the manufacture of an MRI
safe lead and device.
Since the recent 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, gives us a very strong
position in the emergence of MRI safe devices incorporating long wire leads,
such as pacemakers, defibrillators, deep brain stimulators, pain management
devices, and many 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. To the best of our knowledge, no other issued
U.S. patents exist for pacemaker safety. We have in the past declined several
offers for licenses for pacemaker safety which did not meet our minimum royalty
requirements. If an MRI safe pacemaker ships from a manufacturer who is not a
licensee, we will acquire the device and conduct an infringement analysis. In
the event infringement is found we intend to vigorously enforce our patents
rights. We are in discussions with another pacemaker manufacturer regarding a
license, and we have reached an understanding with another company on terms for
a non-exclusive license for pacemaker safety.
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 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 or 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 was applied. An alternative approach, using a miniature resonant circuit
applied to a catheter, makes it easy to track 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. The advantage of a coating solution is that a manufacturer with a
product in the market or in development does not have to radically change the
physical design or its manufacturing process. Thus, the coating solutions we are
pursuing have broad applications to many products, including the rapidly growing
stent market.
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 making recognition molecules and to license the technology
to a partner or partners with established distribution channels.
13
Biothermal Power Source
We acquired a 51% interest in TE Bio, LLC, a company developing implantable
power systems that work on heat created by normal body metabolism, 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 by converting body heat to power. 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 the nanomagnetic particle
is activated by a resonant frequency field and forced to vibrate and lose its
attachment to the drug molecule. 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. John Lanzafame was recruited by Biophan and
nowheads up Nanolution, our drug delivery division, where he is developing this
technology into solutions which can be licensed to customers.
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. For additional information, please contact the Company.
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, royalties on sales of
products and 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 are in addition
to the market opportunity for safer devices. 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, such as 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 type and market segment. 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 or not 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.
14
In situations where we possess several solutions to a problem, we expect that
the customer will then 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. We generally
wish to see a commitment to ship a product within a certain timeframe, certain
annual minimum commitments, minimum royalty payments, milestone payments and an
attractive royalty rate.
The degree of exclusivity is also a key parameter in determining achievable
license terms and royalty rates; 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 have executed a term
sheet which could result in our first non-exclusive license with a manufacturer.
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 the Scimed Division
of Boston Scientific. 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 agreement further specifies that the initial $750,000 payment
must be made not later than August 15, 2005.
In addition to the license agreement, Boston Scientific has entered into an
agreement to invest $5 million in Biophan. The investment will be 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 too the date of funding.
Funding will take place once Biophan provides Boston Scientific with
documentation confirming Biophan's ownership of certain patent rights resulting
from its recent German acquisitions. This funding must also take place no later
than August 15, 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, original equipment manufacturing arrangements and licensing
agreements.
The transaction with Boston Scientific has provided a validation point 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 be MRI safe
and image compatible, and we feel that the Boston Scientific agreement
facilitates this goal.
Biophan previously declined two offers from a major pacemaker manufacturer for
an exclusive license to one of its patents, which management and our board of
directors felt was not equitable. The Boston Scientific Agreement contains the
types of provisions that management and the board feel are equitable and
desirable for our shareholders.
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.
15
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.
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.
16
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 142 U.S. patents, inclusive of those
assigned and licensed, and including filed applications and allowed and issued
patents. This represents a 2-1/2 fold over the number at this time last year.
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 on implantable and
interventional medical devices and for a new class of applications to enhance
the uptake, release and monitoring of drugs in medical device coatings.
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 and that these solutions provide a meaningful
margin of safety. Our solutions address both the problems of device heating and
induced voltages in pacemakers, defibrillators, and neurostimulators, which are
the two primary problems associated with the use of MRI for patients with these
devices. 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.
17
Additionally, there is a rapidly growing field of medicine known as minimally
invasive surgery, using "interventional" devices such as guidewires and
catheters to do many procedures in cardiology, oncology and other specialties.
The majority of procedures are done in catheter labs equipped with X-ray or
fluoroscopy devices for imaging and guiding the procedures. Many of these
devices do not offer the advantages of tissue visualization and discrimination
provided by MRI. The combined problems of device safety (they heat up and may
induce electrical stimulation), and the image artifacts created by these devices
in MRI, have limited the use of MRI machines in this rapidly growing area of
medicine. The desire and need for MRI is demonstrated by the advent of catheter
labs which have both X-ray devices for guiding devices into the body, and MRI
machines for evaluating progress and observing tissue and results. In these new
operating theaters, the patients are moved back and forth on a conveyor
belt-like system between the imaging devices. For the past five years, Biophan
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.
Biophan has two solutions for resolving the heating of wire leads, such as
pacemaker leads (in which we include pacemaker and defibrillator leads) and
neurostimulator leads (including deep brain stimulation, or DBS, systems for
Parkinson's and epilepsy; systems for pain control, etc.). One solution is an RF
filter, licensed from Johns Hopkins exclusively for implantable devices, and
co-exclusively for non-implantable catheters) which can resolve lead heating (it
is the metal wire lead connecting a device to the body that is the cause of most
of the MRI safety problems). Additionally, to resolve the problems associated
with very long metal wires such as surgical guidewires and catheters, we have
been developing "anti-antenna geometries" in these leads. By slightly altering
the way the leads are made, we can create self-canceling attributes that resolve
the radio frequency related problems that cause heating and induced voltages in
the lead. Together, these solutions allow making an MRI-safe lead and device.
Several broad patents for this innovation were filed several years ago, and one
recently issued. As a result, we have now publicly disclosed our solutions, and
we have demonstrated the success of our approach to prospective customers and
industry experts. We have begun manufacturing samples of devices modified with
our solution, which is extremely cost effective. We have modified a pacemaker
lead for a pacemaker company concerned with pacemaker safety, which is currently
being evaluated by that company. Recent publications by scientists and by
personnel working for the U.S. Food and Drug Administration (FDA) have increased
both the concern, and the interest in solutions that can resolve the safety
problems that restrict the ability of virtually all recipients of pacemakers,
cario-defibrillators, neurostimulators, and pain devices, to be diagnosed using
MRI. The FDA recently issued an advisory alert regarding neurostimulators,
citing both injuries and deaths associated with MRI. This report is posted on
our website and can be found at http://www.fda.gov/cdrh/safety/neurostim.html.
The April 2005 issue of PACE (Pacing and Clinical Electrophysiology) was devoted
to the issues of MRI safety, and included editorial comments by Medtronic,
Guidant, St. Jude, and the FDA, about patient safety. This increasing awareness
and concern has caused renewed interest in Biophan's solutions, and greater
appreciation for our grasp of the issues as well as our comprehensive solutions.
We are currently engaged in discussions with several pacemaker manufacturers
which may lead to licensing our technologies for the pacemaker,
cardio-defibrillator, and neurostimulator markets.
During the past year, we received an issued patent, U.S. 6,829,509 for
anti-antenna geometries, which we believe, along with Johns Hopkins patent U.S.
5,217,010, for which we hold an exclusive license for implanted medical devices,
gives us a dominant position in the emergence of MRI safe devices using long
wire leads, such as pacemakers, defibrillators, deep brain stimulators, pain
devices, and many others. This modification of a metal device has broad
application. It can also address a significant limitation associated with
virtually all stents, medical devices used to keep vessels open. It is very
difficult to image inside the stent to determine if blockage is occurring, once
the stent is installed in the body. Currently, no diagnostic systems such as
X-ray or fluoroscopy are effectively able to image inside of a stent.
We have demonstrated effective MRI imaging of the interior of stents.
Researchers in Europe have also demonstrated at conferences that this approach
works, and there are some stents shipping in Europe using this approach. The
solution requires a change in the way most stents are made. We recently filed
nine continuations of our original patent application, applying this innovation
to other devices, such as stents, guidewires and catheters. The stent, guidewire
and catheter businesses are very large and have many players who compete with
one another for competitive advantage. This solution to both heating and stent
imaging has broad implications
We are also working on coatings that can improve MRI imaging of devices such as
guidewires and catheters that would otherwise be invisible under MRI, using thin
film coatings described above. The advantage of a coating solution is that a
manufacturer with a product in the market or in development does not have to
radically change the physical design manufacturing process. Thus, the coating
solution, which we are pursuing, has broad applications for the rapidly growing
stent market.
18
There is increasing industry interest in these approaches to making devices
imageable under MRI. The solution must be applied to the device itself, and is
not something that can be incorporated in the MRI machine or its software.
However, the solution is of interest to MRI manufacturers we have met with, all
of whom benefit from seeing the aforementioned expansion in the use of MRI for
interventional medicine and expanded diagnostics (as with stents, and other
applications). MRI is also used extensively in oncology, due to its ability to
discriminate tissue types.
Image compatibility also has benefits for a pacemaker device manufacturers. The
goal of making pacemakers safe for MRI is to allow a pacemaker patient to
receive an MRI scan for staging a cancer operation, and subsequent follow-up, or
to diagnose a brain tumor, or back or knee problem, etc. However, a device made
safe may still cause a significant image artifact. By adding "image
compatibility" to a pacemaker made safe, it may be possible to enable a
pacemaker patient to one day have an MRI angiogram, and avoid having an invasive
procedure. Similarly, a patient with a Deep Brain Stimulator (DBS) device can
undergo a full power MRI of the brain if their lead is not only safe, but also
image compatible.
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. He has focused on leveraging recent
discoveries in nanotechnology such as Biophan's use of nanomagnetic particles
for the purposes of drug delivery and drug elution from devices. 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. Over thirty 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. We have also entered into a consulting agreement with
Isoflux in Rochester, New York, a leading developer of plasma coating equipment,
such as that used to coat stents and long metal wires. Isoflux is headed by Dr.
David Glocker, formerly head of the thin film R&D Group at Eastman Kokak
Company, to assist in our device coatings experiments, testing, and design. Dr.
Glocker is also a member of the Biophan Scientific Advisory Board.
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.
As a result of the growing awareness of the problems outlined here and our broad
patent portfolio, we are seeing an increased interest from the medical device
industry in our solutions. We are in various stages of discussions and
negotiations with an expanded group of companies, both in the United States and
abroad, regarding the utilization of our technology. The value to our
prospective customers is competitive advantage with the potential to gain
increased market share.
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
the Company 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.
19
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. We intend to file our application with the
exchange shortly after the receipt of funds from Boston Scientific.
Financing Activities
On June 30, 2005, we executed a definitive equity investment agreement and a
technology license with Boston Scientific. 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 is to occur by August 15,
2005. The combined cash from this transaction is anticipated to be more than
adequate to enable us to list on a major stock exchange within the current
fiscal year.
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. Currently the full $2 million has been provided 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.
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. We believe that this credit facility, the
revised SBI stock purchase agreement, and the pending transaction with Boston
Scientific, provide the Company with more than adequate capital resources for
the upcoming 12 month timeframe; including the ability to fund, as needed,
potential additional acquisition 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 $3,327,000
General and administrative expenses,
including administrative salaries
and benefits, office expenses,
rent expense, legal and accounting,
publicity, and investor relations 3,463,000
----------
Total estimated cash requirements for next twelve months $6,790,000
==========
Our current strategic plan does not indicate a need for material capital
expenditures in the conduct of research and development activities, nor does the
plan contemplate any significant change in the number of employees. We currently
employ twelve full-time individuals.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(a) Derivative Financial Instruments, Other Financial Instruments, and
Derivative Commodity Instruments.
As of May 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 May 31, 2005, foreign currency
translation gains were approximately $7,000 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-QSB, 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 May 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 will be
exempt from registration pursuant to Sections 3(a) 9 and 4(2) of the Securities
Act.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
21
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
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
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: July 15, 2005
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