As filed with the Securities and Exchange Commission on February 27, 2007
Registration No. 333-138632
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
Amendment No. 2 to
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Biophan Technologies, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Nevada 3841 82-0507874
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
15 Schoen Place
Pittsford, New York 14534
(585) 267-4800
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
Michael L. Weiner
Chief Executive Officer
Biophan Technologies, Inc.
15 Schoen Place
Pittsford, New York 14534
(585) 267-4800
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
Copy to:
William E. Kelly, Esq.
Nixon Peabody LLP
100 Summer Street
Boston, Massachusetts 02110
(617) 345-1000
Approximate date of commencement of proposed sale to the public: From time
to time after this registration statement becomes effective.
If any of the securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. |X|
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
CALCULATION OF REGISTRATION FEE
Title of Each Class Proposed Maximum Proposed Maximum
of Securities to be Amount to be Offering Price per Aggregate Offering Amount of
Registered Registered (1) Share (2) Price (2) Registration Fee (3)(4)
------------------- -------------- ------------------ ------------------ --------------------
Common Stock, par
value $0.005 24,591,491 $0.57 $14,017,149 $1,500
(1) This Registration Statement shall also cover any additional shares of
Common Stock which become issuable by reason of any stock dividend, stock
split, recapitalization or other similar transaction effected without the
receipt of consideration which results in an increase in the number of the
outstanding shares of Common Stock of the Registrant.
(2) Computed in accordance with Rule 457(c) under the Securities Act of 1933
(the "Securities Act"), solely for the purpose of calculating the
registration fee, and based on the average of the high and low prices of
the Common Stock of the Registrant as reported on November 7, 2006 on the
NASDAQ OTC Bulletin Board.
(3) Computed in accordance with Section 6(b) under the Securities Act, solely
for the purpose of calculating the registration fee.
(4) Previously paid.
The Registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act or until the registration statement shall become effective on
such date as the Commission, acting pursuant to said Section 8(a), shall
determine.
================================================================================
The information contained in this prospectus is not complete and may be changed.
Neither we nor the selling stockholders may sell these securities until the
registration statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these securities and it is
not soliciting offers to buy these securities in any state where the offer or
sale is not permitted.
================================================================================
PROSPECTUS (Subject to Completion)
February 27, 2007
24,591,491 Shares
BIOPHAN TECHNOLOGIES, INC.
COMMON STOCK
This prospectus relates to 24,591,491 shares of our common stock that may
be sold from time to time by the selling stockholders named herein.
This offering is not being underwritten. The selling stockholders may
offer the shares through public or private transactions at the market price for
our common stock at the time of the sale, a price related to the market price, a
negotiated price or such other prices as the selling stockholders determine from
time to time. See "Plan of Distribution" beginning on page 50.
All of the net proceeds from the sale of these shares of common stock will
go to the selling stockholders. We will not receive any proceeds from sales of
these shares. We will bear the costs relating to the registration of these
shares.
Our common stock is quoted on the OTC Bulletin Board under the symbol
"BIPH". On February 23, 2007, the last reported sale price on the OTC Bulletin
Board for our common stock was $0.47 per share.
You should read this prospectus carefully before you invest.
Investing in our common stock involves substantial risks. See "Risk
Factors" beginning on page 4.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities, or determined if
this prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
TABLE OF CONTENTS
Page
----
Prospectus Summary ............................................................1
Risk Factors ..................................................................4
Forward-Looking Statements ....................................................8
Use of Proceeds ...............................................................8
Dividend Policy ...............................................................8
Selected Consolidated Financial Data ..........................................9
Management's Discussion and Analysis of Financial Condition and
Results of Operations ......................................................10
Business .....................................................................17
Management ...................................................................35
Beneficial Ownership of Common Stock by Directors, Officers and
Principal Stockholders ....................................................44
Certain Relationships and Related Party Transactions .........................46
Tranactions with Selling Stockholders ........................................47
Selling Stockholders .........................................................48
Plan of Distribution .........................................................50
Description of Capital Stock .................................................52
Legal Matters ................................................................53
Experts ......................................................................53
Where You Can Find More Information ..........................................53
Index to Consolidated Financial Statements ..................................F-1
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We and the selling stockholders are offering to
sell, and seeking offers to buy, shares of our common stock only in
jurisdictions where offers and sales are permitted. The information in this
prospectus is accurate only as of the date of this prospectus, regardless of the
time of delivery of this prospectus or any sale of shares of our common stock.
-ii-
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this
prospectus. This summary does not contain all of the information you should
consider before investing in our common stock. You should read this entire
prospectus carefully, especially the risks of investing in our common stock
discussed under "Risk Factors" beginning on page 4, and the consolidated
financial statements and notes to those consolidated financial statements,
before making an investment decision.
BIOPHAN TECHNOLOGIES, INC.
Our Corporate Information
We were incorporated in the State of Idaho on August 1, 1968, under the
name Idaho Copper and Gold, Inc. On February 9, 1999, we changed our name to
Idaho Technical, Inc. On January 24, 2000, we changed our domicile to Nevada by
merging into our wholly-owned Nevada subsidiary. We began our current line of
business on December 1, 2000. On December 1, 2000, we changed our name to
GreatBio Technologies, Inc. and on July 19, 2001, we changed our name to Biophan
Technologies, Inc.
From inception through November 30, 2006, we have incurred cumulative net
losses of $44,234,140. Since December 1, 2000, we have relied almost entirely on
sales of our securities and loans to fund our operations.
Our principal executive offices are located at 15 Schoen Place, Pittsford,
New York 14534 and our telephone number is (585) 267-4800.
THE OFFERING
Common stock offered by the
selling stockholders 24,591,491 shares
Common stock to be outstanding
after this offering 108,023,190*
Use of proceeds We will not receive any proceeds from the
sale of shares by the selling stockholders.
Risk factors You should read the "Risk Factors" section
of this prospectus for a discussion of
factors that you should consider carefully
before deciding to invest in shares of our
common stock.
OTC Bulletin Board symbol "BIPH"
The number of shares of our common stock to be outstanding following this
offering is based on 83,431,699 shares of our common stock outstanding as of
February 23, 2007*, and assumes (i) the conversion of an aggregate face amount
of $7,250,000 of our outstanding Senior Secured Convertible Notes due October
11, 2009 into an aggregate of 10,820,896 shares of common stock to be sold by
selling stockholders in this offering, (ii) the exercise of warrants to purchase
an aggregate of 11,686,568 shares of common stock to be sold by selling
stockholders in this offering, and (iii) the issuance of an aggregate of
2,084,027 shares of common stock in payment of interest to accrue under the
Notes during their term, and to be sold by the selling stockholders in this
offering, and excludes (i) the exercise of outstanding options under our
incentive stock compensation plans, (ii) the issuance of any shares of our
common stock to SBI Brightline XI, LLC pursuant to the Stock Purchase Agreement
dated as of May 27, 2005 (as amended), and (iii) the exercise of any other
options, warrants or other rights to acquire shares of our common stock by any
person or entity (including the selling stockholders).
* Includes 4,923,080 shares of our common stock held by Myotech, LLC, an
entity of which we are a 43.5% beneficial owner. Because we consolidate our
financial statements with those of Myotech in accordance with FASB
Interpretation No. 46 (Revised December 2003), "Consolidation of Variable
Interest Entities" ("FIN 46(R)"), these shares are carried as treasury shares on
our Consolidated Balance Sheets and Consolidated Statements of Stockholders'
Equity. However, because we do not have direct or indirect control over the
voting or disposition of the shares held by Myotech, these shares are treated as
issued and outstanding shares throughout this prospectus except (i) in the
section entitled "Selected Financial Data" on page 9 and (ii) in the Financial
Statements beginning on page F-1.
2
SUMMARY CONSOLIDATED FINANCIAL DATA
The tables below, which summarize our consolidated statements of
operations data for the years ended February 28, 2006, 2005 and February 29,
2004, have been derived from our audited consolidated financial statements and
related notes, which are included elsewhere in this prospectus. The consolidated
statements of operations data for the nine months ended November 30, 2006 and
2005 and the balance sheet as of November 30, 2006 have been derived from our
unaudited condensed consolidated financial statements and related notes, which
are included elsewhere in the prospectus. You should read the following
information together with the more detailed information contained in "Selected
Consolidated Financial Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our consolidated financial statements
and the accompanying notes included elsewhere in this prospectus.
For the Year Ended
----------------------------------------- For the Nine Months Ended
February 28, February 29, November 30,
-------------------------- ------------ ---------------------------
2006 2005 2004 2006 2005
------------ ----------- ------------ ------------ ------------
(Restated)
CONSOLIDATED STATEMENTS
OF OPERATIONS DATA:
Revenues:
Development payments $ 225,000 $ -- $ 75,000 $ -- $ 225,000
License Fees 479,166 -- -- 500,000 250,000
Testing services and
consulting fees 340,695 -- -- 381,115 113,119
------------ ----------- ------------ ------------ ------------
1,044,861 -- 75,000 881,115 588,119
Operating expenses:
Research and development 6,829,142 2,629,980 1,240,439 6,267,272 5,103,743
General and administrative 8,451,886 3,337,185 1,911,003 4,923,853 6,567,924
------------ ----------- ------------ ------------ ------------
15,281,028 5,967,165 3,151,442 11,191,125 11,671,667
------------ ----------- ------------ ------------ ------------
Operating loss (14,236,167) (5,967,165) (3,076,442) (10,310,010) (11,083,548)
Other income(expense):
Interest expense (1,140,866) -- (729,527) (2,573,595) (1,010,648)
Interest income 70,701 11,869 1,815 46,303 60,638
Additional expense related to
warrants -- -- -- (7,304,105) --
Change in fair value of warrant
liability -- -- -- 6,722,184 --
Loss on extinguishment of
debt - related party -- -- -- (670,053) --
Other income 215,789 161,749 85,584 138,200 225,541
------------ ----------- ------------ ------------ ------------
(854,376) 173,618 (642,128) (3,641,066) (724,469)
Loss from continuing operations
before minority interest in net
loss of Myotech, LLC (15,090,543) (5,793,547) (3,718,570) (13,951,076) (11,808,017)
Minority interest in net loss
of Myotech, LLC 606,159 -- -- 1,686,594 --
------------ ----------- ------------ ------------ ------------
Loss from continuing operations (14,484,384) (5,793,547) (3,718,570) (12,264,482) (11,808,017)
------------ ----------- ------------ ------------ ------------
Net loss $(14,484,384) $(5,793,547) $(3,718,570) $(12,264,482) $(11,808,017)
============ =========== =========== ============ ============
Loss per common share - basic
and diluted $ (0.19) $ (0.08) $ (0.08) $ (0.16) $ (0.16)
============ =========== =========== ============ ============
Weighted average shares
outstanding 75,787,052 69,263,893 44,017,010 78,180,322 75,430,870
============ =========== =========== ============ ============
November 30,
2006
------------
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents $ 4,795,122
Intangible assets, net $24,761,317
Total assets $31,787,957
Total liabilities $15,818,019
Minority interest $13,552,378
Total stockholders' equity $ 2,417,560
3
RISK FACTORS
Investing in our common stock involves a high degree of risk. You should
carefully consider the following risk factors, as well as the other information
in this prospectus, before deciding whether to invest in our common stock. If
any of the following risks actually materializes, our business, financial
condition and results of operations would suffer. The trading price of our
common stock could decline as a result of any of these risks, and you might lose
all or part of your investment in our common stock. You should read the section
entitled "Forward-Looking Statements" immediately following these risk factors
for a discussion of what types of statements are forward-looking statements, as
well as the significance of such statements in the context of this prospectus.
WE ARE A BUSINESS WITH A LIMITED OPERATING HISTORY AND ARE NOT LIKELY TO
SUCCEED UNLESS WE CAN OVERCOME THE MANY OBSTACLES WE FACE.
We are an early-stage research and development company with limited prior
business operations and no material revenues to date. We are presently engaged
in the development of certain technologies for use with medical procedures and
biomedical devices. Because of our limited operating history, you may not have
adequate information on which you can base an evaluation of our business and
prospects. To date, our efforts have been devoted primarily to the following:
o organizational activities;
o developing a business plan;
o obtaining funding;
o conducting research and working toward the ultimate successful development
of our technologies;
o aggressively patenting our intellectual property;
o licensing technology from third parties related to our business; and
o marketing to major biomedical device manufacturers.
In order to establish ourselves in the medical device market, we are
dependent upon continued funding and the successful development and marketing of
our products. You should be aware of the increased risks, uncertainties,
difficulties, and expenses we face as a research and development company and
that an investment in our common stock may be worthless if our business fails.
4
IF WE ARE UNABLE TO GENERATE SUFFICIENT REVENUES IN THE FUTURE, WE MAY NOT
BE ABLE TO CONTINUE OUR BUSINESS.
We are still in our formative and development stage. As an investor, you
should be aware of the difficulties, delays, and expenses normally encountered
by an enterprise in its development stage, many of which are beyond our control,
including unanticipated research and developmental expenses, employment costs,
and administrative expenses. We cannot assure our investors that our proposed
business plans as described in this prospectus will materialize or prove
successful, or that we will ever be able to finalize development of our products
or operate profitably. If we cannot operate profitably, you could lose your
entire investment. As a result of the start-up nature of our business, initially
we expect to sustain substantial operating expenses without generating
significant revenues.
WE HAVE A HISTORY OF LOSSES AND A LARGE ACCUMULATED DEFICIT AND WE EXPECT
FUTURE LOSSES THAT MAY CAUSE OUR STOCK PRICE TO DECLINE.
For the fiscal years ended February 28, 2006 and 2005, and February 29,
2004, we incurred net losses of $14,484,384, $5,793,547, and $3,718,570,
respectively. We have incurred cumulative net losses from inception through
November 30, 2006 of $44,234,140. We expect to continue to incur losses as we
spend additional capital to develop and market our technologies and establish
our infrastructure and organization to support anticipated operations. We cannot
be certain whether we will ever earn a significant amount of revenues or profit,
or, if we do, that we will be able to continue earning such revenues or profit.
Also, our current financial condition may limit our ability to develop and
ultimately market our technologies. Any of these factors could cause our stock
price to decline and result in you losing a portion or all of your investment.
THE INABILITY TO RETAIN AND ATTRACT KEY PERSONNEL COULD ADVERSELY AFFECT
OUR BUSINESS AND PLAN OF OPERATIONS.
We believe that our future success will depend on the abilities and
continued service of certain of our senior management and executive officers,
particularly our President and CEO and those persons involved in the research
and development of our products. If we are unable to retain the services of
these persons, or if we are unable to attract additional qualified employees,
researchers, and consultants, we may be unable to successfully finalize and
eventually market our medical devices and other products being developed, which
will have a material adverse effect on our business.
OUR RESEARCH AND DEVELOPMENT EFFORTS MAY NOT RESULT IN COMMERCIALLY VIABLE
PRODUCTS, WHICH COULD RESULT IN A DECLINE OF OUR STOCK PRICE AND A LOSS OF YOUR
INVESTMENT.
Our technologies are in the development stage. Further research and
development efforts will be required to develop these technologies to the point
where they can be incorporated into commercially viable or salable products. We
have set forth in this prospectus our proposed research and development program
as it is currently conceived. We cannot assure you, however, that this program
will be accomplished in the order or in the time frame set forth. We reserve the
right to modify the research and development program. We may not succeed in
developing commercially viable products from our technologies. Also, our
research and development efforts are aimed at technology that will enable
certain medical procedures and biomedical devices to become safe and compatible
with MRI diagnostics. If MRI diagnostics are replaced by the healthcare
industry, our technology and products, if any, may become obsolete. If we are
not successful in developing commercially viable products or if such products
become obsolete, our ability to generate revenues from our technologies will be
severely limited. This would result in the loss of all or part of your
investment.
5
WE MAY NOT BE ABLE TO DEVELOP A MARKET FOR OUR TECHNOLOGY, WHICH WILL
LIKELY CAUSE OUR STOCK PRICE TO DECLINE.
The demand and price for our technology and related products will be based
upon the existence of markets for the technology and products and the markets
for products of others, which may utilize our technology. The extent to which we
may gain a share of our intended markets will depend, in part, upon the cost
effectiveness and performance of our technology and products when compared to
alternative technologies, which may be conventional or heretofore unknown. If
the technology or products of other companies provide more cost-effective
alternatives or otherwise outperform our technology or products, the demand for
our technology or products may be adversely affected. Our success will be
dependent upon market acceptance of our technology and related products. Failure
of our technology to achieve and maintain meaningful levels of market acceptance
would materially and adversely affect our business, financial condition, results
of operations, and market penetration. This would likely cause our stock price
to decline.
IF WE ARE NOT ABLE TO COMPETE EFFECTIVELY IN THE COMPETITIVE MEDICAL
DEVICE INDUSTRY, OUR FUTURE GROWTH AND OPERATING RESULTS WILL SUFFER.
Our future success depends on our ability to compete effectively with
manufacturers of medical devices, including major manufacturers of pacemakers
and other implantable devices that may have internal development programs. We
are an early-stage research and development company engaged exclusively in
developing our initial technologies. Products using our technologies have not
yet been commercialized and we have generated no material revenue from
operations. As a result, we may have difficulty competing with larger,
established medical device companies. Most of our potential competitors will be
established, well-known companies that have:
o substantially greater financial, technical and marketing resources;
o larger customer bases;
o better name recognition;
o related product offerings; and
o larger marketing areas.
Companies such as Medtronic Incorporated, Guidant Corporation, St. Jude
Medical, Boston Scientific Corporation, and Johnson & Johnson are major,
international providers of active medical devices currently contraindicated for
MRI. Because these companies may possibly develop MRI safe solutions for their
own product lines, they may ultimately be in competition with us. These
companies represent a wide array of medical devices and products, technologies,
and approaches. All of these companies have more resources than we do and,
therefore, a greater opportunity to develop comparable products and bring those
products to market more efficiently than we can. If we do not compete
effectively with current and future competitors, our future growth and operating
results will be adversely affected.
WE MAY NOT BE ABLE TO OBTAIN NECESSARY GOVERNMENT APPROVAL TO MARKET
OUR TECHNOLOGY WHICH WILL LIKELY CAUSE OUR STOCK PRICE TO DECLINE AND OUR
BUSINESS TO FAIL.
Our marketing partners must obtain the approval of the U.S. Food and Drug
Administration in order to market our MRI safe technology. If these approvals
are not obtained, or are significantly delayed, our ability to generate revenues
may be adversely affected and our development and marketing efforts inhibited.
This would most likely cause our stock price to decline and result in the loss
of all or part of your investment.
6
WE MAY NOT BE ABLE TO PROTECT OUR PROPRIETARY RIGHTS AND WE MAY INFRINGE
THE PROPRIETARY RIGHTS OF OTHERS. OUR INABILITY TO PROTECT OUR RIGHTS COULD
IMPAIR OUR BUSINESS AND CAUSE US TO INCUR SUBSTANTIAL EXPENSE TO ENFORCE OUR
RIGHTS.
Proprietary rights are critically important to us. We currently have 57
issued U.S. patents and over 100 U.S. and international patents pending.
Although we intend to aggressively pursue additional patent protection for our
technologies as we continue to develop them, we cannot assure you that any
additional patents will be issued. Although we will seek to defend our patents
and to protect our other proprietary rights, our actions may be inadequate to
protect our patents and other proprietary rights from infringement by others, or
to prevent others from claiming infringement by us of their patents and other
proprietary rights.
Policing unauthorized use of our technology is difficult, and some foreign
laws do not provide the same level of protection as U.S. laws. Litigation may be
necessary in the future to enforce our intellectual property rights, to protect
our trade secrets or patents that we may obtain, or to determine the validity
and scope of the proprietary rights of others. Such litigation could result in
substantial costs and diversion of resources and have a material adverse effect
on our future operating results.
FUTURE SALES OF OUR COMMON STOCK WOULD HAVE A DILUTIVE EFFECT ON CURRENT
STOCKHOLDERS AND COULD ADVERSELY IMPACT THE MARKET PRICE FOR OUR COMMON STOCK.
Sales of a substantial number of shares of our common stock, or the
perception that sales could occur, whether at the then current market price or
below the then current market price, could adversely affect prevailing market
prices for our common stock. For example, in connection with our issuance of
$7,250,000 of senior secured amortizing convertible notes on October 12, 2006,
the holders of the notes may elect to convert the notes at any time into shares
of our common stock at a price of $0.67 per share (the "Conversion Price").
Payments of interest and principal on the notes may be made, at our option, in
cash or shares of our common stock registered for resale under the Securities
Act, and if we elect to make payments on the notes in shares, those payments
will be based on the lower of (i) the Conversion Price or (ii) 90% of the volume
weighted trailing average price per share of our common stock for the 20 trading
days ending 23 trading days prior to the date we make a payment. As additional
consideration to the purchasers of the notes, we issued five-year warrants to
purchase an aggregate of 10,820,896 shares of our common stock. The first
five-year warrants allow for the purchase of 5,410,448 shares of our common
stock at an exercise price of $0.81 per share, and the second five-year warrants
allow for the purchase of 5,410,448 shares of our common stock at an exercise
price of $0.89 per share. As further consideration to the purchasers of the
notes, we issued one-year warrants to purchase up to 10,820,896 shares of our
common stock at a price of $0.67 per share. If the purchasers elect to exercise
this one-year warrant, they will also receive additional five-year warrants to
purchase our common stock equal to the number of shares purchased under this
one-year warrant, with 50% of the additional warrants having an exercise price
of 115% of the per share purchase price ($0.77 per share), and the remaining 50%
of the additional five-year warrants having an exercise price of 125% of the per
share purchase price ($0.84 per share). In addition, if we issue additional
shares of our common stock for sale in future financings, our stockholders would
experience additional dilution.
BECAUSE OUR CEO IS AN EQUITY OWNER AND MANAGER OF BIOMED SOLUTIONS, LLC, A
SIGNIFICANT CREDITOR OF BIOPHAN, AND BECAUSE SEVERAL OF OUR DIRECTORS AND
OFFICERS ARE AFFILIATES OF OTHER ENTITIES WITH WHOM BIOPHAN HAS SIGNIFICANT
BUSINESS RELATIONSHIPS, THERE MAY BE CONFLICTS OF INTEREST THAT YOU SHOULD
CONSIDER BEFORE INVESTING IN OUR COMMON STOCK.
Michael L. Weiner, our President, CEO and director, is the Manager and a
24.3% beneficial owner of Biomed Solutions LLC, a company engaged in the
business of identifying and acquiring technologies in the biomedical field for
exploitation. Mr. Weiner and Ross Kenzie, a former director of Biophan, make up
the Biomed Board of Members. Biomed is a beneficial owner of 9.65% of our
outstanding common stock and holds on aggregate of $4,430,000 face amount of our
convertible promissory notes. Mr. Weiner is also the Manager and 42.3% equity
member of Technology Innovations, LLC, which is a 57% equity member of Biomed.
Further, Mr. Weiner is on the boards of Nanoset, LLC, an entity owned in part by
Biomed and with which we have entered into a technology license agreement, and
of Myotech, LLC, an entity in which Biomed is a 13% owner. Mr. Weiner, as well
as Steven Katz, another of our directors, and John Lanzafame, our COO, are also
on the Board of NaturalNano, Inc., the largest shareholder of which is
Technology Innovations, LLC. NaturalNano has entered into a research and
development agreement with us for drug eluting technology.
7
Because of the nature of our business and the business of these other entities,
the relationships of Messrs. Weiner, Katz and Lanzafame with these other
entities may give rise to conflicts of interest with respect to certain matters
affecting us. Potential conflicts may not always be resolved in a manner that is
favorable to us. We believe it is impossible to predict the precise
circumstances under which future potential conflicts may arise and therefore
intend to address potential conflicts on a case-by-case basis. Under Nevada law,
directors have a fiduciary duty to act in good faith and with a view to the best
interests of the corporation.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. All statements other
than statements of historical facts contained in this prospectus, including
statements regarding our future results of operations and financial position,
business strategy and plans and objectives of management for future operations,
are forward-looking statements. These statements involve known and unknown
risks, uncertainties and other factors that may cause our actual results,
performance or achievements to be materially different from any future results,
performance or achievements expressed or implied by the forward-looking
statements.
In some cases, you can identify forward-looking statements by terms such
as "may," "will," "should," "expects," "plans," "anticipates," "could,"
"intends," "target," "projects," "contemplates," "believes," "estimates,"
"predicts," "potential" or "continue" or the negative of these terms or other
similar words. These statements are only predictions. We have based these
forward-looking statements largely on our current expectations and projections
about future events and financial trends that we believe may affect our
business, financial condition and results of operations. We discuss many of the
risks in greater detail under the heading "Risk Factors." Also, these
forward-looking statements represent our estimates and assumptions only as of
the date of this prospectus. Except as required by law, we assume no obligation
to update any forward-looking statements after the date of this prospectus.
This prospectus also contains estimates and other statistical data made by
independent parties and by us relating to market size and growth and other
industry data. This data involves a number of assumptions and limitations, and
you are cautioned not to give undue weight to such estimates. We have not
independently verified the statistical and other industry data generated by
independent parties and contained in this prospectus and, accordingly, we cannot
guarantee their accuracy or completeness. In addition, projections, assumptions
and estimates of our future performance and the future performance of the
industries in which we operate are necessarily subject to a high degree of
uncertainty and risk due to a variety of factors, including those described in
"Risk Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operation" and elsewhere in this prospectus. These and other factors
could cause results to differ materially from those expressed in the estimates
made by the independent parties and by us.
USE OF PROCEEDS
We will not receive any of the proceeds of the sale of shares of common
stock by the selling stockholders.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock and
do not expect to pay any cash dividends for the foreseeable future. We intend to
use future earnings, if any, in the operation and expansion of our business. In
addition, the terms of our credit facility restrict our ability to pay
dividends, and any future indebtedness that we may incur could preclude us from
paying dividends.
8
SELECTED FINANCIAL DATA
The following consolidated statements of operations data for the years
ended February 28, 2006 and 2005 and February 29, 2004 and consolidated balance
sheet data as of February 28, 2006 and 2005 have been derived from our audited
consolidated financial statements and related notes, which are included
elsewhere in this prospectus. The consolidated statements of operations data for
the years ended February 28, 2003 and 2002 and the balance sheet data as of
February 29, 2004 and February 28, 2003 and 2002 have been derived from our
audited consolidated financial statements that do not appear in this prospectus.
The consolidated statement of operations data for the nine months ended November
30, 2006 and 2005 and the balance sheet as of November 30, 2006 have been
derived from our unaudited condensed consolidated financial statements and
related notes, which are included elsewhere in the prospectus. In the opinion of
management, the unaudited interim condensed consolidated financial statements
have been prepared on the same basis as the audited consolidated financial
statements and include all adjustments necessary for the fair presentation of
our financial position and results of operations for these periods. The
consolidated selected financial data set forth below should be read in
conjunction with our consolidated financial statements, the related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus. The historical results are
not necessarily indicative of the results to be expected for any future period.
Nine Months Nine Months
Year ended Year ended Year ended Year ended Year ended Ended Ended
February 28, February 28, February 29, February 28, February 28, November 30, November 30,
Operating Data: 2006 2005 2004 2003 2002 2006 2005
-------------------------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
(Restated)
Revenues $ 1,044,861 $ -- $ 75,000 $ -- $ -- $ 881,115 $ 588,119
Research and development
expenses 6,829,142 2,629,980 1,240,439 1,373,124 949,124 6,267,272 5,103,743
General and administrative
expenses 8,451,886 3,337,185 1,911,003 1,792,593 2,248,065 4,923,853 6,567,924
Other income (expense) (854,376) 173,618 (642,128) (272,535) (508,728) (3,641,066) (724,469)
Loss from continuing
operations before
minority interest in
net loss of Myotech, LLC (15,090,543) (5,793,547) (3,718,570) (3,438,252) (3,705,917) (13,951,076) (11,808,017)
Minority interest in
net loss of Myotech, LLC 606,159 -- -- -- -- 1,686,594 --
------------ ----------- ----------- ----------- ----------- ------------ ------------
Net loss $(14,484,384) $(5,793,547) $(3,718,570) $(3,438,252) $(3,705,917) $(12,264,482) $(11,808,017)
============ =========== =========== =========== =========== ============ ============
Loss per common share -
basic and diluted $ (0.19) $ (0.08) $ (0.08) $ (0.11) $ (0.14) $ (0.16) $ (0.16)
============ =========== =========== =========== =========== ============ ============
Weighted average shares
outstanding 75,787,052 69,263,893 44,017,010 31,731,051 27,000,962 78,180,322 75,430,870
============ =========== =========== =========== =========== ============ ============
February 28, February 28, February 29, February 28, February 28, November 30, November 30,
Balance Sheet Data: 2006 2005 2004 2003 2002 2006 2005
(Restated) (Restated)
--------------------- ------------ ------------ ------------ ------------ ------------ ----------- -----------
Current assets $ 1,880,826 $2,007,181 $2,077,307 $ 476,353 $672,823 $ 5,145,949 $ 2,894,931
Intangible assets, net 25,854,850 -- -- -- -- 24,761,317 26,219,360
Total assets 27,968,066 3,181,370 2,231,345 683,056 866,638 31,787,957 29,345,770
Current liabilities 3,231,158 1,462,103 254,058 796,187 645,389 6,924,387 2,944,097
Long-term liabilities -0- -0- -0- 83,333 -0- 8,893,632 -0-
Minority interest 15,189,109 -- -- -- -- 13,552,378 15,752,248
Stockholders' equity (deficit) 9,547,799 1,719,267 1,977,287 (196,464) 221,249 2,417,560 10,649,425
Working capital (deficiency) (1,350,332) 545,078 1,823,249 (319,834) 27,434 (1,778,438) (49,166)
9
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with our consolidated
financial statements and related notes that appear elsewhere in this prospectus.
In addition to historical consolidated financial information, the following
discussion contains forward-looking statements that reflect our plans, estimates
and beliefs. Our actual results could differ materially from those discussed in
the forward-looking statements. Factors that could cause or contribute to these
differences include those discussed below and elsewhere in this prospectus,
particularly in "Risk Factors."
Overview
We are a technology development company with a strong focus on solving
real-world technical challenges facing the medical device industry. We currently
have 57 issued U.S. patents and over 100 U.S. and international patents pending.
We believe that a strong intellectual property portfolio is vital to our ability
to achieve and maintain royalties and product sales to major industrial partners
across our product lines.
When selecting a market opportunity to address, we generate a wide range
of potential technical solutions. We strive to assure that each technical
solution we pursue is well-protected by intellectual property to ensure that we
have the capability to effectively market our technologies. Whenever practical,
we attempt to develop and patent multiple solutions for any given technology
requirement. This is done both to strengthen our position against competitors,
and to be in a position to offer multiple manufacturers alternative solutions,
such as for MRI safety of pacemakers, or MRI visibility of vascular stents, as
we introduce our technologies to the market. This approach has resulted in the
development of a range of core technologies, in various related segments of the
medical device market. We are aggressive in development and defense of our
intellectual property.
We also continue development of a new cardiac assist device, the MYO-VAD,
through our relationship with Myotech, LLC. The MYO-VAD is a life-saving device
that provides benefits and competitive advantages not possible with other
cardiac assist devices. In the past, this technology has saved human lives and
holds the potential for the treatment of multiple forms of acute and chronic
heart failure.
10
Revenue
We currently derive revenue from development contract payments and license
fees from Boston Scientific Scimed and operating revenues from our European
subsidiary, consisting primarily of MRI-related testing and consulting services
to medical device manufacturers.
Research and Development Expenses
Research and development expenses consist primarily of:
o salaries and related costs for our research and development employees at
our U.S. and European sites;
o funding for various research projects, often employing the use of
consulting scientists and engineers;
o legal fees to file, renew, and defend our patent estate; and
o license fees for access to certain patent technologies developed by
others.
General and Administrative Expenses
General and administrative expenses consist primarily of:
o salaries and related costs of executives, administrative and marketing
personnel;
o professional service costs;
o public / investor relations;
o travel and related costs; and
o occupancy and other overhead costs.
11
Stock-Based Compensation Expenses
Effective March 1, 2006, the Company adopted SFAS No. 123 (revised),
"Share-Based Payment" (SFAS 123(R)) utilizing the modified prospective approach.
Prior to the adoption of SFAS 123(R), stock option grants to employees and
directors were accounted for in accordance with APB Opinion No. 25, "Accounting
for Stock Issued to Employees" (the intrinsic value method) and the
disclosure-only provisions of SFAS 123, "Accounting for Stock-Based
Compensation." Accordingly, employee compensation expense was recognized only to
the extent that the fair value of our common stock on the date of grant exceeded
the stock option exercise price.
Under the modified prospective approach, SFAS 123(R) applies to new grants
and to grants that were outstanding on February 28, 2006 that are subsequently
modified, repurchased or cancelled. Under the modified prospective approach,
compensation cost recognized in the first three quarters of fiscal 2007 includes
compensation cost for all share-based payments granted prior to, but not yet
vested as of February 28, 2006, based on the grant-date fair value estimated in
accordance with the original provisions of SFAS 123, and compensation cost for
all share-based payments granted subsequent to February 28, 2006, based on the
grant-date fair value estimated in accordance with the provisions of SFAS
123(R). Prior periods were not restated to reflect the impact of adopting the
new standard.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America. The
preparation of these consolidated financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenue, costs and expenses, and related disclosures. We evaluate
our estimates and assumptions on an ongoing basis. Our actual results may differ
from these estimates.
We believe that of our significant accounting policies, which are
described in the notes to our consolidated financial statements, the following
accounting policies involve a greater degree of judgment and complexity.
Accordingly, we believe that the following accounting policies are the most
critical to aid in fully understanding and evaluating our consolidated financial
condition and results of operations.
Revenue Recognition
We earn and recognize revenue under development agreements when the phase
of the agreement to which amounts relate is completed and we have 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.
We recognize initial license fees over the term of the related agreement.
Revenue related to a performance milestone is recognized upon the achievement of
the milestone, as defined in the respective agreements.
We also recognize revenues from testing services and consulting fees as
services are performed.
Liquidity and Capital Resources
Our affiliate Biomed Solutions, LLC, has provided us with a $5 million
line of credit. Under the line of credit agreement, advances may be drawn down
in such amounts and at such times as we determine upon 15 days prior notice to
Biomed, except that we may not draw down more than $1,500,000 in any 30-day
period. Amounts borrowed will bear interest at the rate of 8% per annum and are
convertible into shares of our common stock at the rate of $1.46 per share.
Biomed's obligation to lend to us under the line of credit agreement expires on
June 30, 2007, on which date the entire amount borrowed by us (and not converted
into shares of our common stock) becomes due and payable. The balance of
borrowings on the line was $3,930,000 at November 30, 2006. Biomed is headed by
our CEO, Michael Weiner, who is also a substantial beneficial owner of Biomed.
The Biomed line of credit is on terms we believe to be competitive with
comparable transactions involving unaffiliated parties and was approved
unanimously by the disinterested members of our Board of Directors.
12
On May 27, 2005, we entered into a Line of Credit Agreement with Biomed,
whereby Biomed agreed to provide a line of credit facility of up to $2 million.
Borrowings under the line bear interest at 8% per annum, are payable on demand
after August 31, 2006 and are convertible, at Biomed's election into the
Company's common stock at 90% of the average closing price for the 20 trading
days preceding the date of borrowings under the line. In June 2005, we borrowed
the entire $2 million under the line in two separate draws of $1 million each,
in accordance with the agreement. On August 31, 2005, Biomed elected to convert
$1 million of the note plus accrued interest into 480,899 shares of common stock
at which time, the remaining discount related to the $1 million portion of the
loan was fully expensed. On October 7, 2005, we repaid $500,000 of principal and
all accrued interest on the loan. The balance of borrowings on the line was
$500,000 at November 30, 2006.
On October 11, 2006, in connection with our Securities Purchase Agreement dated
October 11, 2006 with Iroquois Master Fund Ltd and other private investors (the
"Purchase Agreement"), we amended our January 24, 2006 Line of Credit Agreement
(the "Biomed Line of Credit Agreement") with Biomed and the Convertible
Promissory Note in the original principal amount of $5,000,000 issued by us to
Biomed on January 24, 2006 pursuant to the Biomed Line of Credit Agreement (the
"$5,000,000 Biomed Note"). The amendments reduce the price at which the
$5,000,000 Biomed Note is convertible into shares of our common stock from $1.46
per share to a conversion price of $0.67. The amendments also eliminate our
obligation to draw down the entire credit facility. In connection with the
Purchase Agreement, we also entered into a Subordination and Standstill
Agreement (the "Subordination Agreement") with Biomed and the investors who are
parties to the Purchase Agreement, pursuant to which Biomed agreed (i) to
subordinate its rights to payment under the $5,000,000 Biomed Note and the
Convertible Promissory Note in the original principal amount of $2,000,000
issued by us to Biomed on May 27, 2005 to the rights of the investors under the
Notes and (ii) to convert the entire outstanding amount of principal and
interest due under the $5,000,000 Biomed Note in excess of $700,000 into shares
of our common stock upon the effectiveness of an amendment to our Articles of
Incorporation to increase the number of our authorized shares which we have
agreed, in the Purchase Agreement, to propose to our shareholders.
As described in greater detail under the heading "Common Stock Subscribed"
and "Stockholders' Equity" in the "Notes to Condensed Consolidated Financial
Statements", we are a party to a Securities Purchase Agreement dated May 27,
2005 (the "SBI Agreement") with SBI Brightline XI, LLC for a $30 million fixed
price financing involving the sale to SBI of up to 10,000,000 shares of our
common stock. We elected to sell the first tranche of 1 million shares at $2 per
share on May 23, 2006; the funds from the sale of this first tranche have been
received. We elected to sell the second tranche of 1 million shares at $2 per
share on July 21, 2006. To date $1,175,000 of the funds from the sale of this
tranche has been received and 587,500 additional shares have been issued. On
October 11, 2006, we elected to exercise all of our remaining put rights,
requiring SBI to purchase the remaining tranches at a price of $26,000,000. SBI
has failed to meet its obligation to purchase these shares.
We believe that SBI's failure to purchase all of the shares which we
elected to sell to them on July 21, 2006 or any of the shares which we elected
to sell to them on October 11, 2006 constitutes a breach of SBI's contractual
obligations under the SBI Agreement. Under the SBI Agreement, SBI is irrevocably
bound to purchase the shares in the amounts and at the times determined by us.
We have been engaged in discussions with SBI in an effort to address SBI's
default. In our Purchase Agreement with Iroquois Master Fund Ltd and other
investors (described above) we agreed (i) to enforce all of our rights and
remedies under the SBI Agreement in connection with the breach by SBI, and (ii)
not to agree to any settlement, amendment, waiver or consent under the SBI
Agreement without the prior written consent of Iroquois.
Effective November 30, 2005, we entered into a Securities Purchase
Agreement for the acquisition of an initial 35% interest in Myotech, LLC
("Myotech"), a New York limited liability company, whereby we exchanged
4,923,080 shares of our common stock for 3,768,488 Class A (voting) units of
Myotech. Based upon the terms of the Securities Purchase Agreement, we were
obligated to purchase for cash consideration of $2,225,000 an additional 811,037
Class A units. We may also elect to acquire up to an additional 3,563,097 Class
A units for further cash consideration of up to $9,775,000 over a 24-month
period, which may result in our owning a majority interest in Myotech. During
the three month period ended February 28, 2006, we provided $1,185,000 of
additional funding to Myotech in exchange for 431,946 Class A units, which
increased our ownership to 38%. During the nine month period ended November 30,
2006, we provided $1,040,000 of additional funding, satisfying the mandatory
$2,225,000 cash contribution, and received in exchange 379,091 Class A units of
Myotech. We also provided an additional $577,447 to Myotech in the quarter ended
November 30, 2006 for 210,747 additional Class A units, which increased our
ownership to 41.5%, for a total investment of $12,700,746 at November 30, 2006.
Additional investments of $1,032,410 have been made since November 30, 2006 in
exchange for 376,325 additional Class A units, which raised our ownership
percentage to 43.5% as of January 31, 2007.
We have determined that Myotech is a Variable Interest Entity within the
meaning of FIN 46(R) and that we are the primary beneficiary (as defined in FIN
46(R)). Consequently, the financial statements of Myotech have been consolidated
with our consolidated financial statements for all periods ending on or after
November 30, 2005, the date of our initial investment in Myotech.
13
On October 11, 2006, we entered into a Securities Purchase Agreement (the
"Purchase Agreement") with 10 private investors led by Iroquois Master Fund Ltd
("Iroquois"). Pursuant to the Purchase Agreement, on October 12, 2006 we issued
$7,250,000 of Senior Secured Convertible Notes (the "Notes") to the investors
and received proceeds of $6,219,880 after paying estimated fees and expenses of
$1,030,120 related to the transaction. The holders of the Notes may elect to
convert the Notes at any time into shares of our common stock based upon a price
of $0.67 per share (the "Conversion Price"). Interest on the outstanding
principal amount under the Notes is payable quarterly at a rate equal to the
six-month London InterBank Overnight Rate plus 500 basis points, with a minimum
rate of 10% per annum and a maximum rate of 12% per annum, payable at our option
in cash or shares of our common stock registered for resale under the Securities
Act of 1933, as amended (the "Securities Act"). If we elect to make an interest
payment in common stock, the number of shares issuable by us will be based upon
the lower of (i) 90% of the 20-day trailing average volume weighted average
price per share as reported on Bloomberg LP (the "VWAPS") or (ii) the Conversion
Price. Principal on the Notes amortizes and payments are due in 33 equal monthly
installments commencing four months following issuance of the Notes, and may be
made at our option in cash or shares of our common stock registered for resale
under the Securities Act. If we elect to make a principal payment in common
stock, the number of shares issuable by us will be based upon the lower of (i)
87.5% of the 15-day trailing VWAPS prior to the principal payment date or (ii)
the Conversion Price. Our obligations under the Notes are secured by a first
priority security interest in substantially all of our assets pursuant to a
Security Agreement dated as of October 11, 2006 among us, the investors and
Iroquois, as agent for the investors (the "Security Agreement").
As further consideration to the investors, we issued to the investors
one-year warrants to purchase an aggregate of 10,820,896 shares of our common
stock at a price of $0.67 per share. If the investors elect to exercise these
one-year warrants, they will also receive additional five-year warrants to
purchase the shares of our common stock equal to the number of shares purchased
under the one-year warrants, with 50% of the additional warrants having an
exercise price of 115% of the per share purchase price, and the remaining 50% of
the additional five-year warrants having an exercise price of 125% of the per
share purchase price. We also issued to the investors five-year warrants to
purchase an aggregate of 10,820,896 shares of our common stock. The first
five-year warrants allow for the purchase of 5,410,448 shares of our common
stock at an exercise price of $0.81 per share, and the second five-year warrants
allow for the purchase of 5,410,448 shares of our common stock at an exercise
price of $0.89 per share. The warrants contain anti-dilution protection that,
should we issue equity or equity-linked securities at a price per common share
below the exercise price of the five-year warrants, will automatically adjust
the exercise price of the warrants to the price at which we issue such equity or
equity-linked securities.
We further agreed to register for resale under the Securities Act the
common stock issuable upon the exercise of the warrants and any shares of common
stock we may issue to the holders of the Notes in connection with payments of
interest and principal, or which we are obligated to issue upon any conversion
of the Notes at the option of the holders.
On February 21, 2007, we entered into a Forbearance Agreement (the
"Forbearance Agreement") with the investors pursuant to which the investors
agreed that, during the period commencing on February 16, 2007 and ending on the
earlier of (i) March 31, 2007 or (ii) the date on which any Termination Event
(as defined in the Forbearance Agreement) first occurs (the "Forbearance
Period"), they will forbear from exercising any and all of the rights and
remedies which they may have against us or any of our assets under the Notes or
the Purchase Agreement or at law or in equity as a result of any default under
the Notes or as a result of the occurrence of certain events with respect to the
Purchase Agreement. In exchange for entering into the Forbearance Agreement, we
issued pro rata to the investors three-year warrants for the purchase of an
aggregate of 60,000 shares of our common stock at an exercise price of $0.51 per
share (the "Fee Warrants").
Upon the issuance of the Fee Warrants, the exercise prices of the
five-year warrants issued to the investors pursuant to the Purchase Agreement
(the "Original Warrants") for the purchase of an aggregate of 10,820,896 shares
of our common stock were automatically adjusted from $0.81 per share and $0.89
per share, respectively, to $0.51 per share, and the number of shares of our
common stock issuable upon exercise of the Original Warrants was automatically
adjusted, proportionately, to an aggregate of 18,034,830 shares. In the
Forbearance Agreement, the investors waived, with respect to the issuance of the
Fee Warrants, application of similar anti-dilution adjustments contained in the
Notes and in a third series of warrants for the purchase, on or before October
12, 2007, of an aggregate of 10,820,896 additional shares of our common stock at
an exercise price of $0.67 per share (the "One Year Warrants"). C.E. Unterberg
Towbin, which holds a warrant for the purchase of 865,672 shares of our common
stock at an exercise price of $0.67 per share, issued to it in connection with
its services as exclusive placement agent under the Purchase Agreement,
separately agreed to waive, with respect to the issuance of the Fee Warrants,
application of the anti-dilution provisions set forth in that warrant. Because
the anti-dilution adjustment to the Original Warrants will be accounted for as a
modification of the Original Warrants, we expect to record an expense in the
period ended February 28, 2007. In accordance with the guidance provided by EITF
00-19, Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock, we expect to record a liability
in the period ended February 28, 2007 relating to the issuance of the Fee
Warrants and the increase in the number of shares of our common stock issuble
upon exercise of the Original Warrants.
Based on our current cash, anticipated licensing revenues and anticipated
expenditures, we believe that we have adequate working capital resources for the
upcoming four to six months of operations.
Accounting Requirements Resulting from the Securities Purchase Agreement dated
October 11, 2006
The accounting treatment for the $7,250,000 in Senior Secured Convertible
Notes and related warrants issued pursuant to the Securities Purchase Agreement
dated October 11, 2006 among Biophan and the Investors named therein (the
"Purchase Agreement") must be in accordance with EITF 00-19, Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock and EITF 00-27 Application of Issue No. 98-5 to Certain
Convertible Instruments. EITF 00-19 requires freestanding contracts that are
settled in a company's own stock to be designated as an equity instrument, an
asset or a liability. A contract designated as a liability must be carried at
fair value with any changes in fair value recorded in results of operations for
the current period. We have determined that the warrants issued pursuant to the
Purchase Agreement, due to the registration rights requirements contained
therein, as well as other outstanding warrants, due to the insufficiency of the
Company's current number of authorized and unissued shares of common stock,
should be designated as a liability. Accordingly, using the Black-Scholes method
to compute the fair value, we recorded a fair value of warrant liability of $8.6
million. Further, we recognized the allocation of value to the warrants by
recording a $7,250,000 discount against the Notes. The discount will be
amortized to Interest Expense over the term of the Note, using the effective
interest method.
In addition, on October 11, 2006, in connection with our Securities
Purchase Agreement dated October 11, 2006 with Iroquois Master Fund Ltd and
other private investors (the "Purchase Agreement"), we amended our January 24,
2006 Line of Credit Agreement (the "Biomed Line of Credit Agreement") with
Biomed and the Convertible Promissory Note in the original principal amount of
$5,000,000 issued by us to Biomed on January 24, 2006 pursuant to the Biomed
Line of Credit Agreement (the "$5,000,000 Biomed Note"). The amendment reduced
the price at which the $5,000,000 Biomed Note is convertible into shares of our
Common Stock from $1.46 per share to a conversion price of $0.67. In connection
with the Purchase Agreement, we also entered into a Subordination and Standstill
Agreement (the "Subordination Agreement") with Biomed and the investors who are
parties to the Purchase Agreement, pursuant to which Biomed agreed (i) to
subordinate its rights to payment under the $5,000,000 Biomed Note and the
Convertible Promissory Note in the original principal amount of $2,000,000
issued by us to Biomed on May 27, 2005 to the rights of the investors under the
Notes and (ii) to convert the entire outstanding amount of principal and
interest due under the $5,000,000 Biomed Note in excess of $700,000 into shares
of our common stock upon the effectiveness of an amendment to our Articles of
Incorporation to increase the number of our authorized shares which we have
agreed, in the Purchase Agreement, to propose to our stockholders. For
accounting purposes, these amendments have been treated, in substance, as an
extinguishment of the old debt. Accordingly, the remaining unamortized discount
on the old debt of $1,098,442 was written off, a loss on extinguishment of
$670,053 on the old debt was recognized, and a discount was recorded on the new
debt of $175,970 during the quarter ended November 30, 2006.
The warrants subject to the Subordination Agreement were not reclassified
because Biomed agreed not to exercise them until the proposed increase in the
number of authorized shares is effective, and Biomed has agreed not to require a
cash settlement in the event the number of authorized shares is not increased.
Accounting for Income Taxes
We are a development stage company with accumulated deficits through
November 30, 2006 of $44,234,140. We plan to use our net operating loss
carryforwards to offset our future taxable net income until the accumulated net
operating losses are exhausted.
14
Overview of Results of Operations
The following table sets forth our results of operations for the periods
shown:
Year Ended
-------------------------------------------- Nine Months Ended
February 28, February 29, November 30,
---------------------------- ------------ ----------------------------
2006 2005 2004 2006 2005
------------ ------------ ------------ ------------ ------------
(Restated)
Revenues:
Development payments $ 225,000 $ -- $ 75,000 $ -- $ 225,000
License fees 479,166 -- -- 500,000 250,000
Testing services and consulting fees 340,695 -- -- 381,115 113,119
------------ ------------ ------------ ------------ ------------
1,044,861 -- 75,000 881,115 588,119
Operating expenses:
Research and development 6,829,142 2,629,980 1,240,439 6,267,272 5,103,743
General and administrative 8,451,886 3,337,185 1,911,003 4,923,853 6,567,924
------------ ------------ ------------ ------------ ------------
15,281,028 5,967,165 3,151,442 11,191,125 11,671,667
------------ ------------ ------------ ------------ ------------
Operating loss (14,236,167) (5,967,165) (3,076,442) (10,310,010) (11,083,548)
Other income(expense):
Interest income 70,701 11,869 1,815 46,303 60,638
Interest expense (1,140,866) -- (729,527) (2,573,595) (1,010,648)
Additional expense related to warrants -- -- -- (7,304,105) --
Change in fair value of warrant liability -- -- -- 6,722,184 --
Loss on extinguishment of debt - related
party -- -- -- (670,053) --
Other income 215,789 161,749 85,584 138,200 225,541
Other expense -- -- -- -- --
------------ ------------ ------------ ------------ ------------
(854,376) 173,618 (642,128) (3,641,066) (724,469)
------------ ------------ ------------ ------------ ------------
Loss from continuing operations before minority
interest in net loss of Myotech, LLC (15,090,543) (5,793,547) (3,718,570) (13,951,076) (11,808,017)
Minority interest in net loss of Myotech, LLC 606,159 -- -- 1,686,594 --
------------ ------------ ------------ ------------ ------------
Loss from continuing operations (14,484,384) (5,793,547) (3,718,570) (12,264,482) (11,808,017)
------------ ------------ ------------ ------------ ------------
Net loss $(14,484,384) $ (5,793,547) $ (3,718,570) $(12,264,482) $(11,808,017)
============ ============ ============ ============ ============
Loss per common share - basic and diluted $ (0.19) $ (0.08) $ (0.08) $ (0.16) $ (0.16)
============ ============ ============ ============ ============
Weighted average shares outstanding 75,787,052 69,263,893 44,017,010 78,180,322 75,430,870
============ ============ ============ ============ ============
Comparison of the Nine Months Ended November 30, 2006 to the Nine Months Ended
November 30, 2005.
Revenues: Revenues were $0.881 million for the nine months ended November 30,
2006 as compared to $0.588 million revenues for the nine months ended November
30, 2005 due to development contract payments and license fees from Boston
Scientific Scimed, and operating revenues from our European subsidiary, which
consisted primarily of MRI-related testing and consulting services to medical
device manufacturers.
Operating Expenses
Research and Development. Research and development expenses increased by 23%, to
approximately $ 6.267 million for the nine months ended November 30, 2006 from
approximately $5.104 million for the nine months ended November 30, 2005. Stock
options expense (noncash expense) amounted to $0.472 million in the nine months
ended November 30, 2006 and $2.081 million in the nine months ended November 30,
2005 due primarily to the accounting for contingent stock options in the nine
months ended November 30, 2005. Without consideration for expenses related to
stock options, the expense for the nine months ended November 30, 2006 would
have been $5.795 million compared to $3.022 million for the same period in 2005,
or a 92% increase of $2.772 million.
Because we consolidated Myotech LLC at November 30, 2005, the nine months ended
November 30, 2006 include approximately $1.8 million of operating expenses from
Myotech and $1.033 million in noncash intangible assets amortization pertaining
to Myotech. With the inclusion of Myotech, and aside from the increase due to
amortization expenses, the increase in expenses is primarily attributable to
spending on certain research projects of approximately $2.0 million and
increased salary-related expenses of approximately $0.375 million, partially
offset by reduced license and patent attorney fees of approximately $0.615
million.
General and Administrative. General and administrative expenses decreased by 25%
to approximately $4.924 million for the nine months ended November 30, 2006 from
approximately $6.568 million for the nine months ended November 30, 2005. Stock
options expense (noncash expense) amounted to $0.641 million in the nine months
ended November 30, 2006 and $2.563 million in the nine months ended November 30,
2005 due primarily to the accounting for contingent stock options in the nine
months ended November 30, 2005. Without consideration of expenses related to
stock options, and without the inclusion of Myotech, the expense for the nine
months ended November 30, 2006 would have been $4.283 million compared to $4.005
million, or a 7% increase of $0.278 million from the same period in 2005.
Because we consolidated Myotech LLC at November 30, 2005, the nine months ended
November 30, 2006 include approximately $0.396 million of operating expenses
from Myotech. With the inclusion of Myotech, expenses increased by 7% and the
increase in expenses is primarily attributable to spending for salaries and
related costs of $0.380 million and increased outside financial compliance,
audit, legal and other professional services of $0.350 million, partially
offset by reduced spending in most other general and administrative expense
categories.
Tabular Disclosure of Contractual Obligations
The following table sets forth information, as of February 28, 2006, our
most recent fiscal year end, with respect to our known contractual obligations
reflected on our Balance Sheet as of such date:
Payment Due By Period
--------------------------------------------------------------
Less Than 1 - 3 3 - 5 More Than
Total 1 Year Years Years 5 Years
---------- ---------- ---------- ---------- ----------
Contractual Obligations:
Long-Term Debt $2,800,000 $ -0- $2,800,000 $ -0- $ -0-
Capital Lease Obligations $ -0- $ -0- $-0- $ -0- $ -0-
Operating Lease Obligations $ -0- $ -0- $-0- $ -0- $ -0-
Purchase Obligations $ -0- $ -0- $-0- $ -0- $ -0-
Other Long-Term Liabilities Reflected on the $ -0- $ -0- $-0- $ -0- $ -0-
Registrant's Balance Sheet under GAAP *
---------- ---------- ---------- ---------- ----------
Total $2,800,000 $ -0- $2,800,000 $ -0- $ -0-
========== ========== ========== ========== ==========
* As of February 28, 2006 we had the following commitments which are not
required by GAAP to be reflected on our Balance Sheet:
Lease Obligation
We are obligated under operating leases for office space expiring
January 30, 2008. We may terminate the lease upon ninety days prior written
notice to the landlord. Following are the minimum future payments under this
lease for the years ending February 28:
2007 $161,038
2008 98,672
--------
$259,710
========
Rent expense, net of subleases, charged to operations under these
operating leases aggregated $70,775, $58,546 and $57,899 for the years ended
February 28, 2006, 2005 and February 29, 2004, respectively. Rent expense, net
of subleases, charged to operations for the period from August 1, 1968 (Date of
Inception) to February 28, 2006 was $255,465.
Cooperation Agreement
Our subsidiary, Biophan Europe, had a cooperation agreement with a German
university to test and further develop coronary stents whereby the parties
provide personnel and know-how. The agreement terminated May 31, 2006. Biophan
Europe was committed to assume costs of the project up to an amount of
approximately $133,000.
License Agreements
We are obligated under seven license or royalty agreements for patents
that expire at various dates through 2025. These agreements may be terminated by
us with 60 days written notice. Aggregate minimum future payments over the
remaining life of the patents under these agreements total $6,352,500.
License/royalty expense charged to operations was $594,890, $89,880 and $15,000
for the years ended February 28, 2006, 2005 and February 29, 2004, respectively.
Employment Agreements
We have employment agreements with our executive officers that renew
annually unless terminated by either party. Such agreements, which have been
revised from time to time, provide for minimum salary levels, adjusted annually
for cost-of-living changes, as well as for incentive bonuses that are payable if
specified management goals are attained.
Also, we have an employment contract with an officer that expires November
9, 2007, and Biophan Europe has an employment agreement with a key employee that
expires on February 24, 2009. These agreements provide for base salaries,
bonuses based on attaining certain milestones, a restricted stock grant and
stock options. The aggregate commitment for future base salaries at February 28,
2006, excluding bonuses and other awards approximates $615,000.
Investment in Myotech, LLC
Effective November 30, 2005, we entered into a Securities Purchase
Agreement for the acquisition of an initial 35% interest in Myotech, LLC
("Myotech"), a New York limited liability company, whereby we exchanged
4,923,080 shares of our common stock for 3,768,488 Class A (voting) units of
Myotech.
Based upon the terms of the Securities Purchase Agreement, we were
obligated to purchase for cash consideration of $2,225,000 an additional 811,037
Class A units. We may also elect to acquire up to an additional 3,563,097 Class
A units for further cash consideration of up to $9,775,000, over a 24-month
period, which may result in our owning a majority interest in Myotech. During
the three month period ended February 28, 2006, we provided $1,185,000 of
additional funding for 431,946 additional Class A units of Myotech. During the
nine month period ended November 30, 2006, we provided $1,040,000 of additional
funding satisfying the mandatory $2,225,000 cash contribution, and received
in exchange 379,091 additional Class A units of Myotech. In addition, Biophan
has also provided an additional investment of $577,447 to Myotech in the quarter
ended November 30, 2006 for 210,747 additional Class A units, which increased
our ownership to 41.5%, for a total investment of $12,700,746 at November 30,
2006. Additional investments of $1,032,410 have been made since November 30,
2006 for 376,325 additional Class A units, which raised our ownership percentage
to 43.5% at February 23, 2007.
We have determined that Myotech is a Variable Interest Entity within the
meaning of FIN 46(R) and that we are the primary beneficiary (as defined in FIN
46(R)). Consequently, the financial statements of Myotech have been consolidated
with our consolidated financial statements for all periods ending on or after
November 30, 2005, the date of our initial investment in Myotech.
15
Other Income (Expense)
Interest Expense. We incurred interest expense amounting to approximately $2.574
million for the nine months ended November 30, 2006 compared to $1.011 million
of expense for the nine months ended November 30, 2005. The increased expense
(noncash) is attributed to the write-off of $1.1 million of the remaining
unamortized discount on a note to Biomed Solutions, LLC due to the substantial
amendment of the note.
Fair Value of Warrant Liability. In accordance with the guidance provided by
EITF 00-19, Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock, we have recorded a liability of
$8,191,418 for the fair value of the warrants related to the Senior Secured
Convertible Notes at November 30, 2006 in accordance with the accounting for the
registration rights contained in the Securities Purchase Agreement and because
we currently do not have sufficient available authorized shares to effect full
conversion of the Notes and exercise of the related warrants and thus we would
be required to settle the contract in cash. In addition, since we currently do
not have sufficient available authorized shares to execute a potential exercise
of other outstanding warrants if requested to do so by the holders, we could be
required to settle any exercise requests in cash. Therefore, we reclassified
warrants with an approximate value of $756,000 from equity to the warrant
liability. The fair value of this amount was $396,378 at November 30, 2006. The
Company expects to seek stockholder approval to increase the authorized shares
at a Special Meeting to be scheduled within the next three months. The total
fair value of warrant liability, originally recorded at $15,309,980 on October
12, 2006, was adjusted by $6,722,184 to $8,587,796 at November 30, 2006. The
fair value of the warrant liability is volatile. For a further explanation on
the factors and assumptions included in the Black-Scholes model to derive the
fair values, please refer to the notes to the condensed consolidated financial
statements under the heading 'Fair Value of Warrant Liability'.
Loss on Extinguishment of Debt. We incurred a loss on the extinguishment of the
note (noncash) to Biomed Solutions, LLC due to the substantial amendment to the
note to Biomed, amounting to $0.670 million.
Minority Interest in Net Loss of Myotech LLC. The loss of $1.687 million is a
pro rata share of the loss incurred by Myotech, LLC attributable to minority
interests for the nine months ended November 30, 2006. There was no investment
in Myotech LLC or loss on investment in Myotech LLC for the nine months ended
November 30, 2005. As further described under the heading "Investment in Myotech
LLC" in the "Notes to Condensed Consolidated Financial Statements" the Company
holds a 41.5% interest in Myotech LLC, valued on our balance sheet at November
30, 2006 at $12.701 million, which we must consolidate as a variable interest
entity since the Company is deemed to be the primary beneficiary in the
relationship with Myotech.
Comparison of the Years Ended February 28, 2006 and 2005
Revenues
Revenues for the year ended February 28, 2006 were $1.045 million compared
to no revenues in 2005. Our 2006 revenues pertain to $0.704 million in
development payments and license fees from our licensing agreement with Boston
Scientific Scimed, Inc. and $0.341 million from our MRI testing services and
consulting fees in Biophan Europe.
Operating Expenses
Research and Development. These expenses primarily consist of the
personnel-related, technical consulting, professional fees for patent attorneys,
and license fees. For the year ended February 28, 2006, these expenses increased
by 160%, or $4.199 million, to $6.829 million compared to $2.630 million for
2005. Because we consolidated Myotech, LLC at November 30, 2005, the fourth
quarter included $0.443 million of Myotech operational expenses and $0.344 of
Myotech intangible assets amortization. Excluding these expenses, the
year-to-year comparison would have reflected an increase of 130%,or $3.411
million The most significant increase was caused by $1.948 million in non-cash
contingent stock option expense due to the vesting of contingent options that
vested upon the achievement of specified performance-based milestones. With the
inclusion of the Myotech expenses, we also increased funding of various research
and development projects by $0.846 million; we incurred increased licensing fees
by $0.515 million, and increased expenses for additional professional staff and
salary increases for current staff of $0.538 million.
General and Administrative. General and administrative expenses include the
costs of personnel-related expenses for the administrative, legal, finance,
information technology, and communications functions. For the year ended
February 28, 2006, these expenses rose by 153%, or $5.115 million to $8.452
million compared to $3.337 million for 2005. Because we consolidated Myotech LLC
at November 30, 2005, the fourth quarter included $0.165 million of Myotech
operational expenses. The most significant increase in expense was caused by
approximately $2.296 million in non-cash contingent stock option expense due to
the vesting of contingent options that vested upon the achievement of specified
performance-based milestones. With the inclusion of the Myotech expenses,
outside services increased by $1.666 million, consisting primarily of additional
legal and financial consulting and communications expenses, combined with $0.358
million in added costs for new staff and increased salaries, and $0.518 million
for travel and other administrative expenses.
16
Other Income (Expense)
Interest Expense. We incurred interest expense amounting to approximately $1.141
million primarily related to a $5 million line of credit from Biomed Solutions,
LLC ("Biomed"), which included a beneficial conversion feature of approximately
$1.0 million. The discount is being amortized over the term of the line of
credit. The Company incurred no interest expense in 2005
Minority Interest. This amount is the pro rata share of the loss incurred by
Myotech LLC for the 4th quarter of fiscal 2006 at which time Myotech is
consolidated with the Company. For further information regarding the basis of
consolidation of Myotech, please refer to Footnote 7 in the Notes to the
Consolidated Financial Statements.
Comparison of the Years Ended February 28, 2005 and February 29, 2004
Revenues
The Company recorded no revenues for the year ended February 28, 2005, and
$75,000 in revenues from a single development payment in the year ended February
29, 2004.
Operating Expenses
Research and Development. Research and development expenses primarily
consist of the personnel-related, technical consulting, professional fees for
patent attorneys, and license fees. For the year ended February 28, 2005, these
expenses increased by $1.39 million or from $1.240 million to $2.630 million.
The increased expenses were due primarily to approximately $0.4 million in
increased outside patent attorney services, $0.5 million in increased stent
project funding with Alfred University, and $0.2 million in increased technical
consulting expenses.
General and Administrative. General and administrative expenses include
the costs of personnel and related expenses for the administrative, legal,
finance, information technology and communications functions. For the year ended
February 28, 2005, these expenses rose by approximately $1.4 million to $3.337
million compared to $1.911 million for 2004. This increase was due primarily to
$1.0 million in communications expenses and an increase of $0.3 million in legal
and financial consulting fees.
Other Income (Expense)
Interest Expense. We incurred no interest expense in 2005 and $0.730
million in 2004. We recorded a discount on a note from Biomed due to a
beneficial conversion feature on the note. The discount was amortized over the
term of the note.
BUSINESS
OVERVIEW
Biophan Technologies, Inc. is a technology development company with a
strong market focus. We were co-founded by current CEO Michael Weiner and Wilson
Greatbatch, inventor of the first successfully implanted cardiac pacemaker,
which he licensed to Medtronic. We went public in December 2000. We have
assembled a veteran management team, with extensive experience in technology
development, product development, intellectual property management and
business-to-business technology licensing. We were formed to enable all medical
devices to be capable of safely and successfully working with Magnetic Resonance
Imaging (MRI).
17
MRI Related Technologies
Our technologies for MRI safety and image compatibility apply to a broad
segment of the medical device marketplace. The limitations of existing devices
are becoming increasingly significant as MRI continues to grow as a premier
imaging modality due to its exceptional soft tissue contrast, ability to provide
functional data and its lack of ionizing radiation, which separates MRI from
fluoroscopy and CT imaging.
The limitations of existing medical devices with MRI are two-fold. Some
devices have safety limitations - patients with these types of implants would be
in danger if they were placed in an MRI machine. These devices are currently
contraindicated for use with MRI, preventing patients with these implants from
having potentially life saving diagnostic MRI procedures performed. Devices that
are currently contraindicated for use with MRI include pacemakers, implantable
cardioverter defibrillators (ICDs) and neurostimulators.
Other types of medical devices are safe for use with MRI, but interfere
with the MRI image, creating an image artifact (distortion) when viewed under
MRI. This limited MRI image compatibility prevents imaging either within the
implant or in the area immediately around the implant. Devices that have limited
MRI image compatibility include stents, heart valves, vena cava filters,
occluders and certain types of catheters and guidewires.
Biophan has solutions to the problems of MRI safety and image
compatibility that enable:
Removal of the MRI contraindications from an important category of
implants, including pacemakers, ICDs and neurostimulators, allowing
millions of patients with these implants to receive potentially life
saving diagnostic MRI procedures;
MRI image compatible stents which allow for the detection of
in-stent restenosis and thrombus detection with a non-invasive MRI
procedure rather than a much more invasive angiogram or intravenous
ultrasound procedure;
MRI image compatible vena cava filters, which allow for
visualization within the filter for the detection of thrombi caught
in the filter, enabling the physician to determine when it is safe
to remove the device;
MRI image compatible stent-based heart valves, which can be placed
under MRI guidance and enable non-invasive follow up and evaluation
of the function of the valve; and
Catheters and guidewires designed to operate in an MRI environment
safely and effectively, enabling much broader adoption of MRI guided
interventional procedures which benefit from improved soft tissue
contrast and reduce the exposure of both the patient and physician
to the radiation associated with fluoroscopy and CT imaging.
We believe that Biophan's suite of technology solutions solves all of the
MRI limitations associated with these products, enabling the development of
products with significant competitive advantages. The market for devices that
currently have either safety or image compatibility limitations with MRI is
currently in excess of $15.8 billion, with strong historic growth rates.
Biophan has aggressively protected its technologies with broad patent
protection. We control, directly or through exclusive licenses, 57 issued U.S.
patents, and over 100 pending applications at various stages of examination at
the U.S. Patent and Trademark Office.
Biophan is well positioned to take advantage of this market opportunity,
with proven technologies and broad intellectual property protection. We employ
internal research facilities, combined with outsourcing to contract laboratories
and universities with appropriate expertise, leveraging our core competencies
with a network of strategic partnerships. This approach eliminates the need to
build unnecessary infrastructure.
18
Biophan's marketing efforts are focused on business-to-business sales of
our technology. Since we are focused on working with the leaders in each market
segment, the number of prospective partners is approximately 25 medical device
companies. Biophan's marketing and sales efforts rely on a select group of
experienced business development and technology licensing executives.
Biophan entered into its first significant license agreement with Boston
Scientific Scimed Corporation in 2005 covering a range of products in exclusive
and non-exclusive product segments.
MYOTECH MYO-VAD
Biophan has also taken a minority equity position in Myotech, LLC, with an
option to take a majority position, to help Myotech develop and market a novel
cardiac support system. The Company has determined that Myotech is a variable
interest entity in accordance with FIN 46(R). The Company has further concluded
that it is the primary beneficiary as defined by FIN 46(R) and, as a result, the
Company is required to consolidate Myotech as of the date of acquisition of
November 30, 2005. Therefore, the consolidated financial statements of the
Company include the accounts of Myotech, LLC.
Myotech was formed in July 2003 to commercialize a new mechanical cardiac
support system called the MYO-VAD(TM) which is based upon a family of
technologies known as Direct Mechanical Ventricular Actuation (DMVA). The
MYO-VAD is aimed at one of the largest and fastest growing medical market
segments, the treatment of heart failure. ABN-AMRO Morgan Stanley has forecast
worldwide sales of ventricular assist devices (VAD) to grow from its 2003 level
of $400 million to $7.1 billion by 2009, reflecting an anticipated compounded
annual growth rate of 61%.
Existing cardiac assist devices, such as VADs, have serious limitations
that include clotting and stroke, infection, bleeding, repeat major surgery, and
high mortality rates. The devices are available only at a limited number of
transplant and specialized cardiac centers and are very expensive to use,
costing in excess of $200,000 per procedure.
The MYO-VAD is a comprehensive cardiac support system that
has features designed to provide safer and more effective support to a wide
array of acute and chronic heart failure conditions. As shown in trials of early
prototypes at Duke University in the 1990s, such a device can be installed
quickly to stabilize and provide short term support to patients suffering from
acute heart failure (in order to minimize ischemic damage) as well as remain in
the body for extended periods to provide longer-term support for chronic heart
failure patients to help the heart to recover and ultimately allow the device to
be removed. The MYO-VAD offers the following additional competitive advantages:
No contact with circulating blood which reduces the problems of
clotting and stroke, bleeding, repeat surgery, and infection -
problems that plague existing VADs;
Technically simple, rapid installation (approximately three minutes)
that does not require highly specialized cardiothoracic surgeons; and
The ability to completely restore blood flow from the diseased or
failed heart. The MYO-VAD provides systolic (emptying) and diastolic
(filling) support to both ventricles. Current VADs typically provide
only systolic support to one ventricle.
Future versions are expected to include designs with therapeutic
capabilities, such as drug delivery designed to enable the MYO-VAD to treat a
wide variety of acute and chronic heart failure conditions. We also plan to make
the MYO-VAD available in multiple sizes to treat more heart failure patients,
including women.
Healthcare leaders in the U.S. government and private sector also
recognize this and have allocated $1 million dollars in 2007 to accelerate the
availability of the MYO-VAD in forward combat treatment stations as well as
suburban and rural hospitals.
The short term goal is to develop and introduce a first generation (Gen-1)
product. We will initially focus on the commercialization of the Gen-1 MYO-VAD
product, which is designed to address the Bridge-to-Bridge / Bridge-to-Recovery,
Acute Resuscitation and Bridge-to-Transplant market segments. Additional R&D
will be conducted in parallel to develop the technological capabilities required
for the Company to expand the use of the Gen-1 product.
It is anticipated that the Gen-1 MYO-VAD will enter into clinical studies
in fiscal year 2008. The clinical study is planned to include fifty to sixty
patients at 6 to 10 centers. It is anticipated that it will take approximately
six months to complete the clinical study. The MYO-VAD is targeted to be
marketed and distributed by entering into a strategic relationship with a major
medical device company.
19
MARKET OPPORTUNITY
MRI Related Technologies
Some medical devices have limitations related to MRI safety, and may be
contraindicated for use with MRI (such as pacemakers and neurostimulators).
Patients with these types of implants cannot have MRI exams performed even if
the exams are needed for life threatening conditions, such as cancer detection
or diagnosis of aneurysms.
Biophan has developed a "toolbox" of solutions to enable implants such as
pacemakers, ICDs and neurostimulators to be manufactured to be MRI safe. Biophan
has also in-licensed some complementary technologies to provide a full range of
technology solutions. Devices made incorporating Biophan's patented technologies
have the capability to have their contraindication removed, allowing patients to
be free to have critical MRI examinations performed. We believe that this
capability can provide a competitive advantage in the marketplace.
Many devices are already safe for use with MRI, but have limited MRI image
compatibility. This includes devices such as stents, vena cava filters, and some
types of catheters and guidewires. Some of these devices are simply not well
imaged under MRI, while other devices have properties that interfere with the
MRI image by causing an image artifact (distortion) in the area in and around
the device, limiting the effectiveness of MRI for placement or diagnostic
follow-up on these implants.
Biophan has solutions to these problems as well. Biophan's internally
developed technology and patents, in combination with exclusive in-licensed
technologies provide comprehensive intellectual property coverage for Biophan's
MRI image compatibility solutions. Our solutions include an MRI-safe motor that
can be used in implantable devices such as drug pumps.
The total market for all cardiac rhythm management products, including
pacemakers, implantable cardioverter defibrillators and cardiac
resynchronization therapy is estimated by Paumanok Publications, Inc. in its
2005 Implantable Defibrillator Markets Report to exceed $10 billion in 2006.
This represents the largest single segment of the potential market for MRI-safe
implants.
Management believes that the most significant product opportunity in MRI
image compatibility is the coronary stent market, which is dominated by drug
eluting stents. This market was estimated by Lehman Brothers Equity Research in
its 2006 Medical Device Outlook to exceed $5.5 billion in 2006.
20
STRATEGY
MRI Related Technologies
Management believes that the target market for Biophan's MRI related
technologies, represented by the number of medical devices and implants that
have limitations related to MRI safety or image compatibility, is in excess of
$15.8 billion.
The FDA's position on MRI-safe devices has become increasingly clear, as
the FDA has presented data recently (including at the Society for Medical
Innovations and Technology, May 2006) which has validated the MRI safety
problems, and the difficulties of testing, associated with implants such as
pacemakers, implantable cardioverter defibrillators, and cardiac
resynchronization therapy devices provides for technology to improve the MRI
safety and image compatibility of medical devices. Our primary competition comes
from in-house research and development efforts by the major medical device
manufacturers.
Management is not aware of any other integrated solutions.
Based upon the above, and management's knowledge of this market, Biophan
has developed the following strategy and operating philosophy:
o Position Biophan as the leading innovator in applying technologies
for MRI safety and image compatibility to medical implants and
interventional devices;
Continue to focus on developing and marketing solutions to
enable MRI safe and image compatible products and implants;
and
Seek new and novel market applications for the Company's
primary technologies;
o Utilize an experienced business-to-business sales and technology
licensing team to market the Company's technologies;
o Protect current and future technology developments by establishing
and maintaining a strong patent position; and
o Continue to call on development and marketing partners to bring
these technologies to the market in a broad range of products,
focusing on the leading 20 to 25 medical device manufacturers, with
specific targeting of the top three in each major product category.
21
MYOTECH MYO-VAD(TM)
With regard to the MYO-VAD(TM) technology, we recognize the following:
Mechanical cardiac assist devices provide many benefits for heart
failure patients relative to existing treatment procedures;
The potential of the VAD market alone is estimated to be
approximately $7 to $8 billion and growing at a rate of 50-60%
annually;
Conventional VADs have distinct disadvantages including invasiveness
to the patient, clotting and stroke, bleeding, repeat surgery, and
infection;
There are currently no other equally capable solutions on the market
and none are anticipated. This position is based upon the following:
Searches of the medical market;
Review of U.S. and foreign patents and patent activity;
Review of the literature and activity within the
scientific community;
Our Scientific Advisory Board's knowledge of relevant
industry activities; and
Participation in relevant tradeshows;
We possess a substantial intellectual property portfolio which
protects current and future developments of its technology in the
U.S. and other major international markets; and
The expertise, depth, and experience of its management team.
Based on the above and management's knowledge of its markets, Biophan,
along with MYOTECH, has developed the following strategy and operating
philosophy:
o Initially focus on the development and approval of a Gen-1 product
for the Bridge-to-Bridge, Bridge-to-Recovery, and Acute
Resuscitation market segments;
o On an intermediate basis, focus on next-generation products for the
Therapeutic Recovery and Destination Therapy market segments;
o Enhance awareness of the MYO-VAD by:
Utilizing the Scientific Advisory Board;
Engaging industry thought leaders;
Publication of the results of pre-clinical and clinical
activities; and
Participation at major medical and scientific forums;
o Interface with the FDA on a pre-approval basis to help ensure rapid
approval of MYO-VAD Gen-1 product;
o Market and distribute the MYO-VAD by entering into a strategic
relationship with a leading medical device company with an
appropriate sales and marketing infrastructure;
o Utilize well-recognized manufacturing companies currently producing
products for the major medical device companies, to minimize entry
costs and shorten time to market. Utilize this manufacturing
capacity until such time as product manufacturing is brought in
house or taken over by the strategic partner;
22
o Protect current and future technology developments by establishing a
strong trademark and patent position;
o Recruit additional, expert-level subject matter expertise where it
compliments core team capabilities; and
o Rapidly develop and introduce a first generation product to
establish an early revenue stream, while conducting parallel R&D to
demonstrate the ability of the technologies to meet the needs of
additional market segments.
23
TECHNOLOGY
Technologies for MRI Safety
Biophan has created a portfolio of technologies for MRI safety, to enable
broad patent coverage and different solutions customized to work with different
types of products. Below is a description of four of the key technologies that
Biophan has which enable devices such as pacemakers, ICDs and neurostimulators
to be made safe for use in an MRI environment.
1. Discrete Resonant Circuit - Resonant circuit that blocks RF induced
currents to minimize heating. The Company has demonstrated the effectiveness of
this solution in laboratory tests.
2. Lead Wire Winding - Tuning the lead by modifying the windings to reduce
energy transfer, thereby minimizing induced heating. We have demonstrated the
effectiveness of this solution in laboratory tests.
3. Low Pass Filter - Inductor-capacitor circuit to form a low pass filter
to minimize heating.
4. Wire Looping - Opposing loops minimize induced voltages.
Technologies for MRI Image Compatibility
Biophan has developed and in licensed a number of technologies for
improving MRI image compatibility of interventional devices and implants. These
technologies fall into two main categories:
o Resonator Technology
o Incorporating a resonant circuit, tuned to the resonant
frequency of the MRI machine, to enhance the MRI signal
and overcome the image artifact (distortion).
o Novel Device Designs
o Our other approach to overcoming the limitations with
MRI is a combination of novel designs and materials
which effectively cancel out the artifacts that
interfere with the image. There are two types of
artifacts:
o The Faraday Cage effect is formed from the
distribution of electromagnetic signals on a
conducting form such as a stent or vena cava
filter. This artifact source can be overcome
by modifying the geometry of the device.
o The second source of image artifact is a
magnetic susceptibility artifact, resulting
from the materials of construction of the
device and their magnetic properties.
Modifying the material that the device is
made from will overcome this artifact
source.
o Biophan has licensed a patent covering the combination
of anti-Faraday Cage geometries combined with materials
designed to reduce the magnetic susceptibility artifact.
Products That Can Benefit From Improved MRI Safety
Patients with implanted devices such as pacemakers, defibrillators, and
neurostimulators are currently denied the benefits of MRI due to the risks posed
by their implants. Implanted leads (wire-like devices) and other metallic
devices, acting as antennas, adsorb radio-frequency energy from an MRI machine.
The effect can cause the leads to heat up and generate induced voltages,
contributing to the current contraindication of devices for use with MRI -
patients with these implants are not permitted to have MRI procedures performed.
These contraindications apply to any device with a long, conductive lead or
wire. This includes the following:
24
o Pacemakers
o Implantable cardioverter defibrillators (ICDs)
o Cardiac resynchronization therapy (CRT) devices
o Neurostimulators, including deep brain stimulators
Product Opportunities for Improved MRI Imaging
These product opportunities include the following:
o MRI visible stents
o MRI visible vena cava filters
o MRI visible stent based heart valve
o Guidewires
o Catheters
MRI Visible Stents
A stent is a device that is implanted to hold open an artery that has
become too narrow due to atherosclerosis. When imaged under MRI, stents act as a
Faraday cage, and create a large image artifact which prevents viewing of
blockages or clotting within the stent. Biophan has developed a solution to this
problem.
The image artifact (a large dark area on the MRI image in the area where
the stent is located) prevents the physician from seeing the critical area in
and around the stent. This is caused by the fact that a metallic stent behaves
as a Faraday Cage due to its geometry and material, and the stent additionally
creates a magnetic susceptibility artifact due to the material of manufacture of
the stent.
To overcome this limitation, Biophan has developed a resonator technology,
which uses tuned circuits to increase the RF signal, making it possible to image
within and around a stent.
Biophan's technology allows imaging of a blood clot or restenosis within a
stent. Currently, measuring restenosis within a stent requires either
angiography or intravenous ultrasound, both of which involve complex and
invasive catheterization procedures and have a higher chance of complications to
the patient than a simple, non-invasive MRI scan.
MRI Visible Vena Cava Filters
A vena cava filter is a device inserted into a major vein to prevent a
thrombus (blood clot) from entering the lungs, which could cause a pulmonary
embolism. This device will trap the blood clot in a "cage" before it reaches the
lungs.
Similar to the problems associated with imaging a stent, vena cava filters
create an image artifact when imaged by MRI. Biophan's resonator technology
allows for overcoming this interference. This technology has significant
implications for the future of medical imaging. The ability to effectively
visualize would allow a physician to determine the degree of clotting within the
filter and to know when it is safe to remove the device, or if it is necessary
to take other actions.
25
MRI Visible Stent-Based Heart Valve
A stent based heart valve enables replacement of the aortic valve without
the requirement of an open-heart surgery. In cases of calcification of the
aortic valve, the function of the valve is no longer efficient. The standard
clinical procedure would be to replace the valve in an open-heart surgery. This
is a complicated, risky and expensive procedure.
Our technology allows the procedure to be performed via percutaneous
access through a peripheral vessel, with the procedure performed over a guide
wire for placement. The procedure may be performed under fluoroscopy using
contrast media injections, or under MRI guidance. For this procedure, there is
no need to stop the heart, and no need to put the patient on a heart-lung bypass
machine during the operation.
With an MRI visible stent-based heart valve, the physician can utilize MRI
imaging, with its 3D-orientation and excellent image quality. It is possible to
perform the planning and the implementation of the interventions without the
side effects of exposure to x-rays, including harmful radiation exposure for
both the patients and the physician, and the need for nephrotoxic contrast
media. In addition, the ability to accurately visualize the function of the
valve under MRI with Biophan's resonator technology can allow less invasive
follow up to assess valve function on a regular basis.
26
Guidewires and Catheters
Viewing interventional devices, such as catheters and guidewires, under
MRI is a challenge if the objects are smaller or thinner than the resolution of
the MRI system or if the objects are made of materials that are less well
contrasted under MRI. Biophan's patented technologies overcome this, enabling
surgical procedures under MRI that would have been difficult or impossible
previously.
27
SALES AND MARKETING
MRI Related Technologies
These technologies are applicable to a broad array of products, including:
For MRI safety - pacemakers, implantable cardioverter defibrillators,
cardiac resynchronization therapy, neurostimulators, and guidewires; and
For MRI image compatibility - stents, vena cava filters, heart valves,
occluders, and catheters.
Biophan's technology supplies an important feature for these devices, but
the devices and systems are complex and have a significant hurdles in terms of
design, development, manufacturing and regulatory approval. As a result, Biophan
plans to license these technologies to leading medical device manufacturers who
have the experience, capabilities and sales force to market products with these
features and benefits.
Biophan's marketing efforts are focused on business-to-business sales of
our technology. Since we are focused on working with the leaders in each market
segment (which we define as the top three in terms of market share for each
target product), the number of prospective partners is approximately 25 medical
device companies.
28
RESEARCH AND DEVELOPMENT
Biophan's technology development plan is based upon identifying specific
market opportunities and pursuing multiple approaches to provide different
technology solutions for these specific problems. As an example, in the area of
MRI safety Biophan has four basic core technologies and a number of additional
technology options. In the area of MRI image compatibility of stents, Biophan
has two basic technologies platforms, as described in detail above.
This multi-prong approach to technology development has numerous
advantages compared with the typical approach of technology development
companies that focus on one basic technology platform. Biophan's approach allows
comparison of multiple approaches to determine the optimal solution for any
given combination of a desired feature with a specific product. In addition, for
a given feature (such as MRI safety), different products may have different
requirements, so one technology approach may work better for one product, while
a different approach may work better for another.
As an example, pacemakers and ICDs are similar products in physical
design, but ICDs operate at a much higher voltage than pacemakers. As a result,
some of the discrete circuit components that will work well for pacemakers may
be sized incorrectly for ICDs. A non-discrete circuit approach, such as the
Company's lead wire winding approach (described above) could provide a more
robust solution for ICDs.
Also, since we patent multiple solutions, our patent portfolio is much
stronger than if we focused exclusively on a single technology platform.
29
COMPETITION
MRI Related Technologies
Our management believes that Biophan has no direct competition for our MRI
related technologies. Our competition comes from the in-house research and
development efforts of the major medical device manufacturers.
MYOTECH MYO-VAD(TM)
Although advancements in pacemakers and defibrillators have been
substantial, and while the development and increasing use of extremely
successful drugs such as ACE inhibitors and statins have proven to be very
beneficial to patients suffering from various forms of heart disease, the number
of deaths remains at a high level.
Analysis of the major players in the cardiac devices market in the U.S.
indicates that the largest device companies (e.g. Johnson & Johnson, Medtronic
or Boston Scientific) have yet to position themselves in this segment of the
market.
Management believes that the MYO-VAD cardiac support system
currently has no direct competition.
VAD Competitors
When considering the MYO-VAD solely as an alternative VAD for the
Bridge-to-Bridge, Bridge-to-Recovery, Bridge-to-Transplant and Destination
Therapy markets, the MYO-VAD(TM) would compete with three companies; Thoratec,
Abiomed, and World Heart.
Acute Resuscitation Competitors
When considering the MYO-VAD solely as an Acute Resuscitation device, the
MYO-VAD(TM) would compete with three technologies:
o Cardio Pulmonary Resuscitation (CPR)
o Intra-Aortic Balloon Pump (IABP)
o Percutaneous Ventricular Assist (PVA)
30
The current standard of care for acutely decompensating patients (e.g.
sudden cardiac arrest patients) is CPR, which was standardized in 1960. CPR,
even when optimally performed and augmented by mechanical devices, produces at
most about 25% of normal cardiac output. This is inadequate to sustain life,
although the output can be adequate to maintain the viability of the brain for
occasionally up to an hour. Studies published by the National Registry of
Cardiopulmonary Resuscitation have shown that only about 15% to 20% of sudden
cardiac arrest (SCA) patients are successfully resuscitated and later discharged
from the hospital. Part of the reason for the large number of deaths from SCA is
that the current standard of care has not appreciably improved in the last 25
years. Due to the dismal survival rate of cardiac arrest patients, new
variations of CPR have been developed in an attempt to improve those survival
rates however none have proven widely beneficial.
IABPs are essentially balloons on the tip of a catheter which is placed
within the patient's aorta via puncture of a large vessel. The balloon inflates
and deflates with each cardiac cycle. Inflation occurs after the heartbeat,
forcing blood into the circulation; deflation during the next beat decreases the
force that the heart must generate to eject blood from the ventricle into the
aorta. This provides a small, e.g., 15%, boost to the output of the failing but
still beating heart. This device is used worldwide, but has no clinical utility
when the heart is not beating.
PVA devices include Tandem Heart (Cardiac Assist, Inc.) and ABIOMED's
Impella. These devices utilize several percutaneous, transluminal access methods
to off-load the left ventricle of a weakened, but still functioning heart. Blood
is removed from either the left atrium (Tandem Heart) or left ventricle
(Impella) and introduced into the descending aorta, using either an external
pump (Tandem heart) or internal pumps located in the catheter (Impella). Like
IABPs, these devices provide a small boost to the output of a failing but still
beating heart. These devices suffer the same complications of other
blood-contacting pumps as well as significant hemolysis, low flow rates, and
long installation times due to precise device positioning requirements which
require fluoroscopic guidance.
Therapeutic Recovery Competitors
At this time there are no products on the market that provide effective
Therapeutic Recovery capability.
Product Performance Comparison
Competing devices share a common set of complications: bleeding, clotting,
infection, and multi-organ failure, the latter arising from a low level
consumptive coagulopathy caused by the devices. This is based on a common cause:
these devices all require that blood flows through some type of mechanical pump
that produces sheer stresses in the blood and that has mechanical surface
interface with the blood. No competing technology known to Biophan, either in
the device or the anticoagulation fields, circumvents these fundamental
problems.
31
INTELLECTUAL PROPERTY
MRI Related Technologies
Biophan controls, directly or through exclusive licenses, 57 issued U.S.
patents, and over 100 pending applications at various stages of examination.
Presented below are summaries of some of the key technology areas and a brief
summary of the technology covered.
Photonics
These patents cover components, subsystems, and systems for implanted
devices that use optical fiber technology to eliminate the need for electrically
conductive leads that are the cause of thermal damage and other risks to implant
patients being imaged under MRI.
Discrete Components and Circuits
These patents cover the use of miniature electronic circuits, or
individual electronic components similar to those in cell phones or computers,
to create internal resonance that can block induced energy, or actively
compensate for it, eliminating risk to an implant patient being imaged under
MRI.
Anti-Antenna Geometries
Leads and electrodes can be configured in a way that make them very poor
antennae; these patents and a number of others currently being examined by the
United States Patent and Trademark Office cover this technology.
Other Shield Materials, Structures, and Methods
Shields that are effective in eliminating unwanted induced currents can be
created from non-nanomagnetic materials, and can be improved with larger-scale
structure.
Resonant Circuit Structures
Secondary resonant circuit structures can be used to overcome the
shielding or "Faraday Cage" effect created by implants such as stent, and that
prevents effective MRI imaging of the volume inside the stent.
Nanomagnetic Thin-Film Coatings
Nanomagnetic coatings applied to stents and other implants in the form of
thin film circuits, creating a resonant circuit to block MRI imaging of their
interference.
32
Biothermal Power Source
The small temperature gradients in the body may be used to create
electrical power. The intent of the technology in these patents is to eliminate
the need to remove pacemakers or other implants simply to replace their aging
batteries. We are working with NASA's Ames Center for Nanotechnology on new
coatings to improve the efficiency of thermoelectric devices.
Pulse-width Cardiac Pacing
Pulse-width modulation techniques used in many types of electrical control
systems. Our patent teaches the stimulation of nerve tissue with less electrical
power than is currently used in implantable devices.
Lead and Electrode Components
These patents cover details of materials and construction for cardiac
pacing leads and specifically the end electrodes that directly contact the
heart.
Trademarks
The name "Biophan" is a registered trademark of the Company. We have
filed for registration of the following trademarks: Nanolution, Nanolute and
Nanoview.
Myotech's intangible assets currently consist primarily of trademarks and
patent applications.
Myotech has filed for registration of the following trademarks: Myotech,
MYO-VAD, Your Heart Your Life, and We take therapy to heart.
Myotech's first patent application "Sensor-Equipped and
Algorithm-Controlled Direct Mechanical Ventricular Assist Device" has published
worldwide; national filing has begun in Europe, Canada, Japan, China, and India.
The second patent application "Therapeutic Agent Delivery Apparatus with Direct
Mechanical Ventricular Assist Capability" has published in the US, and has been
filed worldwide as a PCT. These applications are being followed by five
divisionals and CIP applications. A provisional application "Method and
Apparatus for Minimally Invasive Direct Mechanical Ventricular Actuation" has
been filed. Utility and foreign applications will follow. Work has begun on a
comprehensive application focused on the biochemical and physiological aspects
of the treatment of acute and chronic heart.
33
Employees
As of February 23, 2007, we had 28 full-time employees, 23 of whom are in
the US and five of whom are in Europe. We do not anticipate a significant change
in the number of our employees for the remainder of the current fiscal year or
for the first six months of the fiscal year beginning March 1, 2007. We believe
that we have a good relationship with our employees.
Facilities
Our headquarters are located at 15 Schoen Place, Pittsford, New York 14534
with approximately 4,470 square feet of office space and approximately 1,000
square feet of laboratory space. Our lease for this facility extends to April
30, 2022, subject to our right to terminate at any time after January 31, 2009
upon 90 days' notice. For the lease years commencing May 1, 2007 and 2008, we
will pay an annual base rent of $89,558. For each year commencing on May 1, 2009
and continuing through April 30, 2011, the base rent will increase by 5% over
the previous year's rent. For each year commencing on May 1, 2011 and continuing
through April 30, 2017, the base rent will increase by 3% over the previous
year's rent. The landlord will be responsible for all real property taxes for
the first 38 months of the lease term; thereafter, the landlord will absorb the
first 3% of any increase in the real property taxes on the premises in which our
facility is located and two-thirds of the remaining 97% of any such increase,
while we will reimburse the landlord for our proportionate share (48%) of the
remaining one-third of such 97%. We will bear our own gas, electric, water and
other utility charges and our proportionate share of utility charges for the
premises' interior common areas.
We belive that this facility will be adequate for our current and
anticipated future needs through the lease expiration date.
Legal Proceedings
Except as noted below, we are not a party to any material legal
proceedings and there are no material legal proceedings pending with respect to
our property, except as noted below. We are not aware of any legal proceedings
contemplated by any governmental authorities involving either us or our
property. None of our directors, officers or affiliates is an adverse party in
any legal proceedings involving us or our subsidiaries, or has an interest in
any proceeding which is adverse to us or our subsidiaries.
We are pursuing legal claims against one of our former law firms and
certain of its attorneys. Review of the firm's work product and bills recently
revealed questions about the firm's billing practices and other activities. The
amount of potential damages has not yet been quantified. Also, the law firm has
asserted claims seeking payment of additional legal fees, which claims Biophan
has denied. The litigation is in an early stage. While, as with any legal
proceedings, no assurance can be given as to ultimate outcome, management
believes that the outcome of the litigation will not have a material adverse
effect upon our financial condition.
34
MANAGEMENT
Executive Officers and Directors
The following table sets forth information regarding our executive
officers and directors. Each of our executive officers has been elected by our
board of directors and serves until his or her successor is duly elected and
qualified.
Name Age Position
--------------------- --- ------------------------------------------------
Guenter H. Jaensch 68 Director and Chairman of the Board
Michael L. Weiner 59 Director, Chief Executive Officer, and President
Steven Katz 58 Director
Theodore A. Greenberg 47 Director
Stan Yakatan 63 Director
John F. Lanzafame 39 Chief Operating Officer and Vice-President -
Business Development
Darryl L. Canfield 60 Vice-President, Treasurer, Secretary and Chief
Financial Officer
Stuart G. MacDonald 57 Vice-President -- Research and Development
Jeffery L. Helfer 54 Vice-President -- Engineering
The principal occupations and business experience for at least the past
five years of each director and executive officer is as follows.
Guenter H. Jaensch, Ph.D. is the former Chairman and CEO of Siemens
Pacesetter, Inc., a manufacturer of cardiac pacemakers. During his more than
twenty-five years at Siemens, Dr. Jaensch held various senior executive
positions prior to running Siemens Pacesetter, including President of Siemens
Communications Systems, Inc. from August 1983 to March 1985, Chairman and
President of Siemens Corporate Research and Support, Inc., from April 1982 to
September 1991 and Chairman and CEO of Siemens Pacesetter, Inc. and Head of the
Cardiac Systems Division of Siemens AG Medical Engineering Group from October
1991 to September 1994. In 1994, upon the acquisition of Pacesetter by St. Jude
Medical, Inc., he joined St. Jude Medical as Chairman and CEO of Pacesetter,
Inc. and retired in 1995 to manage his personal investments. Since December 1997
he has been a director of MRV Communications, a publicly traded company in the
fiber optic technology business. Dr. Jaensch has been a director of Biophan
since March 2002.
Michael L. Weiner is President, Chief Executive Officer and co-founder of
Biophan, and has served as the Company's CEO since its inception in 2000. From
1975 to 1985 Mr. Weiner worked at Xerox Corporation in sales and marketing
positions. In 1985 he left Xerox to head Microlytics, a Xerox PARC spin-off
company, which subsequently merged with another company. In 1992 Mr. Weiner
co-founded TextWise, a company developing natural language technologies, which
was acquired by Manning and Napier Information Services (MNIS), a company
offering patent analytics and natural language search and translation
technologies, where Mr. Weiner served as CEO through 1999. In 1999 Mr. Weiner
co-founded Technology Innovations, LLC, and serves on the board and as managing
member, and its affiliate, Biomed Solutions, LLC, which together hold equity
interests in several companies, including Biophan. Mr. Weiner serves on the
boards of NaturalNano, Inc. and several privately-held technology companies.
35
Steven Katz has, since 1982, been President of Steven Katz & Associates,
Inc., a health care and technology-based management consulting firm specializing
in strategic planning, corporate development, new product planning, technology
licensing, and structuring and securing various forms of financing. From January
2000 to October 2001 Mr. Katz was President, Chief Operating Officer and a
director of Senesco Technologies, Inc., a publicly-traded company engaged in the
identification and development of proprietary gene technology with application
to human, animal and plant systems. From 1983 to 1984 he was a co-founder and
Executive Vice President of S.K.Y. Polymers, Inc., a bio-materials company.
Prior to this, Mr. Katz was Vice President and General Manager of a non-banking
division of Citicorp, and held various senior management positions at National
Patent Development Corporation, and positions at Revlon, Inc. and Price
Waterhouse & Co. He is a member of the Boards of Directors of NaturalNano, Inc.,
Health Systems Solutions, Inc., Nanoscience Technologies, Inc., USA
Technologies, Inc., and Vivid Learning Systems, Inc. as well as several private
companies . Mr. Katz has been a director of Biophan since July 2001.
Theodore A. Greenberg is Chief Investment Officer, Chief Financial
Officer, Secretary, and is a member of the Board of Directors of Infinity
Capital Group, Inc., a business development company which he joined in 2005.
Since 2004 he has been, and continues to be, a project consultant and advisor
and has provided services to various companies. In 1999, Mr. Greenberg
co-founded Park Avenue Equity Partners, LP, a $100 million middle market private
equity fund and he was a general partner until 2003. From 1998 to 1999, Mr.
Greenberg was the Chief Financial Officer of Development Capital, LLC. Mr.
Greenberg has been a director of Biophan since April 2006.
Stan Yakatan is Chairman and Chief Executive Officer of Katan Associates,
a private company which he founded in May 1989 that provides advisory services
and strategic planning for companies in the life sciences industry. From June
2003 to August 2005, Mr. Yakatan was Chairman and Chief Executive Officer of
Grant Life Sciences, a publicly-traded company engaged in the research,
development, marketing, and sale of diagnostic kits for the screening,
monitoring, and diagnosis of diseases with emphasis on women's health,
infectious diseases, and cancers. Mr. Yakatan continues to serve as a Director
of Grant Life Sciences. He is also a Director of Response Biomedical Corp. and
LifePoint, Inc. and of several privately-held companies in the life sciences
industry. From 1968 until he founded Katan Associates in 1989, Mr. Yakatan held
various senior executive positions with New England Nuclear Corporation (a
division of E.I. DuPont), ICN Pharmaceuticals, Inc., New Brunswick Scientific
Co., Inc. and Biosearch. Mr. Yakatan is the Chairman of Biocomm Inc., a venture
capital firm, and has founded and served as Chief Executive Officer of numerous
entrepreneurial ventures in the biomedical and healthcare sectors. He has served
as a strategic advisor to government agencies in Canada and Australia.
John F. Lanzafame joined Biophan in 2004 and has served as Vice President
- Business Development and President of Nanolution, LLC, the drug delivery
division of Biophan. In 2006, Mr. Lanzafame was promoted to Chief Operating
Officer of Biophan and currently leads operations and business development for
the Company. From 1989 to 2004, Mr. Lanzafame was employed by STS Biopolymers,
Inc., a privately held medical device company that marketed high performance
polymer-based coatings for the medical device industry, including drug eluting
surfaces for devices such as coronary stents and indwelling catheters, serving
in a variety of positions from 1989 to 2003 and as President beginning in 2003.
Mr. Lanzafame left STS Biopolymers in 2004, following sale of the company to
Angiotech Pharmaceuticals. Mr. Lanzafame is a member of the Board of Directors
of NaturalNano, Inc.
Darryl L. Canfield has been Chief Financial Officer, Vice President,
Treasurer, and Secretary of Biophan since January 2006. For five years prior to
joining Biophan in November 2005, Mr. Canfield was Vice President, Corporate
Controller, and Chief Accounting Officer at Genencor International, Inc., a
company engaged in the development and manufacturing of innovative diversified
products for the biotechnology industry. From 1988 to 1994 Mr. Canfield held
senior financial positions in several food and beverage companies, serving from
1994 to 2000 as CFO of SALOV North America Corp., from 1989 to 1994 as Vice
President and Corporate Controller for Curtice Burns Foods, and from 1988 to
1989 as CFO of Genesee Corporation. From 1986 to 1988, he was CFO of The Systems
Company, a captive high technology division of Fidelity Investments. From 1977
to 1987, he held several financial positions for Sybron Corp, including Group
Controller for the Laboratory Group, and Vice President, Finance, of Brinkmann
Instruments. From 1972 to 1977, he worked as an auditor for Price Waterhouse.
36
Stuart G. MacDonald has been Biophan's Vice-President-Research and
Development since January 2001. From January 1995 through December 2000, Mr.
MacDonald was employed at Ortho-Clinical Diagnostics, a Johnson & Johnson
company, holding the position of Director-Engineering from 1996 to mid-1997 and
Vice-President, Clinical Lab Instrumentation R&D from mid-1997 through December
2000. He worked at Eastman Kodak Company from 1971 to 1994, rising to the
position of Assistant Director, Clinical Diagnostic Research Labs. A portion of
Mr. MacDonald's time is spent assisting with the research programs of Biomed
Solutions, LLC and Myotech, LLC, related companies, for which Biophan is
reimbursed.
Jeffrey L. Helfer has been Biophan's Vice-President-Engineering since
October 2001. Prior thereto, he served in a number of positions at Eastman Kodak
Company for 19 years until November 1994. From December 1994 to September 2001
Mr. Helfer held various positions at Ortho-Clinical Diagnostics, a Johnson &
Johnson company, including as Program Director within OCD's Product Development
and Program Management Center of Excellence from June 1999 to September 2001,
Program Director and Director of Regulatory Affairs from April 2000 to September
2001, Director of Engineering from January 1997 to March 2000, and Director of
New Business Development from February 1995 to December 1996. A portion of Mr.
Helfer's time is spent assisting with the research programs of Biomed Solutions,
LLC, and Myotech, LLC, related companies, for which Biophan is reimbursed.
There are no family relationships among any of our directors or executive
officers.
Corporate Governance Guidelines
Our Board has long believed that good corporate governance is important to
ensure that we are managed for the long-term benefit of our stockholders. Our
common stock is currently quoted on the OTC Bulletin Board. The OTC Bulletin
Board currently does not have any corporate governance rules similar to the
NASDAQ Stock Market, Inc., the American Stock Exchange, Inc. or any other
national securities exchange or national securities association. However, our
Board believes that the corporate governance rules of NASDAQ and AMEX represent
good governance standards and, accordingly, during the past year, our Board has
continued to review our governance practices in light of the Sarbanes-Oxley Act
of 2002, the new rules and regulations of the Securities and Exchange Commission
and the new listing standards of NASDAQ and AMEX, and it has implemented certain
of the foregoing rules and listing standards during this past fiscal year.
Biophan has also adopted a Code of Ethics for Senior Financial Officers that is
applicable to our principal executive officer, principal financial officer,
principal accounting officer or controller, or persons performing similar
functions. Our Board is also considering adopting during this current fiscal
year additional corporate governance guidelines to assist it in the exercise of
its duties and responsibilities and to serve the best interests of Biophan and
its stockholders.
Board Determination of Independence
Under NASDAQ and AMEX rules, generally speaking, a director will only
qualify as an "independent director" if, in the opinion of our Board, that
person does not have a relationship which would interfere with the exercise of
independent judgment in carrying out the responsibilities of a director. Our
Board has determined that each of Dr. Jaensch, Mr. Greenberg and Mr. Yakatan
does not have a relationship which would interfere with the exercise of
independent judgment in carrying out the responsibilities of a director and
that, consequently, each of these directors is an "independent director" as
defined under Rule 4200(a)(15) of the NASDAQ Marketplace Rules and similar AMEX
rules.
37
The Board and Committees of the Board
The Board held six meetings during our fiscal year ended February 28,
2006. The standing committees of the Board are the Audit Committee and the
Compensation Committee. The Board does not currently have a nominating committee
and has not established any specific procedure for selecting candidates for
director. However, directors are currently nominated by a majority vote of the
Board. There is also no established procedure for stockholder communications
with members of the Board or the Board as a whole. However, stockholders may
communicate with our investor relations department, and such communications are
either responded to immediately or are referred to the chief executive officer
or chief financial officer of Biophan for a response. The Board intends to form
a nominating and corporate governance committee during this current fiscal year.
During fiscal 2006, each of the incumbent directors, during his period of
service, attended at least 75% of the total number of meetings held by the Board
and each committee of the Board on which he served.
Audit Committee. The Audit Committee is composed of Dr. Jaensch, Mr.
Greenberg, and Mr. Yakatan. The responsibilities of the Audit Committee as more
fully set forth in the Audit Committee Charter adopted in July 2003 and as
previously provided and posted on our website at www.biophan.com, include
appointing, retaining, replacing, compensating and overseeing the work of the
independent accountants, who report to, and are directly accountable to, the
Committee. The Audit Committee reviews with the independent accountants the
results of the audit engagement, approves professional services provided by the
accountants including the scope of non-audit services, if any, and reviews the
adequacy of our internal accounting controls. The Audit Committee met formally
four times during our fiscal year ended February 28, 2006, but also met
informally on several other occasions. Messrs. Bramson and Katz resigned from
the Committee on January 12, 2006. Mr. Greenberg was appointed to the Committee
in February 2006 and Mr. Yakatan was appointed in December 2006. On the occasion
of two of the four meetings, Mr. Bramson was absent. Otherwise, each member of
the Audit Committee attended all of the meetings. The Board has determined that
each of Dr. Jaensch, Mr. Greenberg and Mr. Yakatan meets the qualifications as
an "audit committee financial expert". Each member of the Audit Committee is
"independent" as such term is used in Section 10A(m)(3) of the Securities and
Exchange Act of 1934, as amended.
Compensation Committee. The Compensation Committee is composed of Dr.
Jaensch and Mr. Katz. The responsibilities of the Compensation Committee as more
fully set forth in the Compensation Committee Charter adopted in June 2005 and
as previously provided and posted on our website at www.biophan.com, include
reviewing our compensation policies, establishing executive officer
compensation, and administering our stock option plans. The Compensation
Committee met three times during our fiscal year ended February 28, 2006. Each
member of the Compensation Committee attended the meetings. All of the members
of the Committee are deemed to be non-employee directors for purposes of Section
162(m) and Rule 16b-3 of the Exchange Act. None of our executive officers serves
as a member of the Board or Compensation Committee, or other committee serving
an equivalent function, of any other entity that has one or more of its
executive officers serving as a member of our Board or Compensation Committee.
None of the members of our Compensation Committee has ever been our employee.
Compensation of the Board
Directors who are also our employees do not receive additional
compensation for serving on the Board or its committees. Non-employee directors,
for their services as directors, are paid an annual cash fee of $8,000. Dr.
Jaensch received an additional $2,000 per month for serving as Chairman of the
Board through July 31, 2005. Commencing August 2005, the monthly fee was
increased to $2,500 per month. In addition, non-employee directors have received
options under our 2001 Stock Option Plan and our 2006 Incentive Stock Plan. All
directors are reimbursed for their reasonable expenses incurred in attending
Board meetings. An additional $3,000 per year is paid to the Chairman of the
Audit Committee. Otherwise, no additional compensation is paid to any director
for serving as a member of any committee of the Board. We maintain directors and
officers liability insurance.
38
Options Granted To Directors In Fiscal 2006.
The following table sets forth the options granted to the non-employee
directors on our Board in fiscal 2006:
Number of Shares Exercise Price
Director Underlying Options Granted Grant Date per Share
--------------------- -------------------------- ---------- --------------
Guenter H. Jaensch 35,000 7/27/05 $2.97
Robert S. Bramson 35,000 7/27/05 $2.97
Steven Katz 35,000 7/27/05 $2.97
Ross B. Kenzie (1) 35,000 7/27/05 $2.97
Theodore A. Greenberg 0 -- --
(1) Retired effective October 31, 2006
Each option grant for 35,000 shares was made pursuant to the automatic
option grant program in effect for the non-employee directors under the 2001
Stock Option Plan as amended and restated in 2005. These options become
exercisable upon the earlier of (i) the optionee's completion of one year of
Board service measured from the grant date or (ii) his continuation in Board
service through the day immediately preceding the date of the next Annual
Stockholders Meeting following such grant date. However, the option will
immediately vest in full upon the optionee's death or disability while a Board
member or upon the occurrence of certain changes in ownership or control.
Executive Compensation
The following table summarizes the annual compensation paid to our named
executive officers during each of the last three fiscal years:
Securities
Underlying
Name and Principal Position Year Salary options/SARs
---------------------------- ------- -------- ------------
Michael L. Weiner, CEO 2/28/06 $237,115 -0-
2/28/05 $198,269 1,000,000
2/29/04 $175,000 300,000
Robert J. Wood, CFO (1) 2/28/06 $160,817 25,000
2/28/05 $134,654 400,000
2/29/04 $129,000 125,000
Darryl L. Canfield, CFO (2) 2/28/06 $ 50,192 600,000
Stuart G. MacDonald,
Vice-President-Research 2/28/06 $175,384 25,000
2/28/05 $149,711 425,000
2/29/04 $153,846 200,000
Jeffrey L. Helfer,
Vice-President-Engineering 2/28/06 $176,153 25,000
2/28/05 $149,711 425,000
2/29/04 $153,846 200,000
John F. Lanzafame,
COO, Vice-President-Business
Development (3) 2/28/06 $159,039 575,000
2/28/05 $ 53,308 250,000
(1) Retired effective January 20, 2006
(2) Hired November 9, 2005, appointed Chief Financial Officer effective
January 20, 2006
(3) Hired September 4, 2004, appointed Chief Operating Officer effective April
12, 2006.
39
Columnar information required by Item 402(a)(2) of Regulation S-K has been
omitted for categories where there has been no compensation awarded to, earned
by, or paid to, the named executive officers required to be reported in the
table during fiscal years 2004 through 2006.
Stock Options
In 2001, the Board adopted, and the stockholders approved, the Biophan
Technologies, Inc. 2001 Stock Option Plan (as subsequently amended, the "2001
Option Plan"). The 2001 Option Plan provides for the grant of incentive and
non-qualified stock options to selected employees, the grant of non-qualified
options to selected consultants and to directors and advisory board members. The
2001 Option Plan is administered by the Compensation Committee of the Board and
authorizes the grant of options or restricted stock awards for 13,000,000
shares. 235,982 shares remain available for future option grants under the 2001
Option Plan. The Compensation Committee determines which eligible individuals
are to receive options or other awards under the 2001 Option Plan, the terms and
conditions of those awards, the applicable vesting schedule, the option price
and term for any granted options, and all other terms and conditions governing
the option grants and other awards made under the 2001 Option Plan. Until
adoption of the 2006 Plan described below, non-employee directors were entitled
to receive periodic option grants pursuant to the automatic grant program in
effect for them under the 2001 Option Plan. Each such director received an
initial grant of options to purchase 20,000 shares, vesting on the first
anniversary of the grant, and additional grants of options to purchase up to
50,000 shares on each succeeding anniversary of such director's election.
During 2006, the Board adopted, and the shareholders approved, the Biophan
Technologies, Inc. 2006 Incentive Stock Plan (the "2006 Plan"), which provides
for the grant of incentive and non-qualified stock options to selected
employees, the grant of non-qualified options to selected consultants and to
directors and advisory board members. The 2006 Plan is administered by the
Compensation Committee of the Board and authorizes the grant of options or
restricted stock awards for 7,500,000 shares. The Compensation Committee
determines which eligible individuals are to receive options or other awards
under the 2006 Plan, the terms and conditions of those awards, the applicable
vesting schedule, the option price and term for any granted options, and all
other terms and conditions governing the option grants and other awards made
under the 2006 Plan. Non-employee directors are entitled to receive automatic
option grants under the 2006 Plan. Upon his or her election to the Board, each
non-employee director receives an initial option to purchase 40,000 shares,
vesting on the first anniversary of the grant; on the date of each annual
meeting, each non-employee director who is re-elected receives an additional
grant of an option to purchase 40,000 shares, vesting on the anniversary of such
grant.
40
OPTION GRANTS IN LAST FISCAL YEAR
The following table summarizes information concerning stock options
granted to the named executive officers during the last completed fiscal year
ended February 28, 2006:
Percent of Potential Realizable Value at
Number of total Assumed Annual Rates of Stock
securities options/SARs Exercise Price Appreciation for Option
underlying granted to or base Term (1)
options/SARs employees in price Expiration -----------------------------
Name granted (#) fiscal year ($/Sh) date 5%($) 10%($)
------------------- ------------ ------------ ------------ -------------- -------- ----------
Michael L. Weiner -0- -0- -0- -0- -- --
Robert J. Wood 25,000 1.47% $2.60 5/27/15 $ 40,878 $ 103,593
Darryl L. Canfield 600,000 35.40% $1.87 11/9/15 $705,620 $1,788,179
Stuart G. MacDonald 25,000 1.47% $.97 5/27/15 $ 40,878 $ 103,593
Jeffrey L. Helfer 25,000 1.47% $.97 5/27/15 $ 40,878 $ 103,593
John F. Lanzafame 575,000 33.92% $1.56 -$1.80 3/10/15-1/6/16 $339,603 $ 860,621
----------
(1) The dollar amounts under these columns are the result of calculations at
rates set by the Securities and Exchange Commission and, therefore, are
not intended to forecast possible future appreciation, if any, in the
price of the underlying Common Stock.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
No named executive officer exercised options in the fiscal year ended
February 28, 2006. The following table presents the number and values of
exercisable and unexercisable options as of February 28, 2006:
Number of Securities Value of unexercised
underlying unexercised in-the-money
options/SARs at FY-end options/SARs at FY-end
---------------------------- ----------------------
Shares (#) ($)
acquired on Value Exercisable/ Exercisable/
Name exercise realized Unexercisable Unexercisable(1)
------------------- ----------- -------- ----------------- -------------------
Michael L. Weiner None -- 1,525,000/275,000 $2,501,000/$451,000
Robert J. Wood None -- 528,750/171,250 $ 826,150/$280,850
Darryl L. Canfield None -- 100,000/500,000 $ 0/$0
Stuart G. MacDonald None -- 715,000/135,000 $1,131,600/$221,400
Jeffrey L. Helfer None -- 715,000/135,000 $1,131,600/$221,400
John F. Lanzafame None -- 725,000/315,000 $ 516,600/$221,400
-----------
(1) As permitted by the rules of the Securities and Exchange Commission, we
have calculated the value of the unexercised in-the-money options at
fiscal year end on the basis of the closing price of $1.64 per share of
our Common Stock as quoted on the OTC Bulletin Board on the last day of
the fiscal year, or February 28, 2006, less the applicable exercise price
multiplied by the number of shares which may be acquired on exercise. We
have calculated the value realized of exercised options based on the
difference between the per share option exercise price and the fair market
value per share of our Common Stock on the date of exercise, multiplied by
the number of shares for which the option was exercised.
41
Employment Agreements
Each of Michael L. Weiner, President and Chief Executive Officer; Darryl
L. Canfield, Vice-President, Treasurer, Secretary and Chief Financial Officer;
Stuart G. MacDonald, Vice President of Research and Development; Jeffrey L.
Helfer, Vice President of Engineering; and John F. Lanzafame, Chief Operating
Officer and Vice President of Business Development, has entered into an
employment agreement with Biophan.
Mr. Weiner's employment agreement has an initial term of three years with
subsequent one-year renewal periods. His employment agreement may be terminated
by us for cause or upon his death or disability. In the event of the disability
of Mr. Weiner, termination of his employment agreement by us following a change
in control or termination of his employment agreement by him for good reason,
Mr. Weiner is entitled to receive (i) the unpaid amount of his base salary
earned through the date of termination; (ii) any bonus compensation earned but
not yet paid; and (iii) a severance payment equal to one (1) year of his then
current salary. In addition, Mr. Weiner will be immediately vested in any
options, warrants, retirement plan or agreements then in effect. "Good reason"
means (i) a material change of Mr. Weiner's duties, (ii) a material breach by us
under the employment agreement, or (iii) a termination of Mr. Weiner's
employment in connection with a change in control.
As used in Mr. Weiner's employment agreement, "change in control" means:
(1) our merger or consolidation with another entity where the members of our
Board do not, immediately after the merger or consolidation, constitute a
majority of the Board of Directors of the entity issuing cash or securities in
the merger or consolidation immediately prior to the merger or consolidation, or
(2) the sale or other disposition of all or substantially all of our assets.
In the event of termination for cause, all of Mr. Weiner's unexercised
warrants and options, whether or not vested, will be canceled, and Mr. Weiner
will not be eligible for severance payments. In the event of voluntary
termination, Mr. Weiner's vested warrants and options remain exercisable for the
life of the applicable agreement but he will not be eligible for severance
payments.
The employment agreements for Messrs. Canfield, MacDonald, Helfer and
Lanzafame are terminable by either us or the employee upon 30 days' notice or
immediately by us for cause (as defined in their employment agreements) or upon
the death or disability of the employee. However, each of them is entitled to
receive severance equal to six months' base salary, payable in six equal
consecutive monthly installments in the event that the employee is terminated by
us within ninety (90) days following a change in control. In addition, under
such circumstances each of them will be immediately vested in any options,
warrants, retirement plan or agreements then in effect.
For purposes of the employment agreements for Messrs. Canfield, MacDonald,
Helfer and Lanzafame "change in control" means (1) on the date of the merger or
consolidation of Biophan with another entity where the members of the Board of
Directors, immediately prior to the merger or consolidation, would not,
immediately after the merger or consolidation, constitute a majority of the
Board of Directors of the entity issuing cash or securities in the merger or
consolidation; (2) on the date Michael L. Weiner is terminated as CEO of the
Company; or (3) on the date of the sale or other disposition of all or
substantially all of the assets of Biophan.
In the event of termination for cause, all unexercised warrants and
options held by the applicable employee, whether or not vested, will be canceled
and the employee will not be eligible for severance payments. In the event of
voluntary termination, all vested warrants and options remain exercisable for
the life of the applicable agreement.
Employee Benefit Plans
401(k) Plan
We maintain a tax-qualified retirement plan that provides all regular
employees with an opportunity to save for retirement on a tax-advantaged basis.
Under the 401(k) plan, participants may elect to defer a portion of their
compensation on a pre-tax basis and have it contributed to the plan subject to
applicable annual Internal Revenue Code limits. Pre-tax contributions are
allocated to each participant's individual account and are then invested in
selected investment alternatives according to the participants' directions.
Employee elective deferrals are 100% vested at all times. The 401(k) plan allows
for matching contributions to be made by us. As a tax-qualified retirement plan,
contributions to the 401(k) plan and earnings on those contributions are not
taxable to the employees until distributed from the 401(k) plan and all
contributions are deductible by us when made.
42
Limitation of Liability and Indemnification
As permitted by the Nevada General Corporation Law, we have adopted
provisions in our certificate of incorporation and by-laws to be in effect at
the closing of this offering that limit or eliminate the personal liability of
our directors. Consequently, a director will not be personally liable to us or
our stockholders for monetary damages or breach of fiduciary duty as a director,
except for liability for:
o any breach of the director's duty of loyalty to us or our
stockholders;
o any act or omission not in good faith or that involves intentional
misconduct or a knowing violation of law;
o any unlawful payments related to dividends or unlawful stock
repurchases, redemptions or other distributions; or
o any transaction from which the director derived an improper personal
benefit.
These limitations of liability do not alter director liability under the
federal securities laws and do not affect the availability of equitable remedies
such as an injunction or rescission.
In addition, our by-laws provide that:
o we will indemnify our directors, officers and, in the discretion of
our board of directors, certain employees to the fullest extent
permitted by the Nevada General Corporation Law; and
o we will advance expenses, including attorneys' fees, to our
directors and, in the discretion of our board of directors, to our
officers and certain employees, in connection with legal
proceedings, subject to limited exceptions.
We also maintain general liability insurance that covers certain
liabilities of our directors and officers arising out of claims based on acts or
omissions in their capacities as directors or officers, including liabilities
under the Securities Act of 1933, as amended. Insofar as indemnification for
liabilities arising under the Securities Act may be permitted to directors,
officers, or persons controlling the registrant pursuant to the foregoing
provisions, we have been informed that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is therefore unenforceable.
These provisions may discourage stockholders from bringing a lawsuit
against our directors for breach of their fiduciary duty. These provisions may
also have the effect of reducing the likelihood of derivative litigation against
directors and officers, even though such an action, if successful, might
otherwise benefit us and our stockholders. Furthermore, a stockholder's
investment may be adversely affected to the extent we pay the costs of
settlement and damage awards against directors and officers pursuant to these
indemnification provisions. We believe that these provisions, the
indemnification agreements and the insurance are necessary to attract and retain
talented and experienced directors and officers.
At present, there is no pending litigation or proceeding involving any of
our directors or officers where indemnification will be required or permitted.
We are not aware of any threatened litigation or proceeding that might result in
a claim for such indemnification.
43
BENEFICIAL OWNERSHIP OF COMMON STOCK BY DIRECTORS,
OFFICERS AND PRINCIPAL STOCKHOLDERS
The following table sets forth the beneficial ownership information of our
common stock at February 23, 2007, for:
o each person known to us to be the beneficial owner of more than 5%
of our common stock (other than selling stockholders, whose
beneficial ownership is disclosed on page 48);
o each named executive officer;
o each of our directors; and
o all of our executive officers and directors as a group.
We have determined beneficial ownership in accordance with the rules of
the SEC. Except as indicated by the footnotes below, we believe, based on the
information furnished to us, that the persons and entities named in the table
below have sole voting and investment power with respect to all shares of common
stock reflected as beneficially owned. We have based our calculation of the
percentage of beneficial ownership on 83,431,699 shares of common stock
outstanding on February 23, 2007.
In computing the number of shares of common stock beneficially owned by a
person and the percentage ownership of that person, we deemed outstanding shares
of common stock subject to options or warrants held by that person that are
currently exercisable or exercisable within 60 days of February 23, 2007. We did
not deem these shares outstanding, however, for the purpose of computing the
percentage ownership of any other person. Beneficial ownership representing less
than 1% is denoted with an asterisk (*).
Shares Beneficially
Owned
Beneficial Owner Number Percent
----------------------------------------------------- ---------- ---------
Guenter H. Jaensch 1,077,500 (1) 1.28%
16065 Bristol Isle Way
Delray Beach, FL 33446
Michael L. Weiner 15,970,522 (2) 17.14%
693 Summit Drive
Webster, NY 14580
Steven Katz 332,500 (3) *
20 Rebel Run Drive
East Brunswick, NJ 08816
Theodore A. Greenberg 0 *
530 F Grand Street
New York, NY 10002
Stan Yakatan 0 *
155 Lyndon Street - First Court
Hermosa Beach, CA 90524
Jeffrey H. Helfer 5,818,780 (4) 6.91%
4 Highland Green
Victor, NY 14564
Stuart G. MacDonald 5,778,080 (5) 6.86%
4663 East Lake Road
Pultneyville, NY 14538
John F. Lanzafame 519,500 (3) *
10 Alameda Drive
Fairport, NY 14450
Darryl L. Canfield 300,000 (3) *
32 Merryhill Lane
Pittsford, NY 14534
Biomed Solutions, LLC 8,839,437 (6) 9.65%
15 Schoen Place
Pittsford, NY 14534
Myotech, LLC 4,923,080 5.90%
15 Schoen Place
Pittsford, NY 14534
Technology Innovations, LLC 9,140,081 (7) 9.98%
15 Schoen Place
Pittsford, NY 14534
All Directors and Executive Officers as a Group (9 persons)
19,950,722 (8) 20.67%
44
(1) Includes 627,000 shares issuable upon exercise of
currently-exercisable options. Also includes 225,000 shares owned by
Dr. Jaensch's wife; Dr. Jaensch disclaims beneficial ownership of
the shares held by his wife.
(2) Includes (i) 656,756 shares owned by Biomed Solutions, LLC and an
aggregate of 8,182,681 shares issuable to Biomed Solutions, LLC upon
exercise of currently-exercisable warrants and conversion of
outstanding convertible promissory notes, (ii) 4,923,080 shares
owned by Myotech, LLC, and (iii) 300,644 shares owned by Technology
Innovations, LLC. Mr. Weiner is deemed to have voting and investment
control over these shares by reason of his status as Manager of
Biomed Solutions, LLC and Technology Innovations LLC and as a member
of the Board of Directors of Myotech, LLC; he disclaims beneficial
ownership of these shares except to the extent of his pecuniary
interest in Biomed Solutions, LLC, Technology Innovations LLC and
Myotech, LLC. Also includes 1,600,000 shares issuable upon exercise
of currently-exercisable options held by Mr. Weiner.
(3) Issuable upon exercise of currently-exercisable options.
(4) Includes 4,923,080 shares owned by Myotech, LLC. Mr. Helfer is
deemed to have voting and investment control over these shares by
reason of his status as a member of the Board of Directors of
Myotech, LLC; he disclaims beneficial ownership of these shares
except to the extent of his pecuniary interest in Myotech, LLC. Also
includes 765,000 shares issuable upon exercise of
currently-exercisable options held by Mr. Helfer.
(5) Includes 4,923,080 shares owned by Myotech, LLC. Mr. MacDonald is
deemed to have voting and investment control over these shares by
reason of his status as a member of the Board of Directors of
Myotech, LLC; he disclaims beneficial ownership of these shares
except to the extent of his pecuniary interest in Myotech, LLC. Also
includes 765,000 shares issuable upon exercise of
currently-exercisable options held by Mr. MacDonald.
(6) Includes 6,434,403 shares issuable upon exercise of
currently-exercisable warrants and conversion of outstanding
convertible promissory notes.
(7) Includes (i) 656,756 shares owned by Biomed Solutions, LLC and (ii)
6,434,403 shares issuable to Biomed Solutions, LLC upon exercise of
currently-exercisable warrants and conversion of outstanding
convertible promissory notes. Technology Innovations, LLC is the
beneficial owner of approximately 57% of the outstanding membership
interests of Biomed Solutions, LLC; it disclaims ownership of these
shares except to the extent of its pecuniary interest in Biomed
Solutions, LLC.
(8) Includes shares issuable upon exercise of options and warrants and
conversion of convertible promissory notes, as described in notes 1
through 7 above. Also includes shares as to which beneficial
ownership is disclaimed, as described in notes 1, 2, 4, 5 and 7
above
45
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Michael L. Weiner, our President and Chief Executive Officer, is the
Manager and a 42.7% equity member of Technology Innovations, LLC., a 57% equity
member of Biomed Solutions, LLC. Mr. Weiner is also the Manager of Biomed.
Biomed is the record owner of 656,756 shares of our common stock and Technology
Innovations is the record owner of 300,644 shares of our common stock. As
Manager of Technology Innovations and Biomed, Mr. Weiner has control over these
entities. Mr. Weiner is also on the board of Nanoset, LLC, an entity owned in
part by Biomed Solutions, and with which we have entered into a technology
license agreement. Mr. Weiner is also on the Board of Myotech, LLC which is the
owner of 4,923,080 shares of our common stock. We beneficially own 43.5% of
Myotech, LLC.
On December 1, 2000, we issued to Biomed Solutions, LLC 10,759,101 shares
of our common stock in exchange for Biomed's shares of LTR Antisense Technology,
Inc.
On December 1, 2000, Biomed Solutions transferred its MRI-compatible
pacemaker patent pending and related technology to Biophan for a future payment
of $500,000. This obligation bore interest at 8% per annum from February 28,
2002. On February 10, 2004, Biomed transferred $300,000 of this obligation to
SBI Brightline Consulting, LLC and converted the remaining balance of $200,000
into shares of our common stock. On the same date, SBI converted the $300,000
obligation transferred to it into 3,000,000 shares of our common stock.
On June 4, 2002, we executed a line of credit agreement with Biomed
providing for borrowings up to $250,000. On August 19, 2002, the line was
increased by $100,000 and the expiration date thereof for that portion of the
line was set at August 19, 2003. The payment date of amounts borrowed under the
original line was extended to December 1, 2002. It was later extended to June 1,
2004. On February 10, 2004, all outstanding balances under the line of credit
were converted to common stock in accordance with the terms of the credit
agreement.
On May 27, 2005, we entered into an unsecured loan agreement with Biomed,
whereby Biomed agreed to provide us with a line of credit facility of up to $2
million. Borrowings under the line bear interest at 8% per annum (compounded
monthly) and are payable on demand on or after November 27, 2005. In June 2005
the entire facility was drawn down. The outstanding principal and interest are
convertible into shares of our Common Stock at 90% of the average market closing
price per share of our Common Stock for the 20 trading days preceding the date
of borrowings under the line ($2.12 per share for the first $1 million and $2.19
per share for the second $1 million). Additionally, Biomed received warrant
coverage of 500,000 shares, with the warrants priced at 110% of the average
market closing price per share of our Common Stock for the 20 trading days
preceding the date of execution of the loan agreement ($2.49 per share). On
August 31, 2005, Biomed elected to convert $1,000,000 of the outstanding debt
plus accrued interest into 480,899 shares of our Common Stock. On October 7,
2005, we repaid $500,000 of the outstanding debt plus the entire accrued
interest to date, leaving an outstanding principal balance of $500,000. The loan
agreement requires us to use our best efforts to include the shares issued and
issuable upon conversion of the loan in any registration statement we file
covering resale of shares of our Common Stock.
On January 24, 2006, we entered into a Line of Credit Agreement (the "Line
of Credit Agreement") with Biomed pursuant to which Biomed has committed to make
advances to us, in an aggregate amount of up to $5,000,000. Our obligations with
respect to borrowings under the credit facility are governed by a Convertible
Promissory Note issued by us to Biomed on January 24, 2006. Under the Line of
Credit Agreement, advances may be drawn down in such amounts and at such times
as we determine upon 15 days' prior notice to Biomed, except that we may not
draw down more than $1,500,000 in any 30-day period. As of January 31, 2007, we
had borrowed an aggregate of $3,930,000 under the Line of Credit Agreement.
Amounts borrowed bear interest at the rate of 8% per annum and were originally
convertible into shares of our Common Stock at the rate of $1.46 per share. On
October 11, 2006, in connection with Biomed's agreement to subordinate its
rights under the Convertible Promissory Note to the interests of the investors
acquiring the Notes described under the heading "Transactions with Selling
Stockholders" on Page 47, we amended the Line of Credit Agreement to reduce the
conversion price to $0.67 per share. Any amounts drawn down and repaid may be
reborrowed at any time (subject to a requirement of 15 days' notice and the
limitation that not more than $1,500,000 may be drawn down during any 30-day
period). Biomed's obligation to lend to us under the Line of Credit Agreement
expires on June 30, 2007, on which date the entire amount borrowed by us (and
not converted into shares of our Common Stock) becomes due and payable. In
connection with the establishment of the credit facility under the Line of
Credit Agreement, on January 24, 2006 we issued to Biomed a Stock Purchase
Warrant (the "Warrant") entitling Biomed to purchase up to 1,198,630 shares of
our Common Stock at an exercise price of $1.89 per share. Biomed's purchase
rights under the Warrant expire on January 23, 2011.
46
We have affiliations with three entities, Biomed Solutions, Technology
Innovations, and Myotech (through November 30, 2005) that are related by virtue
of common senior management personnel and stock ownership. During the years
ended February 28, 2006, 2005 and February 29, 2004, we charged Biomed and
Myotech (through November 30, 2005) for services of certain Biophan personnel.
The total of these charges was $156,647, $161,014 and $85,584, respectively. We
also charge Biomed, Technology Innovations and Myotech (through November 30,
2005) for expenses allocable to and paid on their behalf. During the year ended
February 28, 2006, 2005 and February 29, 2004 expenses paid by us on their
behalf were approximately $647,000, $240,000 and $120,000, respectively. At
February 28, 2006, the combined balances due from these related parties was
$9,387. The amounts do not bear interest and we received payment within
forty-five days.
During the years ended February 28, 2006 and 2005, we were billed $93,000
and $9,000 respectively, for legal services provided by Bramson & Pressman.
Robert S. Bramson, at the time a member of our Board of Directors, is a partner
in Bramson & Pressman.
During the year ended February 28, 2006, we were billed $121,500 for
consulting services provided by Steven Katz, a member of our Board of Directors.
All transactions with affiliates were approved by the disinterested
members of our Board of Directors, who determined that they were on terms no
less favorable to us than would have prevailed in arms-length transactions with
unaffiliated parties under similar circumstances.
TRANSACTIONS WITH SELLING STOCKHOLDERS
On October 11, 2006, we entered into a Securities Purchase Agreement (the
"Purchase Agreement") with ten private investors led by Iroquois Master Fund Ltd
("Iroquois"). The investors party to the Purchase Agreement are selling
stockholders in this offering.
Pursuant to the Purchase Agreement, on October 12, 2006 we issued
$7,250,000 of Senior Secured Convertible Notes (the "Notes") to the investors
and received proceeds of $6,219,880 after paying estimated fees and expenses of
$1,030,120 related to the transaction. The holders of the Notes may elect to
convert the Notes at any time into shares of our common stock based upon a price
of $0.67 per share (the "Conversion Price"). Interest on the outstanding
principal amount under the Notes is payable quarterly at a rate equal to the
six-month London InterBank Overnight Rate plus 500 basis points, with a minimum
rate of 10% per annum and a maximum rate of 12% per annum, payable at our option
in cash or shares of our common stock registered for resale under the Securities
Act of 1933, as amended (the "Securities Act"). If we elect to make an interest
payment in common stock, the number of shares issuable by us will be based upon
the lower of (i) 90% of the 20-day trailing average volume weighted average
price per share as reported on Bloomberg LP (the "VWAPS") or (ii) the Conversion
Price. Principal on the Notes amortizes and payments are due in 33 equal monthly
installments commencing four months following issuance of the Notes, and may be
made at our option in cash or shares of our common stock registered for resale
under the Securities Act. If we elect to make a principal payment in common
stock, the number of shares issuable by us will be based upon the lower of (i)
87.5% of the 15-day trailing VWAPS prior to the principal payment date or (ii)
the Conversion Price. Our obligations under the Notes are secured by a first
priority security interest in substantially all of our assets pursuant to a
Security Agreement dated as of October 11, 2006 among us, the investors and
Iroquois, as agent for the investors (the "Security Agreement").
47
As further consideration to the investors, we issued one-year warrants to
purchase an aggregate of 10,820,896 shares of our common stock at a price of
$0.67 per share. If the investors elect to exercise these one-year warrants,
they will also receive additional five-year warrants to purchase shares of our
common stock equal to the number of shares purchased under the one-year
warrants, with 50% of the additional warrants having an exercise price of 115%
of the per share purchase price, and the remaining 50% of the additional
five-year warrants having an exercise price of 125% of the per share purchase
price. We also issued to the investors two series of five-year warrants to
purchase an aggregate of 10,820,896 shares of our common stock. The first
five-year warrants allow for the purchase of 5,410,448 shares of our common
stock at an exercise price of $0.81 per share, and the second five-year warrants
allow for the purchase of 5,410,448 shares of our common stock at an exercise
price of $0.89 per share. The warrants contain anti-dilution protection that,
should we issue equity or equity-linked securities at a price per common share
below the exercise price of the five-year warrants, will automatically adjust
the exercise price of the warrants to the price at which we issue such equity or
equity-linked securities.
On February 21, 2007, we entered into a Forbearance Agreement (the
"Forbearance Agreement") with the selling investors pursuant to which the
investors agreed that, during the period commencing on February 16, 2007 and
ending on the earlier of (i) March 31, 2007 or (ii) the date on which any
Termination Event (as defined in the Forbearance Agreement) first occurs (the
"Forbearance Period"), they will forbear from exercising any and all of the
rights and remedies which they may have against us or any of our assets under
the Notes or the Purchase Agreement or at law or in equity as a result of any
default under the Notes or as a result of the occurrence of certain events with
respect to the Purchase Agreement. In exchange for entering into the Forbearance
Agreement, we issued pro rata to the investors three-year warrants for the
purchase of an aggregate of 60,000 shares of our common stock at an exercise
price of $0.51 per share (the "Fee Warrants").
Upon the issuance of the Fee Warrants, the exercise prices of five-year
warrants issued to the investors pursuant to the Purchase Agreement to the Note
Holders (the "Original Warrants") for the purchase of an aggregate of 10,820,896
shares of our common stock were automatically adjusted from $0.81 per share and
$0.89 per share, respectively, to $0.51 per share, and the number of shares of
Common Stock issuable upon exercise of the Original Warrants was automatically
adjusted, proportionately, to an aggregate of 18,034,830 shares. In the
Forbearance Agreement, the investors waived, with respect to the issuance of the
Fee Warrants, application of similar anti-dilution adjustments contained in the
Notes and in a third series of warrants for the purchase, on or before October
12, 2007, of an aggregate of 10,820,896 additional shares of our common stock at
an exercise price of $0.67 per share (the "One Year Warrants").
Pursuant to the Forbearance Agreement, we also agreed that we would not,
without the prior written consent of investors then holding Notes representing,
in the aggregate, at least sixty percent (60%) of the face amount of all
outstanding Notes, incur expenses (other than the accrual of interest, penalties
and liquidated damages on the Notes or under the Purchase Agreement) in excess
of $500,000 during any thirty-day period commencing on February 16, 2007 and
terminating on the date on which the Registration Statement to which this
prospectus relates was declared effective by the Securities and Exchange
Commission.
C.E. Unterberg, Towbin acted as the exclusive placement agent in the
offering. We paid the placement agent a cash fee of $580,000 and issued to it a
five-year warrant to purchase an aggregate of 865,672 shares of our common stock
at a price of $0.67 per share. The placement agent is a selling stockholder in
this offering.
In connection with the Forbearance Agreement, C.E. Unterberg Towbin
separately agreed to waive, with respect to the issuance of the Fee Warrants,
application of the anti-dilution provisions set forth in its warrant.
The Registration Statement to which this prospectus relates was filed by
us pursuant to an agreement with the selling stockholders to register for resale
under the Securities Act the common stock issuable upon the exercise of all of
the warrants and any shares of common stock that we may issue at our option to
the holders of the Notes in connection with payments of interest and principal,
or that we are obligated to issue upon any conversion of the Notes at the option
of the holders. We further agreed to propose to our shareholders an amendment to
our Articles of Incorporation in order to increase to at least 150,000,000 the
number of authorized shares of our common stock (the "Charter Amendment") in
order to make available a sufficient number of shares to permit the exercise in
full of the warrants issued to the investors under the Purchase Agreement and
the conversion in full of the Notes. Following approval of the Charter Amendment
by our stockholders, we intend to file another registration statement covering
the resale by the selling stockholders of the remaining shares of our common
stock issuable upon exercise of the warrants.
SELLING STOCKHOLDERS
The following table sets forth the beneficial ownership information of our
common stock at February 23, 2007, and as adjusted to reflect the sale of the
shares of common stock in this offering, for each selling stockholder.
Certain selling stockholders may be affiliates of broker-dealers. To our
knowledge, each selling stockholder purchased the shares of our stock in the
ordinary course of business and, at the time of acquiring the securities to be
resold, the selling stockholder had no agreements or understandings, directly or
indirectly, with any person to distribute the securities.
We have determined beneficial ownership in accordance with the rules of
the SEC. Except as indicated by the footnotes below, we believe, based on the
information furnished to us, that the persons and entities named in the table
below have sole voting and investment power with respect to all shares of common
stock reflected as beneficially owned. We have based our calculation of the
percentage of beneficial ownership on 83,431,699 shares of common stock
outstanding on February 23, 2007, assuming (i) the conversion of an aggregate
face amount of $7,250,000 of our outstanding Senior Secured Convertible Notes
due October 11, 2009 into an aggregate of 10,820,896 shares of common stock to
be sold by selling stockholders in this offering, (ii) the exercise of warrants
to purchase an aggregate of 11,686,568 shares of common stock to be sold by
selling stockholders in this offering, (iii) the issuance of an aggregate of
2,084,027 shares of common stock (at an assumed price of $0.67 per share) in
payment of interest accruing under the Notes through October 11, 2009, to be
sold by selling stockholders in this offering, and (iv) the issuance to the
selling stockholders of additional warrants to purchase an aggregate of
36,069,660 shares of common stock. Our calculation does not include an aggregate
of 60,000 of common stock issuable to the selling stockholders upon exercise of
warrants which may not be exercised.
48
In computing the number of shares of common stock beneficially owned by a
person and the percentage ownership of that person, we deemed outstanding shares
of common stock subject to options or warrants held by that person that are
currently exercisable or exercisable within 60 days of February 23, 2007. We did
not deem these shares outstanding, however, for the purpose of computing the
percentage ownership of any other person. Beneficial ownership representing less
than 1% is denoted with an asterisk (*).
Shares Beneficially Shares Beneficially
Owned Prior Owned After the
to the Offering Offering
---------------------------------- Shares ----------------------------------
Beneficial Owner Number Percent Offered Number Percent
---------------------------------------- --------------- -------------- ------------- --------------- --------------
BridgePointe Master Fund Ltd (2) 6,185,733(1) 4.99%(1) 2,454,389 3,731,344 3.34%
1125 Sanctuary Parkway, Suite 275
Alpharetta, GA 30004
CAMOFI Master LDC (3) 8,247,654(1) 4.99%(1) 3,272,532 4,975,122 4.40%
c/o Centrecourt Asset Management LLC
550 Madison Avenue, 8th Floor
New York, New York 10017
Castlerigg Master Investments LTD (4) 8,247,654(1) 4.99%(1) 3,272,532 4,975,122 4.40%
c/o Sandell Asset Management Corp.
40 W. 57th Street, 26th Floor
New York, New York 10019
Cranshire Capital, L.P. (5) 6,185,733(1) 4.99%(1) 2,454,389 3,731,344 3.34%
3100 Dundee Rd., Suite 703
Northbrook, IL 60062
Crescent International Ltd. (6) 4,123,831 3.73% 1,636,267 2,487,564 2.25%
c/o Cantara (Switzerland) S.A.
84 Avenue Louis-Casai
CH-1216 Cointrin/Geneva, Switzerland
Harborview Master Fund LP (7) 4,123,831 3.73% 1,636,267 2,487,564 2.25%
Harbour House, Second Floor
Waterfront Drive, Road Town
Tortola, British Virgin Islands
Highbridge International LLC (8) 4,123,831 3.73% 1,636,267 2,487,564 2.25%
c/o Highbridge Capital Management, LLC
9 West 57th Street, 27th Floor
New York, NY 10019
Iroquois Master Fund Ltd. (9) 10,309,550(1) 4.99%(1) 4,090,642 6,218,908(1) 4.99%(1)
641 Lexington Avenue, 28th Floor
New York, NY 10022
Rockmore Investment Master Fund Ltd. (10) 4,123,831 3.73% 1,636,267 2,487,564 2.25%
150 East 58th Street, 28th Floor
New York, NY 10155
Truk Opportunity Fund, LLC (11) 4,123,831 3.73% 1,636,267 2,487,564 2.25%
One East 52nd Street, 6th Floor
New York, NY 10022
C.E. Unterberg, Towbin (12) 865,672 * 865,672 0 *
350 Madison Avenue
New York, NY 10017
(1) Includes shares of common stock issuable upon exercise of warrants
which, by their terms, may not be exercised if and to the extent
that the total number of shares of our common stock then
beneficially owned by the holder of such warrants and its affiliates
and any other persons whose beneficial ownership of common stock
would be aggregated with such holder's for purposes of Section 13(d)
of the Exchange Act, would exceed 4.999% of the total number of
shares of our common stock then outstanding.
(2) Eric S. Swartz, in his capacity as manager of Roswell Capital
Partners, LLC, the investment advisor to BridgePointe Master Fund
Ltd., has voting control and investment discretion over the shares
owned by BridgePointe Master Fund Ltd. Mr. Swartz disclaims
beneficial ownership of such shares.
(3) Richard Smithline exercises investment and voting control over the
securities owned by CAMOFI Master LDC. Mr. Smithline disclaims
beneficial ownership of the securities owned by CAMOFI Master LDC.
(4) Sandell Asset Management Corp.("SAMC"), is the investment manager of
Castlerigg Master Investments Ltd ("Master"). Thomas Sandell is the
controlling person of SAMC and may be deemed to share beneficial
ownership of the shares beneficially owned by Master. Castlerigg
International Ltd. ("Castlerigg International") is the controlling
shareholder of Castlerigg International Holdings Limited
("Holdings"). Holdings is the controlling shareholder of Master.
Each of Holdings and Castlerigg International may be deemed to share
beneficial ownership of the shares beneficially owned by Castlerigg
Master Investments. SAMC, Mr. Sandell, Holdings and Castlerigg
International each disclaims beneficial ownership of the securities
with respect to which indirect beneficial ownership is described.
(5) Mitchell P. Kopin, the president of Downview Capital, Inc., the
general partner of Cranshire Capital, L.P, has sole voting control
and investment discretion over securities held by Cranshire Capital,
L.P. Each of Mitchell P. Kopin and Downview Capital, Inc. disclaims
beneficial ownership of the shares held by Cranshire Capital, L.P.
(6) Maxi Brezzi and Bachir Taleb-Ibrahimi, in their capacity as managers
of Cantara (Switzerland) SA, the investment advisor to Crescent
International Ltd., have voting control and investment discretion
over the shares owned by Crescent International Ltd. Messrs. Brezzi
and Taleb-Ibrahimi disclaim beneficial ownership of such shares.
(7) Harborview Master Fund L.P. is a master fund in a master-feeder
structure whose general partner is Harborview Advisors LLC. Richard
Rosenblum and David Stefansky are the managers of Harborview
Advisors LLC and have ultimate responsibility for trading with
respect to Harborview Master Fund L.P. Messrs. Rosenblum and
Stefansky disclaim beneficial ownership of the shares being
registered hereunder.
(8) Highbridge Capital Management, LLC is the trading manager of
Highbridge International LLC and consequently has voting control and
investment discretion over securities held by Highbridge
International LLC. Glenn Dubin and Henry Swieca control Highbridge
Capital Management, LLC and have voting control and investment
discretion over the securities held by Highbridge International LLC.
Each of Highbridge Capital Management, LLC, Glenn Dubin and Henry
Swieca disclaims beneficial ownership of the securities held by
Highbridge International LLC.
(9) Joshua Silverman has voting control and investment decision over
securities held by Iroquois Capital, LP. Mr. Silverman disclaims
beneficial ownership of the shares held by Iroquois Capital, LP.
(10) Rockmore Capital, LLC ("Rockmore Capital") and Rockmore Partners,
LLC ("Rockmore Partners"), each a limited liability company formed
under the laws of the State of Delaware, serve as the investment
manager and general partner, respectively, to Rockmore Investments
(US) LP, a Delaware limited partnership, which invests all of its
assets through Rockmore Investment Master Fund Ltd., an exempted
company formed under the laws of Bermuda ("Rockmore Master Fund").
By reason of such relationships, Rockmore Capital and Rockmore
Partners may be deemed to share dispositive power over the shares of
our common stock owned by Rockmore Master Fund. Rockmore Capital and
Rockmore Partners disclaim beneficial ownership of such shares of
our common stock. Rockmore Partners has delegated authority to
Rockmore Capital regarding the portfolio management decisions with
respect to the shares of common stock owned by Rockmore Master Fund
and, as of December 8, 2006, Bruce T. Bernstein and Brian Daly, as
officers of Rockmore Capital, are responsible for the portfolio
management decisions of the shares of common stock owned by Rockmore
Master Fund. By reason of such authority, Messrs. Bernstein and Daly
may be deemed to share dispositive power over the shares of our
common stock owned by Rockmore Master Fund. Messrs. Bernstein and
Daly disclaim beneficial ownership of such shares and neither of
such persons has any legal right to maintain such authority. No
other person has sole or shared voting or dispositive power with
respect to the shares of our common stock owned by Rockmore Master
Fund (as those terms are used for purposes under Regulation 13D-G of
the Securities Exchange Act of 1934, as amended). No person or
"group" (as that term is used in Section 13(d) of the Securities
Exchange Act of 1934, as amended, or the SEC's Regulation 13D-G)
controls Rockmore Master Fund.
(11) Michael E. Fein and Stephen E. Saltzstein, as principals of Atoll
Asset Management, LLC, the Managing Member of Truk Opportunity Fund,
LLC, exercise investment and voting control over the securities
owned by Truk Opportunity Fund, LLC. Both Mr. Fein and Mr.
Saltzstein disclaim beneficial ownership of the securities owned by
Truk Opportunity Fund, LLC.
(12) Andrew Arno, in his capacity as Chief Executive Officer of C.E.
Unterberg, Towbin LLC, has voting control and investment discretion
over the shares owned by C.E. Unterberg, Towbin LLC. Mr. Arno
disclaims beneficial ownership of such shares.
49
PLAN OF DISTRIBUTION
The selling stockholders may, from time to time, sell any or all of their
shares of common stock on any stock exchange, market or trading facility on
which the shares are traded or in private transactions. These sales may be at
fixed or negotiated prices. The selling stockholders may use any one or more of
the following methods when selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o block trades in which the broker-dealer will attempt to sell the shares as
agent but may position and resell a portion of the block as principal to
facilitate the transaction;
o purchases by broker-dealer as principal and resale by the broker-dealer
for its account;
o an exchange distribution in accordance with the rules of the applicable
exchange;
o privately negotiated transactions;
o settlement of short sales;
o broker-dealer may agree with the selling stockholders to sell a specified
number of such shares at a stipulated price per share;
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
The selling stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus.
The selling stockholders may also engage in short sales against the box,
puts and calls and other transactions in our securities or derivatives of our
securities and may sell or deliver shares in connection with these trades.
Broker-dealers engaged by the selling stockholders may arrange for other
broker-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the selling stockholders (or, if any broker-dealer acts as
agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated. The selling stockholders do not expect these commissions or
discounts to exceed what is customary in the types of transactions involved. Any
profits on the resale of shares of common stock by the broker-dealer acting as
principal might be deemed to be underwriting discounts or commissions under the
Securities Act. Discounts, concessions, commissions and similar selling
expenses, if any, attributable to the sale of shares will be borne by a selling
stockholder. The selling stockholders may agree to indemnify any agent, dealer
or broker-dealer that participates in transactions involving sales of the shares
if liabilities are imposed on that person under the Securities Act.
The selling stockholders may from time to time pledge or grant a security
interest in some or all of the shares of common stock owned by them and, if they
default in the performance of their secured obligations, the pledgees or secured
parties may offer and sell the shares of common stock from time to time under
this prospectus after we have filed an amendment to this prospectus under Rule
424(b)(3) or other applicable provision of the Securities Act of 1933 amending
the list of selling stockholders to include the pledgee, transferee or other
successors in interest as selling stockholders under this prospectus.
The selling stockholders also may transfer the shares of common stock in
other circumstances, in which case the transferees, pledgees or other successors
in interest will be the selling beneficial owners for purposes of this
prospectus and may sell the shares of common stock from time to time under this
prospectus after we have filed an amendment to this prospectus under Rule
424(b)(3) or other applicable provision of the Securities Act of 1933 amending
the list of selling stockholders to include the pledgee, transferee or other
successors in interest as selling stockholders under this prospectus.
50
The selling stockholders and any broker-dealer or agents that are involved
in selling the shares of common stock may be deemed to be "underwriters" within
the meaning of the Securities Act in connection with such sales. In such event,
any commissions received by such broker-dealers or agents and any profit on the
resale of common stock purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act.
We are required to pay all fees and expenses incident to the registration
of the shares of common stock. We have agreed to indemnify the selling
stockholders against certain losses, claims, damages and liabilities, including
liabilities under the Securities Act.
The selling stockholders have advised us that they have not entered into
any agreements, understandings or arrangements with any underwriters or
broker-dealers regarding the sale of their shares of common stock, nor is there
an underwriter or coordinating broker acting in connection with a proposed sale
of shares of common stock by any selling stockholder. If we are notified by any
selling stockholder that any material arrangement has been entered into with a
broker-dealer for the sale of shares of common stock, if required, we will file
a supplement to this prospectus.
The anti-manipulation rules of Regulation M under the Securities Exchange
Act of 1934 may apply to sales of our common stock and activities of the selling
stockholders.
Because the selling stockholders may be deemed underwriters, they will be
subject to the prospectus delivery requirements of the Securities Act.
51
DESCRIPTION OF CAPITAL STOCK
General
Our authorized capital consists of 125,000,000 shares of common stock, par
value $.005 per share.
Common Stock
As of February 23, 2007, we had 83,431,699 shares of common stock
outstanding. Each share of our common stock is entitled to one vote at all
meetings of our stockholders. Our stockholders are not permitted to cumulate
votes in the election of directors. All shares of our common stock are equal to
each other with respect to liquidation rights and dividend rights. There are no
preemptive rights to purchase any additional shares of our common stock. In the
event of our liquidation, dissolution or winding up, holders of our common stock
will be entitled to receive, on a pro rata basis, all of our assets remaining
after satisfaction of all liabilities and preferences of outstanding preferred
stock, if any. Neither our Articles of Incorporation nor our Bylaws contain any
provisions which limit or restrict the ability of another person to take over
our company; however, our Bylaws do permit our Board of Directors to be
classified.
Options and Warrants
As of February 23, 2007, we had outstanding options to purchase an
aggregate of 9,445,564 shares of our common stock pursuant to our 2001 Stock
Option Plan (as amended) and outstanding options to purchase an aggregate of
200,000 shares of our common stock pursuant to our 2006 Incentive Stock Plan.
The exercise prices for these options range from $.10 per share to $2.97 per
share, and the weighted-average exercise price for all of the options is $.93
per share. These options are held by directors, officers, key employees and
consultants. As of February 23, 2007, options to purchase 7,259,314 shares were
exercisable.
As of February 23, 2007, we also had outstanding warrants to purchase
33,229,318 shares of our common stock. The exercise prices for these
warrants range from $.10 per share to $2.49 per share, and the weighted-average
exercise price for all of the warrants is $0.60 share.
Certain Statutory Provisions of the Nevada Revised Statutes
Sections 78.411 through 78.444 of the Nevada Revised Statutes provide, in
general, that a stockholder acquiring more than 10% of the outstanding voting
shares of a publicly-held Nevada corporation subject to the statutes "Interested
Stockholder" may not engage in certain "Combinations" with the corporation for a
period of three years subsequent to the date on which the stockholder became an
Interested Stockholder.
Section 78.416 defines the term "Combination" to encompass a wide variety
of transactions with or caused by an Interested Stockholder in which the
Interested Stockholder receives or could receive a benefit on other than a pro
rata basis with other stockholders, including mergers, certain asset sales,
certain issuances of additional shares to the Interested Stockholder or
transactions in which the Interested Stockholder receives certain other
benefits.
These provisions could have the effect of delaying, deferring or
preventing a change of control of our company. Our stockholders, by adopting an
amendment to our Articles of Incorporation or Bylaws, may elect not to be
governed by these provisions. Neither our Articles of Incorporation nor Bylaws
currently excludes us from these restrictions.
The Nevada Revised Statutes permit a corporation to indemnify its
directors and officers against expenses, judgments, fines and amounts paid in
settlement in cases brought against the director or officer in his capacity as
such, provided the director or officer acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation. The exceptions include a breach of the director's duty of loyalty,
acts or omissions not in good faith or which involve intentional misconduct or
knowing a violation of law, and improper personal benefit. Our Bylaws contain a
provision implementing this statute.
52
Nasdaq Trading Symbol
Our common stock is traded in the over-the-counter markets and is reported
on the Nasdaq OTC Bulletin Board under the trading symbol "BIPH."
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is Continental Stock
Transfer & Trust Company, 17 Battery Place, New York, NY 10004.
LEGAL MATTERS
Nixon Peabody LLP, Boston, Massachusetts, has passed upon the validity of
the shares of common stock offered hereby.
EXPERTS
The consolidated financial statements as of February 28, 2006 and 2005 and
for each of the three years in the period ended February 28, 2006 included in
this prospectus have been so included in reliance on the report of Goldstein
Golub Kessler LLP, an independent registered public accounting firm, given on
the authority of that firm as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 (File
Number 333-138632) under the Securities Act with respect to the shares of
common stock we and the selling stockholders are offering by this prospectus.
This prospectus does not contain all of the information included in the
registration statement. For further information pertaining to us and our common
stock, you should refer to the registration statement and to its exhibits.
Whenever we make reference in this prospectus to any of our contracts,
agreements or other documents, the references are not necessarily complete, and
you should refer to the exhibits attached to the registration statement for
copies of the actual contract, agreement or other document.
We are subject to the informational requirements of the Securities
Exchange Act of 1934 and file annual, quarterly and current reports, proxy
statements and other information with the SEC. You can read our SEC filings,
including the registration statement, over the Internet at the SEC's website at
www.sec.gov. You may also read and copy any document we file with the SEC at its
public reference facility at 100 F Street, N.E., Room 1580, Washington, D.C.
20549.
You may also obtain copies of the documents at prescribed rates by writing
to the Public Reference Section of the SEC at 100 F Street, N.E., Washington,
D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the
operation of the public reference facilities.
53
BIOPHAN TECHNOLOGIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets - At February 28, 2006 and 2005 F-3
Consolidated Statement of Operations - Years ended February 28, 2006
and 2005, and February 29, 2004 F-4
Consolidated Statements of Stockholders' Equity - August 1, 1968 through
February 28, 2006 F-5
Consolidated Statements of Cash Flows - Years ended February 28, 2006
and 2005, and February 29, 2004 F-9
Notes to Consolidated Financial Statements - Years ended February 28,
2006 and 2005, and February 29, 2004 F-12
Condensed Consolidated Balance Sheets - Nine Months ended November 30,
2006 and 2005 F-25
Condensed Consolidated Statement of Operations - Three and Nine Months
ended November 30, 2006 and 2005 F-26
Condensed Consolidated Statements of Cash Flows - Nine Months ended
November 30, 2006 and 2005 F-27
Notes to Condensed Consolidated Financial Statements -
Three and Nine Months ended November 30, 2006 and 2005 F-29
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders Biophan Technologies, Inc.
We have audited the accompanying consolidated balance sheets of Biophan
Technologies, Inc. and Subsidiaries (a development stage company) as of February
28, 2006 and 2005 and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended February 28, 2006, and the amounts in the cumulative column in the
consolidated statements of operations, stockholders' equity, and cash flows for
the period from March 1, 2000 to February 28, 2006. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Biophan
Technologies, Inc. and Subsidiaries as of February 28, 2006 and 2005 and the
results of their operations and their cash flows for each of the three years in
the period ended February 28, 2006 in conformity with United States generally
accepted accounting principles. Additionally, 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, 2006 are fairly presented, in
all material respects, in conformity with United States generally accepted
accounting principles.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Company's
internal control over financial reporting as of February 28, 2006, based on
criteria established in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report
dated January 23, 2007 (as restated) expressed an adverse opinion thereon.
As described in Note 7 of the financial statements, the Company has restated its
financial statements as of February 28, 2006 and for the year then ended.
/S/ GOLDSTEIN GOLUB KESSLER LLP
New York, New York
April 26, 2006, except for Note 8 as to which the date is May 12, 2006
and Note 7 as to which the date is January 23, 2007
F-2
BIOPHAN TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEET
February 28,
---------------------------
2006 2005
------------ ------------
(Restated)
ASSETS
Current assets:
Cash and cash equivalents $ 1,477,716 $ 753,288
Accounts receivable 170,058 --
Stock subscriptions receivable -- 900,000
Due from related parties 4,801 220,959
Prepaid expenses 147,203 91,596
Other current assets 81,048 41,338
------------ ------------
Total current assets 1,880,826 2,007,181
Property and equipment, net 126,341 73,518
Other assets:
Intangible assets, net of amortization:
Myotech, LLC 24,451,580 --
Other 1,403,270 997,738
Investment in New Scale Technologies, Inc. 100,000 100,000
Security deposit 6,049 2,933
Deferred tax asset, net of valuation allowance
of $7,560,000 and $4,787,000, respectively -- --
------------ ------------
25,960,899 1,100,671
------------ ------------
$ 27,968,066 $ 3,181,370
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 1,191,812 $ 1,037,103
Line of credit - related party, net of discount
of $1,323,921 1,476,079 --
Due to related parties 26,548 --
Deferred revenue 520,833 225,000
Note payable 15,886 200,000
------------ ------------
Total current liabilities 3,231,158 1,462,103
Minority interest 15,189,109 --
Stockholders' equity:
Common stock, $.005 par value:
Authorized, 125,000,000 shares
Issued,81,805,243 and
74,317,832 shares, respectively 409,026 371,589
Additional paid-in capital 49,576,129 18,982,952
Stock subscription receivable -- (150,000)
------------ ------------
49,985,155 19,204,541
Less treasury stock, 4,923,080 shares (8,467,698) --
------------ ------------
41,517,457 19,204,541
Deficit accumulated during the development stage (31,969,658) (17,485,274)
------------ ------------
9,547,799 1,719,267
------------ ------------
$ 27,968,066 $ 3,181,370
============ ============
See notes to consolidated financial statements
F-3
BIOPHAN TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended
----------------------------------------- Period from August
February 28, 1, 1968 (date of
-------------------------- February 29, inception) to
2006 2005 2004 February 28, 2006
------------ ----------- ------------ ------------------
(Restated) (Restated)
Revenues:
Development payments $ 225,000 $ -- $ 75,000 $ 300,000
License Fees 479,166 -- -- 479,166
Consulting fees 340,695 -- -- 340,695
------------ ----------- ----------- ------------
1,044,861 -- 75,000 1,119,861
Operating expenses:
Research and development 6,829,142 2,629,980 1,240,439 13,019,419
General and administrative 8,451,886 3,337,185 1,911,003 17,941,372
Write-down of intellectual
property rights -- -- -- 530,000
------------ ----------- ----------- ------------
15,281,028 5,967,165 3,151,442 31,490,791
------------ ----------- ----------- ------------
Operating loss (14,236,167) (5,967,165) (3,076,442) (30,370,930)
Other income(expense):
Interest expense (1,140,866) -- (729,527) (2,871,789)
Interest income 70,701 11,869 1,815 129,148
Other income 215,789 161,749 85,584 692,197
Other expense -- -- -- (65,086)
------------ ----------- ----------- ------------
(854,376) 173,618 (642,128) (2,115,530)
Loss from continuing operations
before minority interest in net
loss of Myotech, LLC (15,090,543) (5,793,547) (3,718,570) (32,486,460)
Minority interest in net loss
of Myotech, LLC 606,159 -- -- 606,159
------------ ----------- ----------- ------------
Loss from continuing operations (14,484,384) (5,793,547) (3,718,570) (31,880,301)
Loss from discontinued operations -- -- -- (89,357)
------------ ----------- ----------- ------------
Net loss $(14,484,384) $(5,793,547) $(3,718,570) $(31,969,658)
============ =========== =========== ============
Loss per common share - basic
and diluted $ (0.19) $ (0.08) $ (0.08)
============ =========== ===========
Weighted average shares
outstanding 75,787,052 69,263,893 44,017,010
============ =========== ===========
See notes to consolidated financial statements
F-4
BIOPHAN TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
PERIOD FROM AUGUST 1, 1968 (DATE OF INCEPTION) TO FEBRUARY 28, 2006
Deficit
Accumulated
Number During the
of Shares Common Paid-in Treasury Subscription Development Equity
Outstanding Stock Capital Stock Receivable Stage (Deficiency)
---------- -------- ---------- -------- ------------ ----------- -------------
1969-1993 - 382,130 shares issued for
services for $.05 per share 382,130 $ 1,911 $ 17,196 $ 19,107
1970 - 1,405,000 shares issued for
mining rights for $.05 per share 1,405,000 7,025 63,225 70,250
Net loss from inception through
February 28, 1998 (89,357) (89,357)
---------- -------- ---------- -------- ----------
Balance at February 28, 1998 1,787,130 8,936 80,421 (89,357) --
1999 - 10,000 shares issued for
services for $.05 per share 10,000 50 450 500
1999 - 1,000,000 shares issued for
services for $.005 per share 1,000,000 5,000 5,000
Net loss for the year ended
February 28, 1999 (5,500) (5,500)
---------- -------- ---------- -------- ----------
Balance at February 28, 1999 2,797,130 13,986 80,871 (94,857) --
2000 - 1,000,200 shares issued
for services for $.005 per share 1,000,200 5,001 5,001
Net loss for the year ended
February 29, 2000 (5,001) (5,001)
---------- -------- ---------- -------- ----------
Balance at February 29, 2000 3,797,330 18,987 80,871 (99,858) --
2000 - 250,000 shares issued for
services for $.005 per share 250,000 1,250 1,250
2000 - Expenses paid by stockholder 2,640 2,640
2000 - 10,759,101 shares issued for
acquisition of Antisense Technology, Inc 10,759,101 53,795 121,205 175,000
2000 - 10,759,101 shares issued for
cash for $.005 per share 10,759,101 53,796 121,204 175,000
Net loss for the year ended
February 28, 2001 (729,130) (729,130)
---------- -------- ---------- -------- ----------
Balance at February 28, 2001 25,565,532 127,828 325,920 (828,988) (375,240)
2001 - 2,399,750 shares issued for
cash for $1.00 per share 2,399,750 11,999 2,387,751 2,399,750
2001 - 468,823 shares issued for interest 468,823 2,344 466,479 468,823
2001 - Redemption of 200,000 shares (200,000) (1,000) (1,000)
CONTINUED ON FOLLOWING PAGE
F-5
BIOPHAN TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
PERIOD FROM AUGUST 1, 1968 (DATE OF INCEPTION) TO FEBRUARY 28, 2006
Deficit
Accumulated
Number Additional Stock During the Stockholders'
of Shares Common Paid-in Treasury Subscription Development Equity
Outstanding Stock Capital Stock Receivable Stage (Deficiency)
---------- -------- ---------- -------- ------------ ----------- -------------
2001 - 1,315,334 shares issued upon
conversion of bridge loans at $.75
per share 1,315,334 6,576 979,924 986,500
2001 - Offering costs associated with
share issuances for cash (254,467) (254,467)
2002 - Grant of stock options for services 702,800 702,800
Net loss for the year ended
February 28, 2002 (3,705,917) (3,705,917)
---------- ------- --------- ---------- ----------
Balance at February 28, 2002 29,549,439 147,747 4,608,407 (4,534,905) 221,249
2002 - Shares issued for cash for
$.34 per share 993,886 4,969 337,461 342,430
2002 - Shares issued for cash for
$.15 per share 1,192,874 5,964 167,002 172,966
2002 to 2003 - Shares issued for cash for
$.25 per share 5,541,100 27,706 1,357,569 1,385,275
2002 to 2003 - Shares issued as commissions
on offerings 357,394 1,787 (1,787) --
2002 to 2003 Cash commissions on offerings (119,488) (119,488)
Offering costs (45,644) (45,644)
Grant of stock options for services 485,000 485,000
Intrinsic value of beneficial conversion
feature of note payable and MRI liability 800,000 800,000
Net loss for the year ended
February 28, 2003 (3,438,252) (3,438,252)
---------- ------- --------- ---------- ----------
Balance at February 28, 2003 37,634,693 188,173 7,588,520 (7,973,157) (196,464)
2003 - Shares issued upon conversion of
related party loans at $.14 per share 1,268,621 6,343 177,607 183,950
2003 - Shares issued upon conversion of
stockholder loan plus accrued interest
at $.20 per share 775,000 3,875 151,693 155,568
2003 - Shares issued for cash pursuant to
equity line of credit at prices from
$.11 to $.23 per share 3,325,757 16,629 474,561 491,190
2003 - Shares issued for option exercises
at $.14 per share 3,000,000 15,000 412,847 427,847
CONTINUED ON FOLLOWING PAGE
F-6
BIOPHAN TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
PERIOD FROM AUGUST 1, 1968 (DATE OF INCEPTION) TO FEBRUARY 28, 2006
Deficit
Accumulated
Number Additional Stock During the Stockholders'
of Shares Common Paid-in Treasury Subscription Development Equity
Outstanding Stock Capital Stock Receivable Stage (Deficiency)
---------- -------- ---------- -------- ------------ ----------- -------------
2004 - Shares issued for warrant exercises
at $.25 and $.50 per share 995,940 4,980 327,864 332,844
2004 - Shares issued for cash pursuant to
stock purchase agreement at prices from
$.15 to $.40 per share 11,000,000 55,000 2,845,000 2,900,000
2004 - Shares issued upon conversion of
related party loans at $.10 per share 7,945,000 39,725 754,775 794,500
Offering costs (209,528) (209,528)
Grant of stock options for the year 565,000 565,000
Intrinsic value of beneficial conversion
feature of note payable 250,950 250,950
Net loss for the year ended February 29, 2004 (3,718,570) (3,718,570)
---------- ------- ---------- -------- ------------ ----------- ----------
Balance at February 29, 2004 65,945,011 329,725 13,339,289 -- (11,691,727) 1,977,287
2004 - Shares issued for option exercise
at $.32 per share 70,000 350 22,050 22,400
2004 - Shares issued for option exercise
at $.50 per share 24,999 125 12,375 12,500
2004 - Shares issued upon exercise of
warrants at $.25 per share 868,700 4,343 212,832 217,175
2004 - Shares issued upon exercise of
warrants at $.50 per share 926,700 4,634 458,716 463,350
2004 - Shares issued upon exercise of
warrants at $1.00 per share 108,375 542 107,833 108,375
2004 - Shares issued upon cashless exercise
of warrants 74,047 370 (370) --
2004 - 2005 - Shares issued for cash pursuant
to stock purchase agreement at prices from
$.60 to $.70 per share 6,000,000 30,000 3,870,000 3,900,000
2005 - Restricted shares issued in connection
with employment agreements at
$1.34 per share 200,000 1,000 267,000 268,000
2005 - Restricted shares issued in connection
with acquisition of Biophan Europe at
$1.34 per share 100,000 500 133,500 134,000
Offering costs (41,998) (41,998)
CONTINUED ON FOLLOWING PAGE
F-7
BIOPHAN TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
PERIOD FROM AUGUST 1, 1968 (DATE OF INCEPTION) TO FEBRUARY 28, 2006
Deficit
Accumulated
Number of Additional Stock During the Stockholders'
Shares Common Paid-in Treasury Subscription Development Equity
Outstanding Stock Capital Stock Receivable Stage (Deficiency)
---------- -------- ----------- -------- ------------ ------------ -------------
Grant of stock options for services 201,000 201,000
Section 16(b) short swing profits 400,725 400,725
Stock subscription receivable (150,000) (150,000)
Net loss for the year ended February 28,
2005 (5,793,547) (5,793,547)
---------- ------- ---------- ----------- --------- ------------ ------------
Balance at February 28, 2005 74,317,832 371,589 18,982,952 (150,000) (17,485,274) 1,719,267
2005 - Shares issued for option exercise
at $.50 per share 74,998 375 66,206 66,581
2005 - Shares issued for option exercise
at $.67 per share 12,500 63 8,312 8,375
2005 - Shares issued for option exercise
at $1.00 per share 136,667 683 106,901 107,584
2005 - Shares issued upon exercise of
warrants at $.16 per share 54,054 270 8,379 8,649
2005 - Shares issued upon exercise of
warrants at $.39 per share 12,500 62 4,813 4,875
2005 - Shares issued upon exercise of
warrants at $.41 per share 17,520 88 7,095 7,183
2006 - Restricted shares issued in
connection with acquisition of
Biophan Europe at $1.34 per share 100,000 500 133,500 134,000
2005 - Shares issued for acquisition of
minority interest in Myotech, LLC
at $1.72 per share 4,923,080 24,615 8,443,083 8,467,698
2005 - Treasury shares (4,923,080) -- 8,467,698 (8,467,698) --
2006 - Shares issued pursuant to
investment agreement with Boston
Scientific at $3.02 per share 1,653,193 8,266 4,991,734 5,000,000
2006 - 22,000 Restricted shares issued
for services at $1.72 per share 22,000 110 37,730 37,840
2006 - Shares issued upon conversion of
related party loans at $2.12 per share 480,899 2,405 1,017,101 1,019,506
Beneficial conversion feature of
note payable 2,395,485 2,395,485
Stock options issued for services 4,609,778 4,609,778
Section 16(b) short swing profits 295,362 295,362
Stock subscription receivable 150,000 150,000
Net loss for the year ended February 28,
2006 (14,484,384) (14,484,384)
---------- ------- ---------- ----------- --------- ------------ ------------
Balance at February 28, 2006 (Restated) 76,882,163 $409,026 $49,576,129 $(8,467,698) $ -- $(31,969,658) $ 9,547,799
========== ======== =========== =========== ========= ============ ============
See notes to consolidated financial statements
F-8
BIOPHAN TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOWS
Period from
Year Ended August 1,
----------------------------------------- 1968 (date of
February 28, inception) to,
-------------------------- February 29, February 28,
2006 2005 2004 2006
------------ ----------- ------------ --------------
(Restated) (Restated)
Cash flows used for operating activities:
Net loss $(14,484,384) $(5,793,547) $(3,718,570) $(31,969,658)
Adjustments to reconcile net loss to net cash
used in operating activities:
Amortization of intangible assets 405,441 -- -- 405,441
Depreciation 47,241 28,020 23,643 139,434
Loss on disposal of equipment 1,505 -- -- 1,505
Realized and unrealized losses on marketable
securities -- -- -- 66,948
Accrued interest on note converted to common
stock 19,506 -- 11,998 31,504
Amortization of interest on convertible notes
payable -- -- 667,617 1,050,950
Write-down of intellectual property rights -- -- -- 530,000
Amortization of discount on payable to related
party 1,071,564 -- -- 1,146,564
Issuance of common stock for services 37,840 268,000 -- 406,948
Issuance of common stock for interest -- -- -- 468,823
Grant of stock options for services 4,609,778 201,000 565,000 6,563,578
Expenses paid by stockholder -- -- -- 2,640
Minority interest (536,616) -- -- (536,616)
Changes in operating assets and liabilities:
(Increase) decrease in advances receivable -- -- 10,127 --
(Increase) decrease in accounts receivable (162,558) -- -- (162,558)
(Increase) decrease in due from related parties 156,858 (186,737) (9,854) (64,101)
(Increase) decrease in prepaid expenses (55,607) (22,411) 21,738 (147,203)
(Increase) decrease in other current assets (39,710) -- -- (39,710)
(Increase) decrease in security deposits (867) -- -- (3,800)
Increase (decrease) in accounts payable and
accrued expenses (14,742) 405,821 (89,158) 631,806
Increase (decrease) in due to related parties 26,548 -- (9,401) (16,948)
Increase (decrease) in deferred revenues 295,833 225,000 -- 520,833
------------ ----------- ----------- ------------
Net cash used in operating activities (8,622,370) (4,874,854) (2,526,860) (20,973,620)
F-9
BIOPHAN TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
Period from
Year Ended August 1,
--------------------------------------- 1968 (date of
February 28, inception) to,
------------------------ February 29, February 28,
2006 2005 2004 2006
----------- ---------- ------------ --------------
(Restated) (Restated)
Cash flows used for investing activities:
Purchases of property and equipment (70,521) (39,302) (21,625) (235,210)
Sales of marketable securities -- 1,150,000 302,000 2,369,270
Purchase of investment -- (100,000) -- (100,000)
Acquisition costs of intangible assets (466,583) -- -- (466,583)
Cash paid for investment in Myotech,
net of cash received of $19,408 (280,594) -- -- (280,594)
Cash paid for acquisition of Biophan Europe,
net of cash received of $107,956 -- (258,874) -- (258,874)
Purchases of marketable securities -- -- (1,150,000) (2,436,218)
----------- ---------- ----------- -----------
Net cash provided by (used in) investing activities (817,698) 751,824 (869,625) (1,408,209)
Cash flows provided by financing activities:
Proceeds of bridge loans -- -- -- 986,500
Loan from stockholder -- -- -- 143,570
Line of credit borrowing from related party 4,300,000 -- 250,950 4,850,950
Line of credit payments (500,000) -- (72,500) (572,500)
Notes payable (184,114) -- -- (184,114)
Proceeds from sales of capital stock 6,050,000 2,850,000 3,252,200 16,263,849
Exercise of options 182,541 34,900 427,847 645,288
Exercise of warrants 20,707 788,900 332,844 1,142,451
Swing profits 295,362 400,725 -- 696,087
Deferred equity placement costs -- (22,107) (19,891) (112,536)
----------- ---------- ----------- -----------
Net cash provided by financing activities 10,164,496 4,052,418 4,171,450 23,859,545
----------- ---------- ----------- -----------
Net increase (decrease) in cash and equivalents 724,428 (70,612) 774,965 1,477,716
Cash and equivalents, beginning 753,288 823,900 48,935 --
----------- ---------- ----------- -----------
Cash and equivalents, ending $ 1,477,716 $ 753,288 $ 823,900 $ 1,477,716
=========== ========== =========== ===========
Supplemental schedule of cash paid for:
Interest $ 9,800 $ -- $ -- $ 9,800
=========== ========== =========== ===========
Continued on next page
F-10
BIOPHAN TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
Period from
Year Ended August 1,
-------------------------------------- 1968 (date of
February 28, inception) to,
----------------------- February 29, February 28,
2006 2005 2004 2006
---------- ---------- ------------ --------------
(Restated) (Restated)
Supplemental schedule of non-cash investing and
financing activities:
Allocation of proceeds from line of credit - related party
to beneficial conversion feature and warrants $2,395,485 $ -- $ -- $ 2,395,485
========== ========== ======== ===========
Issuance of common stock upon conversion
of LOC loans $1,000,000 $ -- $978,450 $ 1,978,450
========== ========== ======== ===========
Issuance of common stock for the acquisition of
A 35% interest in Myotech, LLC $8,467,698 $ -- $ -- $ 8,467,698
========== ========== ======== ===========
Issuance of common stock in satisfaction
of accounts payable $ 134,000 $ -- $ -- $ 134,000
========== ========== ======== ===========
Common stock issued for subscription receivable $ -- $1,050,000 $ -- $ 1,050,000
========== ========== ======== ===========
Liabilities assumed in conjunction with acquisition of
51% interest in Biophan Europe and certain
intellectual property rights:
Fair value of assets acquired $1,105,714
Cash paid (366,830)
Promissory note issued (200,000)
Restricted stock issued (134,000)
Payables incurred (226,500)
----------
Liabilities assumed $ -- $ 178,384 $ -- $ 178,384
========== ========== ======== ===========
Issuance of common stock upon conversion
of bridge loans $ -- $ -- $155,568 $ 1,142,068
========== ========== ======== ===========
Acquisition of intellectual property $ -- $ -- $ -- $ 425,000
========== ========== ======== ===========
Intellectual property acquired through issuance of
capital stock and assumption of related party payable $ -- $ -- $ -- $ 175,000
========== ========== ======== ===========
See notes to consolidated financial statements
F-11
BIOPHAN TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. PRINCIPAL BUSINESS ACTIVITY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
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"), its majority owned subsidiaries Biophan Europe
GmbH ("Biophan Europe"), formerly aMRIs GmbH, and TE Bio LLC ("TE Bio"), and
Myotech, LLC ("Myotech"), a variable interest entity, collectively referred to
as the "Company". All significant inter-company accounts and transactions have
been eliminated in consolidation.
FASB Interpretation No. 46 (FIN-46R) (Revised December 2003), Consolidation of
Variable Interest Entities, requires that if an enterprise is the primary
beneficiary of a variable interest entity, the assets, liabilities and results
of operations of the variable interest entity should be included in the
consolidated financial statements of the enterprise (See Note 7).
COMPANY HISTORY
The Company was incorporated under the laws of the State of Idaho on August 1,
1968 and on January 12, 2000, changed its domicile to Nevada by merging into a
Nevada corporation, and on July 19, 2001, changed its name to Biophan
Technologies, Inc. From the inception of the current line of business on
December 1, 2000, the Company has not generated any material revenues.
Therefore, the Company is in the development stage and will remain so until the
realization of significant revenues. The Company's ability to continue in
business is dependent upon obtaining sufficient financing or attaining future
profitable operations.
PRINCIPAL BUSINESS ACTIVITIES
The primary mission is to develop and commercially exploit technologies for
improving the performance, and as a result, the competitiveness of biomedical
devices manufactured by third party companies. The Company possesses
technologies for enabling biomedical devices, both implantable and those used in
diagnostic and interventional procedures, to be safe (do not harm the patient or
physician) and compatible (allow effective imaging of the device and its
surrounding tissue) with MRI (magnetic resonance imaging). The Company is also
developing technologies for improving MRI contrast agents; for improved drug
elution and drug delivery systems, including an MRI safe and image compatible
ceramic motor; a system for generating power for implantable devices from body
heat, and a series of implantable devices including an MRI-visible vena cava
filter. Further, in connection with our investment in Myotech, LLC, we are
developing a cardiac assist device that is totally non-blood contacting, and
offers other important features including the ability to be installed in less
than three minutes, the ability to be easily removed if the heart recovers and
no longer requires support, and the ability to be used as a drug delivery device
to provide direct access to the heart.
REVENUE RECOGNITION
The Company earns and recognizes revenue under development agreements when the
phase of the agreement to which amounts relate is completed and the Company has
no further performance obligation. Completion is determined by the attainment of
specified milestones including a written progress report. Advance fees received
on such agreements are deferred until recognized.
The Company recognizes initial license fees over the term of the related
agreement. Revenue related to a performance milestone is recognized upon the
achievement of the milestone, as defined in the respective agreements.
The Company recognizes revenues from testing services and consulting fees as
services are performed.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all highly
liquid instruments with an original maturity of three months or less to be cash
equivalents. The Company places its temporary cash investments with high credit
quality financial institutions. At times such investments may be in excess of
the Federal Deposit Insurance Corporation (FDIC) insurance limit.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of cash deposits. Accounts are insured by the
Federal Deposit Insurance Corporation (FDIC) up to $100,000. At times throughout
the year, the Company has balances on account in excess of insured limits.
F-12
BIOPHAN TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ACCOUNTS RECEIVABLE
Accounts receivable are reported at their outstanding unpaid principal balances.
The Company writes off accounts receivable when they are deemed uncollectible.
The Company has historically experienced insignificant amounts of bad debts.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Expenditures for major additions
and improvements are capitalized, and minor replacements, maintenance, and
repairs are charged to expense as incurred. When property and equipment are
retired or otherwise disposed of, the cost and accumulated depreciation are
removed from the accounts and any resulting gain or loss is included in the
results of operations for the respective period. Depreciation is provided over
the estimated useful lives of the related assets using the straight-line method.
The estimated useful lives for significant property and equipment categories are
as follows:
Computers 5 years
Furniture and equipment 5 to 7 years
Internet website 7 years
INTANGIBLE ASSETS
The Company evaluates the recoverability of identifiable intangible assets
whenever events or changes in circumstances indicate that an intangible asset's
carrying amount may not be recoverable. Such circumstances could include, but
are not limited to: (1) a significant decrease in the market value of an asset,
(2) a significant adverse change in the extent or manner in which an asset is
used, or (3) an accumulation of costs significantly in excess of the amount
originally expected for the acquisition of an asset. The Company measures the
carrying amount of the asset against the estimated undiscounted future cash
flows associated with it. Should the sum of the expected future net cash flows
be less than the carrying value of the asset being evaluated, an impairment loss
would be recognized. The impairment loss would be calculated as the amount by
which the carrying value of the asset exceeds its fair value. The fair value is
measured based on quoted market prices, if available. If quoted market prices
are not available, the estimate of fair value is based on various valuation
techniques, including the discounted value of estimated future cash flows. The
evaluation of asset impairment requires the Company to make assumptions about
future cash flows over the life of the asset being evaluated. These assumptions
require significant judgment and actual results may differ from assumed and
estimated amounts. Also, at each balance sheet date, the Company evaluates the
period of amortization of intangible assets.
DEFERRED TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted rates
expected to apply when the differences are expected to be realized. A valuation
allowance is recognized if it is anticipated that some or all of the deferred
tax asset may not be realized.
LOSS PER SHARE
Basic loss per common share is computed by dividing net loss by the weighted-
average number of shares of common stock outstanding during the period. Diluted
loss per common share gives effect to dilutive options, warrants and other
potential common stock outstanding during the period. Potential common stock has
not been included in the computation of diluted loss per share, as the effect
would be antidilutive.
F-13
BIOPHAN TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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:
Year ended February 28, Year Ended
-------------------------- February 29,
2006 2005 2004
------------ ----------- ------------
Net loss - as reported(restated) $(14,484,384) $(5,793,547) $(3,718,570)
Add: Stock-based employee
compensation expense included
in reported net loss, net of
related tax effects 4,384,530 201,000 118,000
Deduct: Total stock-based
employee compensation expense
determined under fair value
based method for all awards,
net of related tax effects (6,520,862) (342,000) (241,000)
------------ ----------- -----------
Net loss - pro forma (restated) (16,620,716) (5,934,547) (3,841,570)
============ =========== ===========
Basic and diluted loss
per share - as reported (restated) $ (0.19) $ (0.08) $ (0.08)
============ =========== ===========
Basic and diluted loss
per share - pro forma (restated) $ (0.22) $ (0.09) $ (0.09)
============ =========== ===========
The Company's assumptions used to calculate the fair values of options issued
during the year ended February 28, 2006 were (i) risk-free interest rates of
4.5% through 4.6%, (ii) expected lives of 5 to 10 years, (iii) expected
volatility of 60% through 103%, and (iv) expected dividends of zero.
The Company's assumptions used to calculate the fair values of options issued
during the year ended February 28, 2005 were (i) risk-free interest rates of
4.04% through 4.50%, (ii) expected lives of 5 to 10 years, (iii) expected
volatility of 88% through 150%, and (iv) expected dividends of zero.
The Company's assumptions used to calculate the fair values of options issued
during the year ended February 29, 2004 were (i) risk-free interest rates of
3.17% through 4.38%, (ii) expected lives of 5 to 10 years, (iii) expected
volatility of 160%, and (iv) expected dividends of zero.
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, the Company is required to implement SFAS No. 123R as of the
first fiscal year after June 15, 2005, which would be March 1, 2006. 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.
F-14
BIOPHAN TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STOCK OPTIONS (CONTINUED)
For the year ended February 28, 2006, the non-cash charge to earnings for stock
options granted was $4,609,778 of which $4,244,280 is related to the vesting,
during the first and second quarters, of contingent options previously granted
to executive officers and non-employee directors that vested on a contingent
basis upon the achievement of specified performance-based milestones. These
particular options, because they are not "fixed and determinable", do not
qualify under the accounting rules for "disclosure only" treatment and
accordingly, must be expensed for any intrinsic value at the time and to the
extent that they vest. The calculated amounts resulted in a non-cash charge in
the statement of operations and an offsetting credit to additional paid-in
capital.
ESTIMATES
Preparing the Company's financial statements in conformity with accounting
principles generally accepted in the United States of America ("GAAP") requires
management to make estimates and assumptions that affect reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
RECLASSIFICATION
For comparative purposes, certain amounts in the accompanying statement of
operations for fiscal 2004 and 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.
RECENT ACCOUNTING PRONOUNCEMENTS
Management does not believe that there are any recently issued, but not yet
effective accounting pronouncements that will have a material effect on
financial reporting other than SFAS No. 123R as discussed above.
2. BUSINESS COMBINATIONS
Effective June 3, 2004, the Company executed final agreements for the
acquisition of a 51% ownership interest in TE Bio, LLC ("TE Bio"), a newly
formed limited liability company that acquired an exclusive license to certain
technology from Biomed Solutions, LLC ("Biomed"), a related party. TE Bio is
also owned 46.5% by Biomed, a related company, and 2.5% by Stuart G. MacDonald,
Vice-President of Research and Development for the Company. The primary reason
for the acquisition was the development of an implantable biothermal battery
using body heat gradients to power medical devices. The Payment Agreement (the
"Agreement") provides for the investment in TE Bio of $300,000 per year for
three years from the Company's working capital. In addition, the Company will
provide certain administrative, marketing, and research and development services
to TE Bio. The results of operations of TE Bio from June 3, 2004 to February 28,
2005 are included in the accompanying consolidated statement of operations. TE
Bio had no significant assets, liabilities or operations at time of acquisition.
On February 24, 2005, the Company entered into an agreement for the purchase of
a 51% ownership interest in aMRIs GmbH, a German company formed November 2004.
Concurrently, aMRIs acquired a 58.4% interest in MR:comp GmbH. The name of aMRIs
was subsequently changed to Biophan Europe GmbH. For accounting purposes, the
acquisition is treated as a purchase as of February 28, 2005. Operating results
of the subsidiary for the period from February 25 through February 28, 2005 were
not material and are not included.
F-15
BIOPHAN TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The principal reasons for the acquisition, in addition to obtaining a European
market presence, were to add complementary intellectual property to the
Company's existing technologies, further expertise to its management team, and
additional research and development capabilities. Accordingly, in connection
with the purchase, the Company executed an exclusive license agreement for
certain patents related to the Company's own proprietary technologies in the
area of MRI safety and compatibility, employment agreements with key executives
of aMRIs and agreed to contribute to aMRIs $2,000,000 over four years for
funding specific salaries and research and development expenses.
Total consideration for the 51% interest in aMRIs and for intellectual property
rights was $1,105,714, consisting of the following:
Cash paid $ 132,500
Promissory note issued 200,000
Amount payable in cash 92,500
Amount payable in restricted stock 134,000
Restricted stock issued (100,000 shares) 134,000
Direct acquisition costs 234,330
Liabilities assumed 178,384
----------
Total purchase price $1,105,714
==========
The allocation of the purchase price is as follows:
Intellectual property rights (estimated useful
life of 17 years) $ 927,738
Current assets 176,954
Equipment 1,022
----------
Total $1,105,714
The following summarized pro forma consolidated statement of operations
(unaudited) for the year ended February 28, 2005, assumes the acquisition of
aMRIs as if it had occurred on March 1, 2004:
Operating expenses:
Research and development $ 2,737,038
General and administrative 3,505,300
-----------
6,242,338
-----------
Operating loss (6,242,338)
Other income 246,745
-----------
Net loss $(5,995,593)
===========
Loss per common share-basic and diluted $ (0.09)
===========
Weighted average shares outstanding 69,263,893
===========
F-16
BIOPHAN TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. PREPAID EXPENSES:
Prepaid expenses consist of the following:
February 28
------------------
2006 2005
-------- --------
Prepaid conference fees $ 29,400 $ --
Prepaid insurance 33,403 23,071
Prepaid license fees - related company 15,000 --
Prepaid legal fees 30,000 20,000
Prepaid supplies -- 18,125
Prepaid royalties - related company 35,000 25,000
Other 4,400 5,400
-------- -------
$147,203 $91,596
======== =======
4. PROPERTY AND EQUIPMENT:
Property and equipment, at cost, consists of the following:
February 28,
--------------------
2006 2005
--------- --------
Furniture and Equipment $ 123,664 $ 66,346
Computers 85,843 45,206
Internet Website 54,159 54,159
--------- --------
263,666 165,711
Less accumulated depreciation (137,325) (92,193)
--------- --------
$ 126,341 $ 73,518
========= ========
Depreciation expense for the years ended February 28, 2006, 2005 and February
29, 2004 amounted to $47,241, $28,020, and $23,643, respectively. Depreciation
expense for the period from August 1, 1968 (date of inception) to February 28,
2006 was $139,434.
5. INTANGIBLE ASSETS:
Certain intellectual property rights were acquired on December 1, 2000 in
connection with the merger that established the Company in its present form.
Additional intangible assets were acquired on February 24, 2005 in connection
with the acquisition of Biophan-Europe and on November 30, 2005 in connection
with the investment in Myotech, LLC. Such rights encompass the utilization of
new proprietary technology to prevent implantable cardiac pacemakers and other
critical and life-sustaining medical devices from being affected by MRI and
other equipment using magnetic fields, radio waves and similar forms of
electromagnetic interference and the development of a cardiac assist device.
These assets are amortized over the estimated 17 to 18 year economic lives of
the underlying patents and core technology. Estimated amortization expense for
the next five years is as follows:
Fiscal year ending February, Amount
---------------------------- ----------
2007 $1,458,042
2008 1,458,042
2009 1,458,042
2010 1,458,042
2011 1,458,042
Amortization expense for the year ended February 28, 2006 was $405,441. There
was no amortization of intangible assets in previous years.
F-17
BIOPHAN TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. INVESTMENT:
The investment in New Scale Technologies, Inc. represents a 10% investment in
it's common stock, a non-public company, stated at cost.
7. INVESTMENT IN MYOTECH, LLC AND RESTATEMENT OF FINANCIAL STATEMENTS:
Effective November 30, 2005, we entered into a Securities Purchase Agreement for
the acquisition of an initial 35% interest in Myotech, LLC ("Myotech"), a New
York limited liability company, whereby we exchanged 4,923,080 shares of our
common stock, par value $.005, for 3,768,488 Class A (voting) units of Myotech.
Under the Securities Purchase Agreement, we are obligated to purchase for cash
consideration of $2.225 million an additional 811,037 Class A units, and we may
acquire up to an additional 3,563,097 Class A units for further cash
consideration of $9.775 million upon achievement of certain milestones
satisfactory to us measured over a 24-month period. Upon consummation of these
additional elective milestone investments, we may acquire up to a majority
interest in Myotech.
As of February 28, 2006, Biophan has provided $1,185,000 of additional funding
for 431,946 newly issued Class A units of Myotech, increasing our ownership
interest to 38%, and has provided a further amount of funding since February 28,
2006 of $305,000.
This investment was previously accounted for using the equity method. However,
the Company has re-evaluated its investment in Myotech and has determined that
Myotech is a variable interest entity in accordance with FASB Interpretation No.
46 (FIN-46R) (Revised December 2003), Consolidation of Variable Interest
Entities. The Company has further concluded that it is the primary beneficiary
as defined by FIN-46R and, as a result, the Company is required to consolidate
Myotech as of the date of acquisition of November 30, 2005. Therefore, the
consolidated financial statements of the Company have been restated to include
the accounts of Myotech, LLC. The principal impact of this consolidation is an
increase in assets due to the recording of the value of intangible assets
acquired of $24,795,968, based on an independent appraisal, over the amount of
the investment, and an increase in the amount of the minority interest
representing outside interests in the equity of Myotech. Aggregate changes were
as follows as of and for the year ended February 28, 2006:
As Previously Adjustment
Reported Increase (Decrease) As Restated
------------ ------------ ------------
Intangible assets, net $ 943,165 $ 24,911,685 $ 25,854,850
Investment in Myotech, LLC 11,767,062 (11,767,062) -0-
Other assets 2,053,228 59,988 2,113,216
------------ ------------ ------------
$ 14,763,455 $ 13,204,611 $ 27,968,066
============ ============ ============
Liabilities $ 3,105,986 $ 125,172 $ 3,231,158
Minority interest 69,543 15,119,566 15,189,109
Capital Stock 409,026 -0- 409,026
Additional paid-in capital 42,979,203 6,596,926 49,576,129
Treasury stock -- (8,467,698) (8,467,698)
Accumulated deficit (31,800,303) (169,355) (31,969,658)
------------ ------------ ------------
$ 14,763,455 $ 13,204,611 $ 27,968,066
============ ============ ============
Operating Loss $(13,276,820) $ (959,347) $(14,236,167)
============ ============ ============
Net Loss $(14,315,029) $ (169,355) $(14,484,384)
============ ============ ============
The following is selected financial data for Myotech, LLC:
February 28, 2006
-----------------
Current assets $ 59,608
Intangible assets, net of amortization 24,451,580
Other assets 37,156
-----------
$24,548,344
===========
Current liabilities $ 161,948
Equity 24,386,396
-----------
$24,548,344
===========
Three Months
Ended February
28, 2006
--------------
Net loss from operations $(992,026)
=========
8. LINE OF CREDIT AGREEMENT:
On January 24, 2006, we entered into a Line of Credit Agreement (the "Line of
Credit Agreement") with Biomed, a related party, pursuant to which Biomed has
committed to make advances to us, in an aggregate amount of up to $5,000,000.
Under the Line of Credit Agreement, advances may be drawn down in such amounts
and at such times as we determine upon 15 days' prior notice to Biomed, except
that we may not draw down more than $1,500,000 in any 30-day period. Amounts
borrowed will bear interest at the rate of 8% per annum and are convertible into
shares of our Common Stock at the rate of $1.46 per share. Biomed's obligation
to lend to us under the Line of Credit Agreement expires on June 30, 2007, on
which date the entire amount borrowed by us (and not converted into shares of
our Common Stock) becomes due and payable. We are obligated to utilize the
entire credit facility. The Company recorded a discount on the borrowings of
$2,300,000 due to the beneficial conversion feature of the note as well as for
the value of the warrants. The discount is being amortized as additional
interest expense over the term of the note. During the quarter ended February
28, 2006 amortization of the discount on the note resulted in a non-cash
interest expense of $113,404. In connection with the establishment of the credit
facility under the Line of Credit Agreement, on January 24, 2006 we issued to
Biomed a Stock Purchase Warrant (the "Warrant") entitling Biomed to purchase up
to 1,198,630 shares of our Common Stock at an exercise price of $1.89 per share.
Biomed's purchase rights under the Warrant expire on January 23, 2011. The
balance of borrowings on the line was $2,300,000 at February 28, 2006 and
$3,450,000 at May 12, 2006. The fair value is not readily determinable as there
is a limited market for such related party debt.
On May 27, 2005, we entered into a Line of Credit Agreement with Biomed, a
related company, whereby Biomed agreed to provide a line of credit facility of
up to $2 million. Borrowings under the line bear interest at 8% per annum, are
payable on demand after August 31, 2006 and are convertible, at Biomed's
election into the Company's common stock at 90% of the average closing price for
the 20 trading days preceding the date of borrowings under the line. In June
2005, the Company borrowed the entire $2 million under the line in two separate
draws of $1 million each and, in accordance with the agreement, Biomed received
warrants to purchase 500,000 shares of the Company's common stock at an exercise
price of 110% of the average closing price for the 20 trading days preceding the
date of execution of the credit agreement. The Company recorded a discount on
the borrowings of $958,160 due to the beneficial conversion feature of the note
as well as for the value of the warrants. The discount was amortized as
additional interest expense over the term of the note and has been fully
amortized as of November 30, 2005. On August 31, 2005, Biomed elected to convert
$1 million of the note plus accrued interest into 480,899 shares of common stock
at which time, the remaining discount related to the $1 million portion of the
loan was fully expensed. On October 7, 2005, we repaid $500,000 of principal and
all accrued interest on the loan. During the year ended February 28, 2006
amortization of the discount on the note resulted in a non-cash interest expense
of $958,160. The balance of borrowings on the line was $500,000 at February 28,
2006.
F-18
BIOPHAN TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consist of the following:
February 28,
-----------------------
2006 2005
---------- ----------
Accounts payable $ 793,873 $ 649,146
Bonuses - Biophan-Europe 150,000 --
Accrued payroll and related
expenses 76,977 46,738
License fees 70,000 --
Interest payable 34,112 --
Other 66,850 87,059
Acquisition fees -- 254,160
---------- ----------
$1,191,812 $1,037,103
========== ==========
10. NOTE PAYABLE:
The note payable at February 28, 2005 in the amount of $200,000, bearing
interest at 2.74% per annum, was paid June 1, 2005 to the previous owners of
Biophan Europe GmbH (formerly aMRIs GmbH). The note was issued on February 24,
2005 as part of the consideration for the acquisition of a 51% ownership
interest in Biophan Europe GmbH. The carrying amount for the note payable
approximates its fair value due to the short-term nature of the note.
11. STOCKHOLDERS' EQUITY:
On February 5, 2004 the Company entered into a stock purchase agreement with SBI
Brightline Consulting, LLC ("SBI") that obligated SBI to purchase, upon the
Company's election, up to 17,750,000 shares of common stock for an aggregate
purchase price of $25 million. Only 6,000,000 shares covered by this stock
purchase agreement were registered for resale. SBI was not obligated to purchase
the remaining shares covered by the stock purchase agreement unless and until
the Company had registered the resale of such shares by SBI. During the year
ended February 28, 2005, the Company elected to sell the 6,000,000 shares to SBI
for an aggregate of $3,900,000. On May 27, 2005, this stock purchase agreement
was cancelled and a new agreement was executed with SBI. 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 1,000,000 shares each and the financing requires the
10,000,000 shares to be registered for resale. As of February 28, 2006, these
shares were included in a registration statement that was filed but had not yet
gone effective.
On February 24, 2005, in connection with the acquisition of Biophan Europe (see
Note 2), 100,000 shares of restricted stock, valued at $134,000, were issued,
fully charged and accrued to intellectual property rights in the accompanying
consolidated balance sheet; and in connection with Employment Agreements of the
same date, 200,000 shares of restricted stock valued at $268,000 were issued to
two key executives of the German subsidiary company aMRIs GmbH and fully charged
to operating expenses in the accompanying consolidated statement of operations.
F-19
BIOPHAN TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On August 2, 2005, the Company entered into an investment agreement with Boston
Scientific Scimed. At that time, 1,653,193 shares of common stock were issued
for $5,000,000.
On November 30, 2005, the Company issued 4,923,080 shares of common stock,
valued at $8,467,698 for the acquisition of a 35% minority ownership in Myotech,
LLC. Under EITF 98-2, Accounting by a Subsidiary or Joint Venture for an
Investment in the Stock of its Parent Company, these shares are accounted for as
treasury stock.
On December 6, 2005, in connection with the acquisition of Biophan Europe (see
Note 2), 100,000 shares of restricted stock, valued at $134,000, were issued in
satisfaction of accounts payable in the accompanying consolidated balance sheet.
Also, on December 6, 2005, the Company issued 22,000 restricted shares of common
stock valued at $37,840 for certain services.
During the years ended February 28, 2006 and 2005, the Company issued 84,074 and
1,903,775 shares of stock upon the exercise of warrants for total proceeds of
$20,707 and $788,900, respectively; and issued 74,047 shares upon exercise of
cashless warrants during the year ended February 28, 2005. As of February 28,
2006 and 2005, warrants to purchase 3,247,920 and 1,525,029 shares of our common
stock were outstanding, respectively. The exercise prices for these warrants
range from $.15 per share to $2.49 per share, and the weighted-average exercise
price for all of the outstanding warrants is $1.28 per share. In addition,
during the years ended February 28, 2006 and 2005, 224,165 and 94,999 shares of
stock were issued upon the exercise of options for total proceeds of $182,541
and $34,900, respectively.
Additional paid-in capital was further increased by$4,609,778 and $201,000 of
expense related to stock options issued for services during the years ended
February 28, 2006 and 2005, respectively. Also, $295,362 and $400,725 of profits
were received during the years ended February 28, 2006 and 2005, respectively,
from a related company owed pursuant to the "short swing profit" rules of the
Securities Exchange Act of 1934.
12. RESEARCH AND DEVELOPMENT COSTS:
Expenditures for research activities relating to intellectual property
development and improvement are charged to expense as incurred. Such
expenditures amounted to $6,829,142, $2,629,980 and $1,240,439 for the years
ended February 28, 2006 and 2005, and February 29, 2004, respectively.
13. COMMITMENTS:
Lease Obligation
The Company is obligated under operating leases for office space expiring
through January 30, 2008. The Company may terminate the leases upon ninety days
prior written notice to the landlord. Following are the minimum future payments
under these leases for the years ending February 28:
2007 $161,038
2008 98,672
--------
$259,710
========
Rent expense, net of subrentals, charged to operations under these operating
lease aggregated $70,775, $58,546 and $57,899 for the years ended February 28,
2006, 2005 and February 29, 2004, respectively. Rent expense, net of subrentals,
charged to operations for the period from August 1, 1968 (Date of Inception) to
February 28, 2005 was $255,465.
Cooperation Agreement
The Company's subsidiary, Biophan Europe, has a cooperation agreement with a
German university to test and further develop coronary stents whereby the
parties provide personnel and know-how. The agreement is for a term of one year
ending May 31, 2006. Biophan Europe is committed to assume costs of the project
up to an amount of approximately $133,000.
F-20
BIOPHAN TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
License Agreements
The Company is obligated under seven license or royalty agreements for patents
that expire at various dates through 2025. These agreements may be terminated by
the Company with 60 days written notice. Aggregate minimum future payments over
the remaining life of the patents under these agreements total $6,352,500.
License/royalty expense charged to operations was $594,890, $89,880 and $15,000
for the years ended February 28, 2006, 2005 and February 29, 2004, respectively.
Employment Agreements
Biophan has employment agreements with its executive officers that renew
annually unless terminated by either party. Such agreements, which have been
revised from time to time, provide for minimum salary levels, adjusted annually
for cost-of-living changes, as well as for incentive bonuses that are payable if
specified management goals are attained.
Also, Biophan has an employment contract with an officer that expires November
9, 2007, and Biophan Europe has an employment agreement with a key employee that
expires on February 24, 2009. These agreements provide for base salaries,
bonuses based on attaining certain milestones, a restricted stock grant and
stock options. The aggregate commitment for future base salaries at February 28,
2006, excluding bonuses and other awards approximates $615,000.
14. RELATED PARTY TRANSACTIONS:
The Company has affiliations with three entities, Biomed, Technology
Innovations, and Myotech (through November 30, 2005) that are related by virtue
of common senior management personnel and stock ownership. During the years
ended February 28, 2006, 2005 and February 29, 2004, the Company charged Biomed
and Myotech (through November 30, 2005) for services of certain Company
personnel. The total of these charges was $156,647, $161,014 and $85,584,
respectively. The Company also charges Biomed, TI and Myotech (through November
30, 2005) for expenses allocable to and paid on their behalf. During the year
ended February 28, 2006, 2005 and February 29, 2004 expenses paid by the Company
on their behalf was approximately $647,000, $240,000 and $120,000, respectively.
At February 28, 2006, the combined balances due from these related parties was
$9,387. The amounts do not bear interest and the Company received payment within
forty-five days.
During the year ended February 28, 2006, 2005 and February 29, 2004, the Company
was billed $93,000, $9,000 and $4,500, respectively for legal services provided
by Bramson & Pressman of which Robert S. Bramson, a director of the Company, is
a partner.
Steven Katz & Associates, Inc. of which Steven Katz, a director of the Company
is an owner, billed the Company $121,500 during the year ended February 28, 2006
for consulting services. No services were billed in preceding years.
Wood & Company, CPA, PC, of which Robert J. Wood, the Company's former CFO is
the owner, billed the Company $9,800 for services rendered during the year ended
February 28, 2006. No services were billed in preceding years.
15. STOCK-BASED COMPENSATION PLAN:
The Company has a stock option plan (the "Plan") which provides for the granting
of nonqualified or incentive stock options ("ISO") to officers, key employees,
non-employee directors and consultants. The Plan authorizes the granting of
options to acquire up to 13,000,000 common shares. ISO grants under the Plan are
exercisable at the market value of the Company's stock on the date of such
grant. Nonqualified option grants under the Plan are exercisable at amounts
determined by the board of directors. All options under the Plan are exercisable
at times as determined by the board of directors, not to exceed 10 years from
the date of grant. Additionally, the Plan provides for the granting of
restricted stock to officers and key employees.
F-21
BIOPHAN TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes activity in stock options:
Weighted-
average
Exercise
Options Price
---------- ---------
Outstanding at February 28, 2003 2,489,995 $ .48
Granted 4,469,998 .17
Forfeited (90,000) .30
Exercised (3,000,000) .14
----------- -----
Outstanding at February 29, 2004 3,869,993 .39
Granted 4,149,859 .96
Forfeited -- --
Exercised (94,999) .37
----------- -----
Outstanding at February 28, 2005 7,924,853 .69
Granted 1,968,331 1.88
Forfeited (74,999) .83
Exercised (224,165) .81
----------- -----
Outstanding at February 28, 2006 9,594,020 $ .95
=========== =====
Weighted-average fair value of options
granted during the year ended:
February 28, 2006 $ 1.54
February 28, 2005 $ .61
February 29, 2004 $ .16
===========
The following table summarizes information about stock options outstanding and
exercisable at February 28, 2006:
Options Outstanding Options Exercisable
------------------------------------- ----------------------
Weighted Weighted
Average Average Weighted
Remaining Remaining Average
Range of Number Contractual Exercise Number Exercise
Exercise Price Outstanding Life Price Exercisable Price
-------------- ----------- ----------- --------- ----------- --------
$.10- $.43 2,175,000 6.32 years $ .25 1,877,500 $ .26
$.50-$1.04 5,032,497 7.22 years $ .82 4,029,997 $ .81
$1.18-$1.26 484,859 7.90 years $1.21 79,859 $1.21
$1.56-$2.97 1,901,664 9.43 years $2.01 517,914 $1.90
--------- ---------- ----- --------- -----
$.10-$2.97 9,594,020 7.49 years $ .95 6,505,270 $ .74
========= ========== ===== ========= =====
F-22
BIOPHAN TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On February 28, 2006 and 2005, 235,982 and 1,740,148, shares of common stock
were reserved for future issuance of stock options.
16. INCOME TAXES:
As of February 28, 2006, the Company had net operating loss carryforwards of
approximately $14,080,000 for federal income tax purposes, which expire through
2025.
The reconciliation of income tax computed at the U.S. federal statutory tax
rates to income tax expense is as follows:
For the Years Ended
---------------------------
February 28, February 29,
------------ ------------
2006 2005 2004
---- ---- ----
Tax benefit at U.S. statutory rates (34%) (34%) (34%)
Increase in valuation allowance 34% 34% 34%
--- --- ---
0% 0% 0%
=== === ===
February 28,
-------------------------
2006 2005
----------- -----------
Deferred tax asset is comprised of the following:
Net operating loss carryforwards $ 7,400,000 $ 4,627,000
Write-down of intellectual property rights 160,000 160,000
----------- -----------
Total deferred tax asset 7,560,000 4,787,000
Valuation allowance $(7,560,000) $(4,787,000)
=========== ===========
17. CONTINGENCIES:
We are not a party to any material legal proceedings and there are no material
legal proceedings pending with respect to our property, except as noted below.
We are not aware of any legal proceedings contemplated by any governmental
authorities involving either us or our property. None of our directors, officers
or affiliates is an adverse party in any legal proceedings involving us or our
subsidiaries, or has an interest in any proceeding which is adverse to us or our
subsidiaries.
F-23
The Company is pursuing legal claims against one of its former law firms and
certain of its attorneys. Review of the firm's work product and bills recently
revealed questions about the firm's billing practices and other activities. The
amount of potential damages has not yet been quantified. Also, the law firm has
asserted claims seeking payment of additional legal fees, which claims the
Company has denied. The litigation is in an early stage. While, as with any
legal proceedings, no assurance can be given as to ultimate outcome, management
believes that the outcome of the litigation will not have a material adverse
effect upon the Company's financial condition. Accordingly, adjustments, if any
that might result from the resolution of this matter have not been reflected in
the financial statements.
BIOPHAN TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. QUARTERLY STATEMENTS OF OPERATIONS (UNAUDITED)
Year Ended February 28, 2006
-----------------------------------------------------
Quarter ended: May 31 August 31 November 30 February 28
----------- ----------- ----------- -----------
(Restated)
Revenues $ -- $ 62,500 $ 466,935 $ 515,426
Research and development expenses 1,599,742 2,291,762 1,212,239 1,725,399
General and administrative expenses 1,895,984 3,123,641 1,548,299 1,883,962
Other income (expense) 85,887 (670,575) (81,098) 417,569
----------- ----------- ----------- -----------
Net loss $(3,409,839) $(6,023,478) $(2,374,701) $(2,676,366)
=========== =========== =========== ===========
Loss per common share - basic and diluted $ (.05) $ (.08) $ (.03) $ (.03)
Weighted average shares outstanding 74,417,378 75,129,518 76,760,163 76,874,030
Year Ended February 28, 2005
-----------------------------------------------------
Quarter ended: May 31 August 31 November 30 February 28
----------- ----------- ----------- -----------
Revenues $ -- $ -- $ -- $ --
Research and development expenses 560,919 573,846 685,469 809,746
General and administrative expenses 433,767 776,804 1,055,312 1,071,302
Other income (expense) 42,661 48,445 36,089 46,423
----------- ----------- ----------- -----------
Net loss $ (952,025) $(1,302,205) $(1,704,692) $(1,834,625)
=========== =========== =========== ===========
Loss per common share - basic and diluted $ (.01) $ (.02) $ (.02) $ (.03)
Weighted average shares outstanding 66,419,732 67,665,026 70,029,872 73,031,165
19. VALUATION AND QUALIFYING ACCOUNTS
Years ended February 28, 2006, 2005 and 2004
----------------------------------------------------------------
Balance at Additions charged Balance at
Description beginning of year to expense (*) Deductions end of year
----------- ----------------- ----------------- ---------- -----------
Year ended February 28, 2006:
Valuation allowance- deferred tax asset $4,787,000 $2,773,000 $-0- $7,560,000
Year ended February 28, 2005:
Valuation allowance-deferred tax asset $2,926,000 $1,861,000 $-0- $4,787,000
Year ended February 29, 2004:
Valuation allowance-deferred tax asset $2,120,000 $ 806,000 $-0- $2,926,000
(*) Offset to tax benefit of net operating losses.
F-24
BIOPHAN TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED BALANCE SHEETS
November 30, February 28,
2006 2006
(Unaudited) (Restated)
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 4,795,122 $ 1,477,716
Accounts receivable 207,280 170,058
Due from related parties -- 4,801
Prepaid expenses 124,460 147,203
Other current assets 19,087 81,048
------------ ------------
Total current assets 5,145,949 1,880,826
Property and equipment, net 304,549 126,341
Other assets:
Intangible assets, net of amortization:
Myotech, LLC 23,418,416 24,451,580
Other 1,342,901 1.403,270
Deferred financing costs, net of amortization
of $62,117 and $0, respectively 1,470,093 --
Investment in New Scale Technologies, Inc. 100,000 100,000
Security deposit 6,049 6,049
Deferred tax asset, net of valuation allowance of
$9,622,000 and $7,560,000, respectively -- --
------------ ------------
26,337,459 25,960,899
------------ ------------
$ 31,787,957 $ 27,968,066
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of senior secured convertible notes
payable, net of discount of $1,903,655 $ 293,312 $ --
Accounts payable and accrued expenses 2,098,165 1,191,812
Notes payable 71,099 15,886
Line of credit - related party, net of discount
of $100,554 and $1,323,921, respectively 4,329,446 1,476,079
Due to related parties 111,532 26,548
Deferred revenues 20,833 520,833
------------ ------------
Total current liabilities 6,924,387 3,231,158
Long-Term Debt:
Senior Secured Convertible Notes Payable, less
discount of $4,747,197 305,836 --
Fair Value of Warrant Liability 8,587,796 --
------------ ------------
Total Liabilities 15,818,019 3,231,158
Minority interest 13,552,378 15,189,109
Stockholders' equity:
Common stock $.005 par value:
Authorized, 125,000,000 shares
Issued, 83,431,699 and
81,805,243 shares, respectively 417,158 409,026
Additional paid-in capital 54,702,240 49,576,129
------------ ------------
55,119,398 49,985,155
Treasury stock, 4,923,080 shares (8,467,698) (8,467,698)
------------ ------------
46,651,700 41,517,457
Deficit accumulated during the development stage (44,234,140) (31,969,658)
------------ ------------
2,417,560 9,547,799
------------ ------------
$ 31,787,957 $ 27,968,066
============ ============
See Notes to Condensed Consolidated Financial Statements.
F-25
BIOPHAN TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Period from
August 1, 1968
Three Months Ended Nine Months Ended (date of
November 30, November 30, inception) to
-------------------------- --------------------------- November 30,
2006 2005 2006 2005 2006
------------ ----------- ------------ ------------ --------------
Revenues:
Development payments $ -- $ 225,000 $ -- $ 225,000 $ 300,000
License fees 62,500 187,500 500,000 250,000 979,166
Testing services and consulting fees 163,594 54,435 381,115 113,119 721,810
------------ ----------- ------------ ------------ ------------
226,094 466,935 881,115 588,119 2,000,976
Operating expenses:
Research and development 1,737,351 1,212,239 6,267,272 5,103,743 19,286,691
General and administrative 1,264,228 1,548,299 4,923,853 6,567,924 22,865,225
Write-down of intellectual property rights -- -- -- -- 530,000
------------ ----------- ------------ ------------ ------------
3,001,579 2,760,538 11,191,125 11,671,667 42,681,916
------------ ----------- ------------ ------------ ------------
Operating loss (2,775,485) (2,293,603) (10,310,010) (11,083,548) (40,680,940)
Other income(expense):
Interest income 34,697 48,922 46,303 60,638 175,451
Interest expense (1,889,188) (243,332) (2,573,595) (1,010,648) (5,445,384)
Additional expense related to warrants (7,304,105) -- (7,304,105) -- (7,304,105)
Change in fair value of warrant liability 6,722,184 -- 6,722,184 -- 6,722,184
Loss on extinguishment of debt - related
party (670,053) -- (670,053) -- (670,053)
Other income 44,499 113,312 138,200 225,541 830,397
Other expense -- -- -- -- (65,086)
------------ ----------- ------------ ------------ ------------
(3,061,966) (81,098) (3,641,066) (724,469) (5,756,596)
------------ ----------- ------------ ------------ ------------
Loss from continuing operations before minority
interest in net loss of Myotech, LLC (5,837,451) (2,374,701) (13,951,076) (11,808,017) (46,437,536)
Minority interest in net loss of Myotech, LLC 470,674 -- 1,686,594 -- 2,292,753
------------ ----------- ------------ ------------ ------------
Loss from continuing operations (5,366,777) (2,374,701) (12,264,482) (11,808,017) (44,144,783)
Loss from discontinued operations -- -- -- -- (89,357)
------------ ----------- ------------ ------------ ------------
Net loss $ (5,366,777) $(2,374,701) $(12,264,482) $(11,808,017) $(44,234,140)
============ =========== ============ ============ ============
Loss per common share - basic and diluted $ (0.07) $ (0.03) $ (0.16) $ (0.16)
============ =========== ============ ============
Weighted average shares outstanding 77,654,013 76,760,163 78,180,322 75,430,870
============ =========== ============ ============
See Notes to Condensed Consolidated Financial Statements.
F-26
BIOPHAN TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Period from
Nine Months Ended August 1, 1968
November 30, (date of
--------------------------- inception) to
2006 2005 November 30, 2006
(Restated)
------------ ------------ -----------------
Cash flows used for operating activities:
Net loss $(12,264,482) $(11,808,017) $(44,234,140)
Adjustments to reconcile net loss to net cash
used in operating activities:
Amortization of intangible assets 1,093,533 40,929 1,498,974
Amortization of deferred financing costs 62,117 -- 62,117
Depreciation 47,818 30,882 187,252
Loss on disposal of equipment 3,651 1,505 5,156
Additional expense related to warrants 7,304,105 -- 7,304,105
Change in fair value of warrant liability (6,722,184) -- (6,722,184)
Realized and unrealized losses on marketable securities -- -- 66,948
Loss on extinguishment of debt - related party 670,053 -- 670,053
Accrued interest on note converted to common stock -- 19,506 31,504
Amortization of discount on convertible notes payable 599,148 -- 1,650,098
Write-down of intellectual property rights -- -- 530,000
Amortization of discount on payable to related party 1,640,438 958,160 2,787,002
Issuance of common stock for services -- -- 406,948
Issuance of common stock for interest -- -- 468,823
Grant of stock options for services 1,112,726 4,644,202 7,676,304
Expenses paid by stockholder -- -- 2,640
Minority interest (1,636,731) 26,523 (2,173,347)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (37,222) -- (199,780)
(Increase) decrease in due from related parties 4,801 134,123 (59,300)
(Increase) decrease in prepaid expenses 22,743 (84,345) (124,460)
(Increase) decrease in other current assets 61,961 (35,832) 22,251
(Increase) decrease in security deposits -- (867) (3,800)
Increase (decrease) in accounts payable and
accrued expenses 906,353 603,544 1,554,045
Increase (decrease) in due to related parties 84,984 -- 68,036
Increase (decrease) in deferred revenues (500,000) 275,000 20,833
------------ ------------ ------------
Net cash used in operating activities (7,546,188) (5,194,687) (28,503,922)
Cash flows used for investing activities:
Purchases of property and equipment (229,677) (53,250) (464,887)
Sales of marketable securities -- -- 2,369,270
Purchase of investment -- -- (100,000)
Acquisition costs of intangible assets -- (466,583) (466,583)
Cash paid for investment in Myotech,
net of cash received of $19,408 -- (280,594) (280,594)
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 (229,677) (800,427) (1,637,886)
Cash flows provided by financing activities:
Proceeds of bridge loans -- -- 986,500
Loan from stockholder -- -- 143,570
Line of credit borrowing from related party, net of
discount 3,630,000 2,000,000 8,480,950
Line of credit payments (2,000,000) (500,000) (2,572,500)
Proceeds of convertible note payable 7,250,000 -- 7,250,000
Notes payable 55,213 (200,000) (144,787)
Proceeds from sales of common stock 3,175,000 6,050,000 19,438,849
Exercise of options 13,178 182,541 658,466
Exercise of warrants -- 20,707 1,142,451
Swing profits -- 295,362 696,087
Deferred financing costs (1,030,120) -- (1,142,656)
------------ ------------ ------------
Net cash provided by financing activities 11,093,271 7,848,610 34,936,930
------------ ------------ ------------
Net increase (decrease) in cash and equivalents 3,317,406 1,853,496 4,795,122
Cash and equivalents, beginning 1,477,716 753,288 --
------------ ------------ ------------
Cash and equivalents, ending $ 4,795,122 $ 2,606,784 $ 4,795,122
============ ============ ============
See Notes to Condensed Consolidated Financial Statements.
F-27
BIOPHAN TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Period from
Nine Months Ended August 1, 1968
November 30, (date of
----------------------- inception) to
2006 2005 November 30, 2006
---------- ---------- -----------------
Supplemental schedule of cash paid for:
Interest $ 30,000 $ 12,603 $ 39,800
========== ========== ==========
Supplemental schedule of non cash investing and financing activities:
Allocation of proceeds from line of credit - related party
to beneficial conversion feature and warrants $ 417,070 $ -- $2,812,555
========== ========== ==========
Allocation of proceeds from notes payable and warrants $7,250,000 $ -- $7,250,000
========== ========== ==========
Issuance of warrants in partial payment of financing costs $ 502,090 $ -- $ 502,090
========== ========== ==========
Reclassification of warrants from equity to warrant liability $ 755,876 $ -- $ 755,876
========== ========== ==========
Issuance of common stock upon conversion
of line of credit loans $ -- $1,000,000 $1,978,450
========== ========== ==========
Issuance of common stock for the acquisition of
a 35% interest in Myotech, LLC $ -- $8,467,698 $8,467,698
========== ========== ==========
Issuance of common stock in satisfaction of
accounts payable $ -- $ -- $ 134,000
========== ========== ==========
Liabilities assumed in conjunction with acquisition of 51% interest in
Biophan Europe and certain intellectual property rights:
Fair value of assets acquired $1,105,714
Cash paid (366,830)
Promissory note issued (200,000)
Restricted stock issued (134,000)
Payables incurred (226,500)
----------
Liabilities assumed $ -- $ -- $ 178,384
========== ========== ==========
Issuance of common stock upon conversion
of bridge loans $ -- $ -- $1,142,068
========== ========== ==========
Acquisition of intellectual property $ -- $ -- $ 425,000
========== ========== ==========
Intellectual property acquired through issuance of
capital stock and assumption of related party payable $ -- $ -- $ 175,000
========== ========== ==========
See Notes to Condensed Consolidated Financial Statements.
F-28
BIOPHAN TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
November 30, 2006
1. PRINCIPAL BUSINESS ACTIVITY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL STATEMENTS
The condensed consolidated financial statements as of November 30, 2006 and for
the three and nine months ended November 30, 2006 and 2005 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-K/A for the fiscal
year ended February 28, 2006.
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"), its majority owned subsidiaries Biophan Europe
GmbH ("Biophan Europe"), formerly aMRIs GmbH, and TE Bio LLC ("TE Bio"), and
Myotech, LLC ("Myotech"), a variable interest entity, collectively referred to
as the "Company". All significant inter-company 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 and
operating profits. Therefore, the Company is in the development stage and will
remain so until the realization of significant revenues and operating profits.
The Company's ability to continue in business is dependent upon maintaining
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 image compatible (allow effective imaging of the device and its
surrounding tissue) with MRI (magnetic resonance imaging). The Company is also
developing and marketing an image compatible ceramic motor; a system for
generating power for implantable devices from body heat, and a series of
implantable devices including MRI-visible vascular implants such as a vena cava
filter, a heart valve and an occluder for the treatment of atrial septal
defects, a hole in the wall separating the left and right chambers of the heart.
The Company's first licensee for several of these technologies is Boston
Scientific (NYSE: BSX). The Company is also an owner of a substantial minority
interest, with rights to take a majority interest, in Myotech,(accounted for as
a variable interest entity) developer of the MYO-VAD, a cardiac assist device
that does not contact circulating blood and utilizes technology that has the
potential to become a standard of care in the device market for treating
multiple types of acute and chronic heart failure including congestive heart
failure and sudden cardiac arrest.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company has two stock-based compensation plans, entitled Biophan
Technologies, Inc. 2001 Stock Option Plan and Biophan Technologies, Inc. 2006
Incentive Stock Plan (the "Plans") which are stockholder approved. The Plans
provide for the grant of incentive and non-qualified stock options to selected
employees, and the grant of non-qualified options to selected consultants and to
directors and advisory board members. In addition, various other types of
stock-based awards may be granted. The Plans are administered by the
Compensation Committee of the Board and authorizes the grant of options or
restricted stock awards for 13,000,000 shares under the 2001 Plan and 7,500,000
shares under the 2006 Plan. The Compensation Committee determines which eligible
individuals are to receive options or other awards under the Plans, the terms
and conditions of those awards, the applicable vesting schedule, the option
price and term for any granted options, and all other terms and conditions
governing the option grants and other awards made under the Option Plan.
Non-employee directors also receive periodic option grants pursuant to the
automatic grant program in effect for them under the 2006 Plan.
Effective March 1, 2006, the Company adopted SFAS No. 123 (revised),
"Share-Based Payment" (SFAS 123(R)) utilizing the modified prospective approach.
Prior to the adoption of SFAS 123(R), stock option grants to employees and
directors were accounted for in accordance with APB Opinion No. 25, "Accounting
for Stock Issued to Employees" (the intrinsic value method) and the
disclosure-only provisions of SFAS 123, "Accounting for Stock-Based
Compensation". Accordingly, employee compensation expense was recognized only to
the extent that the fair value of our common stock on the date of grant exceeded
the stock option exercise price.
F-29
Under the modified prospective approach, SFAS 123(R) applies to new grants and
to grants that were outstanding on February 28, 2006 that are subsequently
modified, repurchased or cancelled. Under the modified prospective approach,
compensation cost recognized in the first three quarters of fiscal 2007 includes
compensation cost for all share-based payments granted prior to, but not yet
vested as of February 28, 2006, based on the grant-date fair value estimated in
accordance with the original provisions of SFAS 123, and compensation cost for
all share-based payments granted subsequent to February 28, 2006, based on the
grant-date fair value estimated in accordance with the provisions of SFAS
123(R). Prior periods were not restated to reflect the impact of adopting the
new standard.
As a result of adopting SFAS 123(R) on March 1, 2006, our net loss and basic and
diluted loss per share for the three months and the nine months ended November
30, 2006, were $228,586 ($.003 per share) and $919,631 ($.012 per share) higher,
respectively, than if we had continued to account for stock-based compensation
under APB Opinion No. 25 for our stock option grants.
The following table illustrates the effect on operating results and per share
information had the Company accounted for stock-based compensation in accordance
with SFAS 123(R) for the three months and nine months ended November 30, 2005:
Nine Months
Three Months Ended Ended
November 30, 2005 November 30, 2005
------------------ -----------------
Net loss - as reported $(2,374,701) $(11,808,017)
Add: Stock-based employee compensation
expense included in reported net loss,
net of related tax effects 29,500 4,355,030
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax effects (220,466) (6,279,291)
----------- ------------
Net loss - pro forma $(2,565,667) $(13,732,278)
=========== ============
Basic and diluted loss
per share - as reported $ (.03) $ (.16)
=========== ============
Basic and diluted loss
per share - pro forma $ (.03) $ (.18)
=========== ============
We use the Black-Scholes option pricing model to estimate the fair value of
stock-based awards with the following weighted-average assumptions for the
indicated periods (no options were granted in the three months ended November
30, 2005:
Nine Nine
Three Months Months Ended Months Ended
Three Months Ended Ended November 30, November 30,
November 30, 2006 November 30, 2005 2006 2005
------------------ ----------------- ------------- ------------
Expected volatility 115.8 N/A 115.8-121.8 60.3-87.8
Risk-free interest rate 4.45% N/A 4.45%-5.35% 4.08%-4.27%
Expected life of options (years) 5.6-6.4 years N/A 3.75-8 years 10 years
Weighted-average grant-date fair value $.33 N/A $.47 $2.09
Expected dividends -0- N/A -0- -0-
The assumptions above are based on multiple factors, including historical
exercise patterns of employees in relatively homogeneous groups with respect to
exercise and post-vesting employment termination behaviors, expected future
exercising patterns for these same homogeneous groups and the implied volatility
of our stock price.
At November 30, 2006, there was $1,547,273 of unrecognized compensation cost
related to stock-based payments which is expected to be recognized over a
weighted-average period of 1.39 years.
F-30
The following table represents stock option activity for the nine months ended
November 30, 2006:
Weighted-Average
Number of Weighted-Average Remaining
Shares Exercise Price Contract Life
--------- ---------------- ----------------
Outstanding options at 2/28/06 9,594,020 $ .95
Granted 240,000 $1.19
Exercised (38,956) $ .34
Forfeited (209,500) $ .82
Expired (90,000) $ .50
---------
Outstanding options at 11/30/06 9,495,564 $ .93 6.85
========= ===== ====
Outstanding exercisable at 11/30/06 7,223,064 $ .78 6.36
========= ===== ====
Shares available for future stock option grants to employees and others under
our 2001 Stock Option Plan were 455,482 shares available for future stock option
grants to employees and others under our 2006 Stock Option Plan were 7,340,000.
At November 30, 2006, the aggregate intrinsic value of shares outstanding was
$546,225, and the aggregate intrinsic value of options exercisable was $507,975.
Total intrinsic value of options exercised was $17,223 for the nine months ended
November 30, 2006.
The following table summarizes our non-vested stock option activity for the nine
months ended November 30, 2006:
Weighted-Average Grant-Date
Number of Shares Fair Value
---------------- ---------------------------
Non-vested stock options at 2/28/06 3,048,750 $1.31
Granted 160,000 $1.03
Vested (791,750) $ .98
Forfeited (144,500) $ .80
---------
Non-vested stock options at 11/30/06 2,272,500 $ .78
=========
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, such as a written progress report. Advance fees received
on such agreements are deferred until recognized.
The Company recognizes initial license fees over the term of the related
agreement. Revenue related to a performance milestone is recognized upon the
achievement of the milestone, as defined in the respective agreements.
The Company recognizes revenues from testing services and consulting fees as
services are performed.
NEW ACCOUNTING PRONOUNCEMENT
EITF 00-19-2 - In December 2006, the FASB issued Staff Position No. EITF
00-19-2. This FSP addresses an issuer's accounting for registration payment
arrangements and specifies that the contingent obligation to make future
payments or otherwise transfer consideration under a registration payment
arrangement should be separately recognized and measured in accordance with FASB
No. 5. The guidance in this FSP amends FASB Statements 133 and 150 and FASB
Interpretation No. 45 to include scope exceptions for registration payments
arrangements. This FSP further clarifies that a financial instrument subject to
a registration payment arrangement should be accounted for without regard to the
contingent obligation to transfer consideration pursuant to the registration
payment arrangement. This guidance is effective for financial statements issued
for fiscal years beginning after December 15, 2006. The Company is currently
assessing the impact this pronouncement will have on its financial statements if
any.
2. INVESTMENT IN MYOTECH, LLC:
Effective November 30, 2005, we entered into a Securities Purchase Agreement for
the acquisition of an initial 35% interest in Myotech, LLC ("Myotech"), a New
York limited liability company, whereby we exchanged 4,923,080 shares of our
common stock, par value $.005, for 3,768,488 Class A (voting) units of Myotech.
Based upon the terms of the Securities Purchase Agreement, we were obligated to
purchase for cash consideration of $2.225 million an additional 811,037 Class A
units. We may elect to acquire up to an additional 3,563,097 Class A units for
further cash consideration of up to $9.775 million, over a 24-month period,
which may result in the Company owning a majority interest in Myotech. During
the three month period ended February 28, 2006, Biophan provided $1,185,000 of
additional funding for 431,946 newly issued Class A units of Myotech. During the
nine month period ended November 30, 2006, Biophan has provided $1,040,000 of
additional funding satisfying the cash consideration of $2.225 million cited
above, for 379,091 newly issued Class A units of Myotech. In addition, Biophan
has also provided an additional investment of $577,447 to Myotech against
milestone 2 in the quarter ended November 30, 2006 for 210,747 newly issued
Class A units, which increased our ownership to 41.5%, for a total investment of
$12,700,746 at November 30, 2006. Additional investments of $800,455 against
milestone 2 have been made since November 30, 2006 for 291,775 additional newly
issued Class A units, which raised our ownership percentage to 42.9% to date.
This investment was previously accounted for using the equity method. However,
the Company re-evaluated its investment in Myotech and has determined that
Myotech is a variable interest entity in accordance with FASB Interpretation No.
46 (FIN-46R) (Revised December 2003), Consolidation of Variable Interest
Entities. The Company has further concluded that it is the primary beneficiary
as defined by FIN-46R and, as a result, the Company is required to consolidate
Myotech as of the date of acquisition of November 30, 2005. Therefore, the
consolidated financial statements of the Company include the accounts of
Myotech, LLC.
The following is selected financial data for Myotech, LLC:
November 30, 2006
------------------
Total current assets $ 18,588
Intangible assets, net of amortization 23,418,416
Other assets 176,468
-----------
Total assets $23,613,472
===========
Current liabilities $ 651,126
Equity 22,962,346
-----------
$23,613,472
===========
Three Months Ended Nine Months Ended
November 30, 2006 November 30, 2006
------------------ -----------------
Net loss from operations $(955,117) $(3,230,046)
========= ===========
3. LINE OF CREDIT AGREEMENTS
On May 27, 2005, we entered into a Line of Credit Agreement with Biomed
Solutions, LLC, a related party, whereby Biomed agreed to provide a line of
credit facility of up to $2 million. Borrowings under the line, bear interest at
8% per annum, are payable on demand and are convertible at Biomed's election,
into the Company's common stock at 90% of the average closing price for the 20
trading days preceding the date of borrowings under the line. In June 2005, the
Company borrowed the entire $2 million under the line in two separate draws of
$1 million each. In accordance with the agreement, Biomed received warrants to
purchase 500,000 shares of the Company's common stock at an exercise price of
110% of the average closing price for the 20 trading days preceding the date of
execution of the credit agreement. The Company recorded a discount on the
borrowings of $958,160 due to the beneficial conversion feature of the note as
well as for the value of the warrants. The discount was amortized as additional
interest expense over the term of the note. In August 2005, Biomed elected to
convert $1 million of the note plus accrued interest into 480,899 shares of
common stock at which time, the remaining discount related to the $1 million
portion of the loan was fully expensed. On October 7, 2005, we repaid $500,000
of principal and all accrued interest on the loan. The balance of borrowings on
the line was $500,000 at November 30, 2006.
On January 24, 2006, we entered into an additional Line of Credit Agreement (the
"Line of Credit Agreement") with Biomed Solutions, LLC, pursuant to which Biomed
committed to make advances to us, in an aggregate amount of up to $5,000,000.
Under the Line of Credit Agreement, advances may be drawn down in such amounts
and at such times as we determine upon 15 days prior notice to Biomed, except
that we may not draw down more than $1,500,000 in any 30-day period. Amounts
borrowed bear interest at the rate of 8% per annum and were convertible into
shares of our Common Stock at the rate of $1.46 per share. Biomed's obligation
to lend to us under the Line of Credit Agreement expires on June 30, 2007, on
which date the entire amount borrowed by us (and not converted into shares of
our Common Stock) becomes due and payable. In connection with the establishment
of the credit facility, we issued to Biomed a warrant to purchase up to
1,198,630 shares of our Common Stock at an exercise price of $1.89 per share.
The Company recorded a discount on the borrowings of $1,678,425 due to the
beneficial conversion feature of the note as well as for the value of the
warrant. The balance of borrowings on the line was $3,930,000 at November 30,
2006. The fair value of the note is not readily determinable as there is a
limited market for such related party debt.
F-31
On October 11, 2006, in connection with our Securities Purchase Agreement dated
October 11, 2006 with Iroquois Master Fund Ltd and other private investors (the
"Purchase Agreement"), we amended our January 24, 2006 Line of Credit Agreement
(the "Biomed Line of Credit Agreement") with Biomed and the Convertible
Promissory Note in the original principal amount of $5,000,000 issued by us to
Biomed on January 24, 2006 pursuant to the Biomed Line of Credit Agreement (the
"$5,000,000 Biomed Note"). The amendment reduced the price at which the
$5,000,000 Biomed Note is convertible into shares of our Common Stock from $1.46
per share to a conversion price of $0.67. In connection with the Purchase
Agreement, we also entered into a Subordination and Standstill Agreement (the
"Subordination Agreement") with Biomed and the investors who are parties to the
Purchase Agreement, pursuant to which Biomed agreed (i) to subordinate its
rights to payment under the $5,000,000 Biomed Note and the Convertible
Promissory Note in the original principal amount of $2,000,000 issued by us to
Biomed on May 27, 2005 to the rights of the investors under the Notes and (ii)
to convert the entire outstanding amount of principal and interest due under the
$5,000,000 Biomed Note in excess of $700,000 into shares of our common stock
upon the effectiveness of an amendment to our Articles of Incorporation to
increase the number of our authorized shares which we have agreed, in the
Purchase Agreement, to propose to our stockholders. For accounting purposes,
these amendments have been treated, in substance, as an extinguishment of the
old debt. Accordingly, the remaining unamortized discount on the old debt of
$1,098,442 was written off, a loss on extinguishment of $670,053 on the old debt
was recognized, and a discount was recorded on the new debt of $175,970 during
the quarter ended November 30, 2006.
F-32
4. SENIOR SECURED CONVERTIBLE NOTES:
On October 11, 2006, we entered into a Securities Purchase Agreement (the
"Purchase Agreement") with 10 private investors led by Iroquois Master Fund Ltd
("Iroquois"). Pursuant to the Purchase Agreement, on October 12, 2006 we issued
$7,250,000 of Senior Secured Convertible Notes (the "Notes") to the investors
and received proceeds of $6,219,880 after paying estimated fees and expenses of
$1,030,120 related to the transaction. The holders of the Notes may elect to
convert the Notes at any time into shares of our common stock based upon a price
of $0.67 per share (the "Conversion Price"). Interest on the outstanding
principal amount under the Notes is payable quarterly at a rate equal to the
six-month London InterBank Overnight Rate plus 500 basis points, with a minimum
rate of 10% per annum and a maximum rate of 12% per annum, payable at our option
in cash or shares of our common stock registered for resale under the Securities
Act of 1933, as amended (the "Securities Act"). If we elect to make an interest
payment in common stock, the number of shares issuable by us will be based upon
the lower of (i) 90% of the 20-day trailing average volume weighted average
price per share as reported on Bloomberg LP (the "VWAPS") or (ii) the Conversion
Price. Principal on the Notes amortizes and payments are due in 33 equal monthly
installments commencing four months following issuance of the Notes, and may be
made at our option in cash or shares of our common stock registered for resale
under the Securities Act. If we elect to make a principal payment in common
stock, the number of shares issuable by us will be based upon the lower of (i)
87.5% of the 15-day trailing VWAPS prior to the principal payment date or (ii)
the Conversion Price. Our obligations under the Notes are secured by a first
priority security interest in substantially all of our assets pursuant to a
Security Agreement dated as of October 11, 2006 among us, the investors and
Iroquois, as agent for the investors (the "Security Agreement").
As further consideration to the investors, on October 12, 2006 we issued to the
investors one-year warrants to purchase an aggregate of 10,820,896 shares of our
common stock at a price of $0.67 per share. If the investors elect to exercise
these one-year warrants, they will also receive additional five-year warrants to
purchase shares of our common stock equal to the number of shares purchased
under this one-year warrant, with 50% of the additional warrants having an
exercise price of 115% of the per share purchase price, and the remaining 50% of
the additional five-year warrants having an exercise price of 125% of the per
share purchase price. We also issued to the investors five-year warrants to
purchase an aggregate of 10,820,896 shares of our common stock. The first
five-year warrants allow for the purchase of 5,410,448 shares of our common
stock at an exercise price of $0.81 per share, and the second five-year warrants
allow for the purchase of 5,410,448 shares of our common stock at an exercise
price of $0.89 per share. The warrants contain anti-dilution protection that
will automatically adjust the exercise price of the warrants should we issue
equity or equity-linked securities at a price per common share below the
exercise price of the five-year warrants to the price at which we issue such
equity or equity-linked securities. The total fair value of the warrants was
$14,554,105. The Company recorded a discount on the Notes of $7,250,000 for the
fair value of the related warrants. This discount on the Notes is being
amortized over the life of the Notes using the effective interest method. The
excess of the fair value of the warrants over the carrying value of the notes,
which amounted to, $7,304,105, was recognized as an additional interest expense.
On February 21, 2007 in connection with a Forbearance Agreement with the
investors three-year warrants for the purchase of an aggregate of 60,000 shares
of our common stock at an exercise price of $0.51 per share (the "Fee
Warrants"). Upon issuance of the Fee Warrants, the exercise price of the five -
year warrants were automatically adjusted from $0.81 per share and $0.89 per
share, respectively, to $0.51 per share, and the number of shares of our common
stock issuable upon exercise of the Original Warrants was automatically
adjusted, proportionately, to an aggregate of 18,034,830 shares. Because the
anti-dilution adjustment to the Original Warrants will be accounted for as a
modification of the Original Warrants, we expect to record an expense in the
period ended February 28, 2007. In accordance with the guidance provided by EITF
00-19, Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock, we expect to record a liability
in the period ended February 28, 2007 relating to the issuance of the Fee
Warrants and the increase in the number of shares of our common stock issuable
upon exercise of the Original Warrants.
5. FAIR VALUE OF WARRANT LIABILITY:
In accordance with the guidance provided by EITF 00-19, Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock, we have recorded a liability of $8,191,418 for the fair
value of the warrants related to the Senior Secured Convertible Notes at
November 30, 2006 in order to provide for the possibility that we may be unable
to comply with the registration rights of the lenders as contained in the
Securities Purchase Agreement and we currently do not have sufficient available
authorized shares to execute a potential conversion of the Notes and related
warrants and thus we would be required to settle the contract in cash. In
addition, since we currently do not have sufficient available authorized shares
to execute a potential conversion of other outstanding warrants if requested to
do so by the grantees, we could be required to settle any conversion requests in
cash. Therefore, we reclassified warrants with an approximate value of $756,000
from equity to the warrant liability. The fair value of this amount was $396,378
at November 30, 2006. The Company expects to seek stockholder approval to
increase the authorized shares at a Special Meeting to be scheduled within the
next three months. The total fair value of derivative liability, originally
recorded at $15,309,980 on October 12, 2006, was adjusted by $6,722,184 to
$8,587,796 at November 30, 2006 resulting in a net non-cash income adjustment of
$581,921 during the quarter ended November 30, 2006.
The warrants subject to the Stand-Still Agreement were not reclassified because
they are not exercisable until the increase in the number of authorized shares
and the investors have agreed not to require a cash settlement in the event the
number of authorized shares is not increased.
As noted above, the fair value of the derivative liability pertaining to the
warrants related to the Senior Secured Convertible Notes is volatile. Several
factors and underlying assumptions are included in the Black-Scholes model to
derive the fair value of the warrants. The factors and the assumptions are as
follows:
1. Number of warrants: varies from time to time dependent upon current
period grants, conversions, forfeitures, and expirations,
2. Term to expiration: expiration dates vary by grant and currently
range from 1-5 years,
3. Market price at the valuation date: $0.70/share at October 12, 2006;
$0.45/share at November 30, 2006,
4. Exercise price of the warrants: varies by grant,
5. Dividend yield - assumed to be zero,
6. Interest rate - we use the US Federal Reserve - "Treasury constant
maturities rates" at the measurement date matched to the maturities
of the warrants. The rates change over time and the maturities of
the warrants change over time.
7. Company stock price volatility on a look-back basis as a proxy for
expected future volatility in stock.price. We use the look-back
approach because the stock has a relatively short trading history as
a publicly traded security.
F-33
While most of these factors changed during the period of October 12, 2006 to
November 30, 2006, the most significant factor impacting the change in fair
value was the change in stock price.
6. STOCKHOLDERS' EQUITY:
On May 27, 2005, the Company entered into a Stock Purchase Agreement with SBI
Brightline XI, LLC. The 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 tranches of 1 million shares each and the financing
agreement requires the shares to be registered for resale by SBI. There are no
resets, warrants, finder's fees or commissions associated with this financing
transaction. Registration of the shares for resale by SBI was effective on May
18, 2006. The Company elected to put the first tranche of 1 million shares at $2
per share on May 23, 2006 and received the entire proceeds. The Company elected
to put the second tranche of 1 million shares at $2 per share on July 21, 2006.
Under this second tranche, only $1,175,000 has been received to date and only
587,500 additional shares have been issued to SBI. On October 11, 2006, the
Company elected to put the entire remaining tranches, at a weighted average
price of $2.60 per share, to SBI. To date, SBI has failed to meet its obligation
to purchase these shares and the Company has not issued the shares.
Changes to stockholders' equity for the nine-month period ended November 30,
2006 were as follows:
Deficit
Accumulated
Number of Additional During the
Outstanding Common Paid-in Treasury Development Stockholders'
Shares Stock Capital Stock Stage Equity
----------- -------- ----------- ----------- ------------ -------------
Balance at February 28, 2006 76,882,163 $409,026 $49,576,129 $(8,467,698) $(31,969,658) $ 9,547,799
Shares issued for option exercises in the
range of $.18 to $.67 per share 38,956 195 12,984 -- -- 13,179
Shares issued for cash pursuant to stock
purchase agreement with SBI at $2.00 per share 1,587,500 7,937 3,167,063 -- -- 3,175,000
Warrants issued in partial payment of
financing costs at $.67 per share -- -- 502,090 -- -- 502,090
Extinguishment of debt on related
party notes payable -- -- 670,053 -- -- 670,053
Allocation of beneficial conversion feature
of related party notes payable -- -- 417,070 -- -- 417,070
Allocation of proceeds to warrants -- -- 7,250,000 -- -- 7,250,000
Reclassification of warrants (8,005,875) (8,005,875)
Stock options expense -- -- 1,112,726 -- -- 1,112,726
Net loss for the nine months ended
November 30, 2006 -- -- -- -- (12,264,482) (12,264,482)
---------- -------- ----------- ----------- ------------ ------------
Balance at November 30, 2006 78,508,619 $417,158 $54,702,240 $(8,467,698) $(44,234,140) $ 2,417,560
========== ======== =========== =========== ============ ============
7. COMMITMENTS:
The Company was obligated under operating leases for office space originally
expiring January 30, 2008, which the Company had the right to terminate upon
ninety days prior written notice to the landlord. The notice of termination was
given to the landlord and we are operating on a month-to-month basis until such
time as a relocation is accomplished. The Company has entered into new operating
leases for office space commencing February 2007 and expiring March 31, 2022,
subject to our right to terminate at any time after December 31, 2008 upon 90
days' notice.
The following is a schedule of future minimum rental payments, included annual
increases, required under the operating lease agreements:
Year Ending
February 28, Amount
------------ ----------
2007 $ 8,297
2008 102,891
2009 139,558
2010 145,954
2011 150,566
Thereafter 1,887,765
-----------
$2,435,031
===========
F-34
----------------------------------------
24,591,491 Shares
BIOPHAN TECHNOLOGIES, INC.
Common Stock
----------------------------------------
Prospectus
_________, 2007
----------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the estimated costs and expenses to be
incurred in connection with the issuance and distribution of the securities
registered under this Registration Statement. All amounts are estimates except
the Securities and Exchange Commission registration fee. The following expenses
will be borne solely by the registrant.
Securities and Exchange Commission registration fee $ 1,500
Printing and engraving expenses 2,000
Legal fees and expenses 75,000
Accounting fees 26,000
--------
Total $104,500
========
Item 14. Indemnification of Directors and Officers.
Under Nevada Revised Statutes Section 78.138, a director or officer is
generally not individually liable to the corporation or its shareholders for any
damages as a result of any act or failure to act in his capacity as a director
or officer, unless it is proven that
o his act or failure to act constituted a breach of his
fiduciary duties as a director or officer; and
o his breach of those duties involved intentional misconduct,
fraud or a knowing violation of law.
This provision is intended to afford directors and officers protection
against and to limit their potential liability for monetary damages resulting
from suits alleging a breach of the duty of care by a director or officer. As a
consequence of this provision, stockholders of Biophan will be unable to recover
monetary damages against directors or officers for action taken by them that may
constitute negligence or gross negligence in the performance of their duties
unless such conduct falls within one of the foregoing exceptions. The provision,
however, does not alter the applicable standards governing a director's or
officer's fiduciary duty and does not eliminate or limit the right of Biophan or
any stockholder to obtain an injunction or any other type of non-monetary relief
in the event of a breach of fiduciary duty.
As permitted by Nevada law, Biophan's By-Laws include a provision which
provides for indemnification of a director or officer by Biophan against
expenses, judgments, fines and amounts paid in settlement of claims against the
director or officer arising from the fact that he was a director or officer,
provided that the director or officer acted in good faith and in a manner he
believed to be in or not opposed to the best interests of Biophan. Biophan has
purchased insurance under a policy that insures both Biophan and its officers
and directors against exposure and liability normally insured against under such
policies, including exposure on the indemnities described above.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons pursuant to
the foregoing provisions, or otherwise, we have been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
II-1
Item 15. Recent Sales of Unregistered Securities.
The following sets forth information regarding unregistered securities
sold by the registrant since October 2003.
(a) On February 21, 2007, we issued to ten holders of our Senior Secured
Convertible Notes, all of whom are qualified institutional buyers (as such term
is defined in Rule 144A under the Securities Act) or accredited investors (as
such term is defined in Rule 501 (a) under the Securities Act) three-year
warrants for the purchase of an aggregate of 60,000 shares of our common stock
at an exercise price of $0.51 per share. The warrants were issued in
consideration for the Note holders' execution of a Forbearance Agreement
relating to certain payment due, or to come due, under the Notes. The issuance
of the warrants was made without registration under the Securities Act pursuant
to the exemption provided in Section 4(2) thereof in as much as it did not
involve any public offering.
(b) On October 18, 2006, we issued and sold 587,500 shares of our common
stock, at a price of $2.00 per share, to SBI Brightline XI, LLC ("SBI"). The
sale was made pursuant to the Stock Purchase Agreement dated as of May 27, 2005
between us and SBI (as amended by Amendment No. 1 thereto dated January 9, 2006,
the "Stock Purchase Agreement"). The shares sold on October 18 constitute a
portion of the second of ten tranches of shares which we may require SBI to
purchase under the Stock Purchase Agreement. The issuance and sale of the shares
was made without registration under the Securities Act of 1933 pursuant to the
exemption provided in Section 4(2) thereof. We have been advised by SBI that it
intends to sell all such shares pursuant to our Registration Statement on Form
S-3 (No. 333-130920) which was declared effective by the Securities and Exchange
Commission on May 18, 2006.
(c) On October 11, 2006, we entered into a Securities Purchase Agreement
(the "Purchase Agreement"). Pursuant to the Purchase Agreement, on October 12,
2006, we issued to ten qualified institutional buyers (as such term is defined
in Rule 144A under the Securities Act) and/or accredited investors (as such term
is defined in Rule 501(a) under the Securities Act) the following securities
(the "Securities"):
(i) an aggregate of $7,250,000 principal amount of our Senior Secured
Convertible Notes due October 11, 2009 (the "Notes");
(ii) five-year warrants for the purchase of an aggregate of 5,410,498
shares of our common stock at an exercise price of $0.81 per share
(the "$0.81 Warrants");
(iii) five-year warrants for the purchase of an aggregate of 5,410,498
shares of our common stock at an exercise price of $0.89 per share;
(the "$0.89 Warrants");and
(iv) one-year warrants for the purchase of an aggregate of 10,820,896
shares of our common stock at an exercise price of $0.67 per share.
The Notes are convertible, at any time at the election of the holders,
into shares of our common stock at a conversion price of $0.67 per share. If the
entire principal amount of the Notes were converted, we would issue to the
holders an aggregate of 10,820,896 shares of our common stock. The Securities
were issued in a private placement not involving any public offering and exempt
from registration under the Securities Act pursuant to the exemptions provided
by Section 4(2) of such Act and by Regulation D and Regulation S promulgated
under such Act. The Securities were sold for cash at an aggregate offering price
of $7,250,000. C.E. Unterberg, Towbin acted as the exclusive placement agent in
the offering. We paid the placement agent a cash fee of $580,000 and issued to
it a five-year warrant to purchase an aggregate of 865,672 shares of our common
stock at a price of $0.67 per share. Pursuant to anti-dilution provisions
contained in the $0.81 Warrants and the $0.89 Warrants, the exercise prices of
those warrants were subsequently adjusted to $0.51 and the number of the shares
of our common stock issuable upon exercise thereof was adjusted,
proportionately, to 8,543,079 and 9.441,751, respectively.
(d) On May 23, 2006, we issued and sold 1,000,000 shares of our common
stock, at a price of $2.00 per share, to SBI Brightline XI, LLC ("SBI"). The
sale was made pursuant to the Stock Purchase Agreement dated as of May 27, 2005
between us and SBI (as amended by Amendment No. 1 thereto dated January 9, 2006,
the "Stock Purchase Agreement"). The shares sold on May 23 constitute the first
of ten tranches of shares which we may require SBI to purchase under the Stock
Purchase Agreement. The issuance and sale of the shares was made without
registration under the Securities Act of 1933 pursuant to the exemption provided
in Section 4(2) thereof. We were advised by SBI that it has sold all such shares
pursuant to our Registration Statement on Form S-3 (No. 333-130920) which was
declared effective by the Securities and Exchange Commission on May 18, 2006.
(e) On January 24, 2006, we entered into a Line of Credit Agreement (the
"Line of Credit Agreement") with Biomed Solutions, LLC, a New York limited
liability company ("Biomed"), pursuant to which Biomed has committed to make
advances to us, in an aggregate amount of up to $5,000,000. Under the Line of
Credit Agreement, advances may be drawn down in such amounts and at such times
as we determine upon 15 days' prior notice to Biomed, except that we may not
draw down more than $1,500,000 in any 30-day period. We are obligated to utilize
the entire credit facility. Amounts borrowed will bear interest at the rate of
8% per annum and are convertible into shares of our common stock at the rate of
$0.67 per share. Any amounts drawn down and repaid may be reborrowed at any time
(subject to a requirement of 15 days' notice and the limitation that not more
than $1,500,000 may be drawn down during any 30-day period). Biomed's obligation
to lend to us under the Line of Credit Agreement expires on June 30, 2007, on
which date the entire amount borrowed by us (and not converted into shares of
our common stock) becomes due and payable. Our obligations with respect to
borrowings under the credit facility are governed by a Convertible Promissory
Note issued by us to Biomed on January 24, 2006. In connection with the
establishment of the credit facility under the Line of Credit Agreement, on
January 24, 2006, we issued to Biomed a Stock Purchase Warrant (the "Warrant")
entitling Biomed to purchase up to 1,198,630 shares of our common stock at an
exercise price of $1.89 per share. Biomed's purchase rights under the Warrant
expire on January 23, 2011. The Note and the Warrant were, and any shares
issuable upon conversion of the Note or exercise of the Warrant will be, issued
in a private placement exempt from the registration requirements of the
Securities Act of 1933 pursuant to the exemption set forth in Section 4(2) of
such Act and Regulation D promulgated thereunder.
II-2
(f) On November 30, 2005, we entered into a Securities Purchase Agreement
for the acquisition of an initial 35% interest in Myotech, LLC ("Myotech"), a
New York limited liability company, whereby we exchanged 4,923,020 shares of our
common stock, par value $.005, for 3,687,719 Class A (voting) units of Myotech.
The shares issuable to Myotech under the Securities Purchase Agreement are
subject to a Rights Agreement between us and Myotech entered into on November
30, 2005. Under the Rights Agreement, we agreed among other things, to register
the Biophan shares issued to Myotech. The shares were offered and issued
pursuant to an exemption from the registration requirements of the Securities
Act of 1933 under Section 4(2) of such Act.
(g) On June 30, 2005, we entered into a license agreement and an
investment agreement with Boston Scientific Scimed, Inc., an affiliate of Boston
Scientific Corporation ("BSS") in connection with the licensing of our
technology to BSS. The investment agreement called for the purchase by BSS of
shares of our common stock for a total purchase price of $5 million, the shares
to be priced at 110% of the average of the closing prices of our common stock on
the OTC Bulletin Board for the 30 calendar-day period prior to the closing. Upon
the satisfaction of certain conditions to the agreement, on August 2, 2005, BSS
paid us the $5 million purchase price and we issued to BSS 1,653,193 shares of
our common stock at a price per share of $3.024 (representing a 10% premium over
the average closing price of $2.75 on the OTC Bulletin Board over the period
July 3, 2005 through August 1, 2005). The shares were offered and sold pursuant
to an exemption from the registration requirements of the Securities Act of 1933
under Section 4(2) of such Act and Rule 506 promulgated thereunder.
(h) On February 24, 2005, pursuant to the terms of a License Agreement
("License"), dated February 24, 2005, between Biophan and aMRIs Patent GmbH
("Licensor"), Biophan agreed to issue 200,000 shares of its unregistered common
stock to aMRIs Patent GmbH, the Licensor. The shares issued were exempt from
registration pursuant to the exemption set forth in Section 4(2) and Regulation
S. Biophan did not receive any cash consideration for the shares of common stock
and no underwriters were involved in the placement of the common stock.
(i) On January 21, 2004 and February 10, 2004, respectively, we issued
932,000 and 500,000 shares of common stock for the conversion of $93,200 and
$50,000 of line of credit obligation payable to Biomed Solutions, LLC. Biomed
had previously sold those portions of its receivable to a single purchaser,
Bellador Advisory Services (Labuan) Ltd., a Kuala Lumpur, Malaysia company. The
shares were issued to Bellador and its assigns pursuant to the exemption
provided by Section 3(a)(9) of the Securities Act of 1933, involving an exchange
of securities with an existing securityholder where no commission is payable.
The debt was assigned by Biomed to Bellador pursuant to the provisions of
Regulation S of the Securities Act. All recipients of the shares were
nonaffiliated, non U.S. persons deemed to be accredited investors and/or persons
with knowledge of business. There was no general solicitation or general
advertising related to the transaction, and the recipients were required to
represent that they were non U.S. persons and that they were not acquiring the
shares for the account or benefit of any U.S. Person. The offer to purchase the
shares was not made to a person in the United States and, at the time of the
transaction, the purchasers were outside the United States.
II-3
(j) On February 10, 2004, we issued 3,000,000 shares of common stock upon
the conversion of $300,000 of the obligations under our obligation payable to
Biomed Solutions, LLC under a transfer agreement. Biomed had previously sold
that portion of its rights to SBI Brightline Consulting, LLC. The shares were
issued to SBI pursuant to the exemption provided by Section 3(a)(9) of the
Securities Act of 1933, involving an exchange of securities with an existing
securityholder where no commission is payable. The debt was assigned by Biomed
to SBI in a transaction that was exempt from registration under Section 4(2) of
the Securities Act because it did not involve any public offering.
(k) On February 10, 2004, we issued 3,513,000 shares of common stock upon
the conversion of our outstanding debt obligations payable to Biomed ($200,000
under a transfer agreement and $151,300 under a line of credit). The shares were
issued to Biomed pursuant to the exemption provided by Section 3(a)(9) of the
Securities Act of 1933, involving an exchange of securities with an existing
securityholder where no commission is payable.
(l) On February 5, 2004 we entered into a stock purchase agreement with
SBI Brightline Consulting, LLC pursuant to which SBI agreed to purchase up to
17,750,000 shares of our common stock at fixed prices ranging from $.60 to $2.00
per share. This transaction was treated as completed at the time of the signing
of the stock purchase agreement and was exempt from registration under Section
4(2) of the Securities Act because it did not involve any public offering.
(m) Between January 15, 2004 and February 29, 2004, we issued 995,940
shares of our common stock upon the exercise of outstanding warrants for
aggregate gross proceeds of $332,844. The shares were issued pursuant to the
exemption provided by Section 3(a)(9) of the Securities Act of 1933, involving
an exchange of securities with an existing securityholder where no commission is
payable.
(n) On October 1, 2003 we entered into a stock purchase agreement with SBI
Brightline Consulting, LLC pursuant to which SBI agreed to purchase up to
11,000,000 shares of our common stock at fixed prices ranging from $.15 to $.40
per share. This transaction was treated as completed at the time of the signing
of the stock purchase agreement and was exempt from registration under Section
4(2) of the Securities Act because it did not involve any public offering. We
sold the shares pursuant to the stock purchase agreement between December 3,
2003 and January 12, 2004 for aggregate proceeds of $2.9 million. We were
advised by SBI that it sold all of such shares pursuant to our Registration
Statement on Form SB-2 (No. 333-109592) which was declared effective by the
Securities and Exchange Commission on November 17, 2003.
Item 16. Exhibits and Financial Statement Schedules.
Please refer to the exhibit index following the signature page of this
registration statement.
Item 17. Undertakings.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Securities and
Exchange Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
II-4
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes:
That, for the purpose of determining liability under the Securities Act
of 1933 to any purchaser, each prospectus filed pursuant to Rule 424(b) as part
of a registration statement relating to an offering, other than registration
statements relying on Rule 430B or other than prospectuses filed in reliance on
Rule 430A, shall be deemed to be part of and included in the registration
statement as of the date it is first used after effectiveness. Provided,
however, that no statement made in a registration statement or prospectus that
is part of the registration statement or made in a document incorporated or
deemed incorporated by reference into the registration statement or prospectus
that is part of the registration statement will, as to a purchaser with a time
of contract of sale prior to such first use, supersede or modify any statement
that was made in the registration statement or prospectus that was part of the
registration statement or made in any such document immediately prior to such
date of first use.
That, for the purpose of determining liability of the registrant under
the Securities Act of 1933 to any purchaser in the initial distribution of the
securities:
The undersigned registrant undertakes that in a primary offering of
securities of the undersigned registrant pursuant to this registration
statement, regardless of the underwriting method used to sell the securities to
the purchaser, if the securities are offered or sold to such purchaser by means
of any of the following communications, the undersigned registrant will be a
seller to the purchaser and will be considered to offer or sell such securities
to such purchaser:
i. Any preliminary prospectus or prospectus of the undersigned
registrant relating to the offering required to be filed pursuant to
Rule 424;
ii. Any free writing prospectus relating to the offering prepared by or
on behalf of the undersigned registrant or used or referred to by
the undersigned registrant;
iii. The portion of any other free writing prospectus relating to the
offering containing material information about the undersigned
registrant or its securities provided by or on behalf of the
undersigned registrant; and
iv. Any other communication that is an offer in the offering made by the
undersigned registrant to the purchaser.
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, the registrant has duly caused this Registration Statement on Form S-1
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
Town of Pittsford, New York, on February 27, 2007.
BIOPHAN TECHNOLOGIES, INC.
By: /s/ Michael L. Weiner
------------------------------------
Michael L. Weiner
President, CEO and Director
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Michael L. Weiner President, CEO and Director February 27, 2007.
-------------------------------------- (principal executive officer)
Michael L. Weiner
/s/ Darryl L. Canfield Vice President, Secretary, February 27, 2007.
-------------------------------------- Treasurer and CFO (principal financial
Darryl L. Canfield and principal accounting officer)
* Chairman February 27, 2007.
--------------------------------------
Guenter H. Jaensch
* Director February 27, 2007.
--------------------------------------
Steven Katz
* Director February 27, 2007.
--------------------------------------
Theodore A. Greenberg
*
--------------------------------------
Stan Yakatan Director February 27, 2007.
* By: /s/ Michael L. Weiner
-----------------------
Attorney-in-fact
Exhibit No. Description Location
----------- ---------------------------------------------------------------------------------------------------------- --------
3.1 Articles of Incorporation (1)
3.2 Amendment to Articles of Incorporation (2)
3.3 Certificate of Amendment to Articles of Incorporation (3)
3.4 Bylaws (4)
4.1 Stock Purchase Agreement dated May 27, 2005 between Biophan and SBI Brightline XI, LLC (5)
4.2 Amendment No. 1, dated January 8, 2006, to Stock Purchase Agreement by and between Biophan and SBI (6)
Brightline XI, LLC
4.3 Line of Credit Agreement dated as of May 27, 2005 between Biophan and Biomed Solutions, LLC (7)
4.4 First Amendment to Line of Credit Agreement between Biophan and Biomed Solutions, LLC (8)
4.5 Convertible Promissory Note of Biophan in the face amount of $2,000,000 payable to the order of Biomed (9)
Solutions, LLC dated May 27, 2005
4.6 First Amendment to Convertible Promissory Note (10)
4.7 Stock Purchase Warrant issued to Biomed Solutions, LLC dated May 27, 2005 (11)
4.8 Rights Agreement among Myotech, LLC, the Members of Myotech, LLC and Biophan (12)
4.9 Line of Credit Agreement dated as of January 24, 2006 between Biophan and Biomed Solutions, LLC (13)
4.10 Amendment No. 1, dated October 11, 2006, to Line of Credit Agreement by and between Biophan Technologies, (14)
Inc. and Biomed Solutions, LLC
4.11 Convertible Promissory Note of Biophan in the face amount of $5,000,000 payable to the order of Biomed (15)
Solutions, LLC dated January 24, 2006
4.12 Amended and Restated Convertible Promissory Note of Biophan Technologies, Inc., in the principal amount of (16)
$5,000,000, dated October 11, 2006, payable to the order of Biomed Solutions, LLC
4.13 Stock Purchase Warrant for the Purchase of up to 1,198,630 Shares of Common Stock issued to Biomed (17)
Solutions, LLC
4.14 Subordination and Standstill Agreement dated October 11, 2006, by and among Biophan Technologies, Inc., (18)
Biomed Solutions, LLC, and those Purchasers named therein
4.15 Form of Senior Secured Convertible Notes due October 11, 2009 issued pursuant to the Securities Purchase (19)
Agreement, dated October 11, 2006, by and among Biophan Technologies, Inc. and those Purchasers named
therein
4.16 Form of Five-Year Warrants issued and to be issued pursuant to the Securities Purchase Agreement, dated (20)
October 11, 2006, by and among Biophan Technologies, Inc. and those Purchasers named therein
4.17 Form of One-Year Warrants issued pursuant to the Securities Purchase Agreement, dated October 11, 2006, (21)
by and among Biophan Technologies, Inc. and those Purchasers named therein
4.18 Form of Three-Year Warrants issued pursuant to the Forbearance Agreement dated as of February 16, 2007
by and among Biophan Technologies, Inc. and the Note Holders named therein. (22)
4.19*** Amended and Restated 2001 Stock Option Plan (23)
4.20*** 2006 Incentive Stock Plan (24)
5.1 Opinion of Nixon Peabody LLP **
10.1 Agreement dated as of February 24, 2005 among Biophan, aMRIs GmbH, Dr. Michael Friebe, Tomovation GmbH, (25)
Prof. Dr. Andreas Melzer, Dipl-Ing. Gregor Schaefers, and Dipl. Betriebsw. Andreas Pieper
10.2 Note and Pledge Agreement dated November 24, 2005 between Biophan, Tomovation GmbH and Prof. Dr. Andreas (26)
Melzer
10.3 Termination of Stock Purchase Agreement between Biophan and SBI Brightline Consulting, LLC (27)
10.4 Investment Agreement dated June 30, 2005 between Biophan and Boston Scientific Scimed, Inc. (28)
Exhibit No. Description Location
----------- ---------------------------------------------------------------------------------------------------------- --------
10.5 Securities Purchase Agreement, dated October 11, 2006, by and among Biophan Technologies, Inc. and those (29)
Purchasers named therein.
10.6 Security Agreement, dated as of October 11, 2006, by and among Biophan Technologies, Inc., the Purchasers (30)
named therein and Iroquois Master Fund Ltd., as agent for the Purchasers
10.7 Forbearance Agreement dated as of February 16, 2007 by and among Biophan Technologies, Inc. and the Note
Holders named therein. (31)
10.8 License Agreement between Biophan, Xingwu Wang and Nanoset, LLC dated January 15, 2004 (32)
10.9 Development Agreement between Biophan and Greatbatch Enterprises, Inc. dated February 28, 2001 (33)
10.10 License Agreement between Biophan and Johns Hopkins University (34)
10.11 AMP-Biophan License Agreement dated February 24, 2005 between Biophan and aMRIs Patent GmbH (35)
(Confidential treatment has been granted with respect to certain
positions of this Agreement. This Agreement has been filed
separately with the SEC)
10.12 License Agreement dated June 30, 2005 between Biophan and Boston Scientific Scimed, Inc. (36)
10.13 Capital Pledge Agreement dated February 24, 2005 among Biophan, TomoVation GmbH, and Prof. Dr. Andreas (37)
Melzer
10.14 Securities Purchase Agreement between Biophan and Myotech, LLC, dated November 30, 2005 (38)
10.15 Letter Agreement, Amendment and Waiver of Certain Conditions to Closing, between Biophan and Myotech, LLC, (39)
dated December 21, 2005
10.16 Amendment No. 2 to Securities Purchase Agreement dated as of November 28, 2006 between Myotech LLC and Biophan (40)
10.17 Letter Agreement dated August 19, 2002 between Biomed Solutions, LLC and Biophan (41)
10.18 Payment Agreement dated June 3, 2004 between Biophan and TE Bio LLC (42)
10.19 Joint Research Agreement between Nanolution, LLC and NaturalNano Inc. dated as of May 25, 2005, together **
with Non-Disclosure Agreement
10.20 Lease Agreement between Biophan and High Technology of Rochester, Inc. (43)
10.21 Lease between Schoen Place LLC and Biophan Technologies, Inc. (44)
10.22 Amendment No. 1 to Lease between Schoen Place LLC and Biophan Technologies, Inc. (45)
10.23*** Executive Employment Agreement between Biophan and Michael L. Weiner dated December 1, 2000 (46)
10.24*** Executive Employment Agreement between Biophan and Jeffrey L. Helfer dated June 6, 2002 (47)
10.25*** Executive Employment Agreement between Biophan and Stuart G. MacDonald dated June 6, 2002 (48)
10.26*** Executive Employment Agreement between Biophan and John F. Lanzafame effective as of September 9, 2004 (49)
10.27*** Executive Employment Agreement dated as of November 9, 2005 between Biophan and Darryl L. Canfield, (50)
together with Employee Confidential Information, Invention and Non-Competition Agreement
10.28*** Executive Employment Agreement dated as of January 1, 2006 between Biophan and Jeffrey L. Helfer (51)
10.29*** Employment Agreement dated February 24, 2005 among aMRIs GmbH, Dr. Michael Friebe and Biophan (52)
21.1 Subsidiaries **
23.1 Consent of Nixon Peabody LLP (53)
23.2 Consent of Goldstein Golub Kessler LLP *
24.1 Power of Attorney of Michael L. Weiner, Darryl L. Canfield, Geunter H. Jaensch, Steven Katz
and Theodore A. Greenberg **
24.2 Power of Attorney of Stan Yakatan **
* Filed herewith
** Previously filed
*** May be deemed a compensatory plan or arrangement.
(1) Incorporated by reference to Exhibit 3.1 to Form 10-KSB for the year ended
February 29, 2000 (the "2000 10-KSB").
(2) Incorporated by reference to Exhibit 3.1(i) to Form 8-K filed on December
15, 2000.
(3) Incorporated by reference to Exhibit 3.1(i) to Form 8-K filed on August 27,
2001.
(4) Incorporated by reference to Exhibit 3.2 to Form 10-SB filed on May 13,
1999.
(5) Incorporated by reference to Exhibit 4.21 to Form 10-KSB/A for the year
ended February 28, 2005 (the "2005 10-KSB").
(6) Incorporated by reference to Exhibit 4.1 to Form 8-K filed January 9, 2006.
(7) Incorporated by reference to Exhibit 10.50 to the 2005 10-KSB.
(8) Incorporated by reference to Exhibit 4.2 to Form 10-Q for the period ended
November 30, 2005 (the "Q3'05 10-Q").
(9) Incorporated by reference to Exhibit 4.22 to the 2005 10-KSB.
(10) Incorporated by reference to Exhibit 4.3 to the Q3'05 10-Q.
(11) Incorporated by reference to Exhibit 4.23 to the 2005 10-KSB.
(12) Incorporated by reference to Exhibit 4.1 to the Q3'05 10-Q.
(13) Incorporated by reference to Exhibit 4.1 to Form 8-K filed January 25, 2006
(the "January 25, 2006 8-K").
(14) Incorporated by reference to Exhibit 10.2 to Form 8-K filed October 13,
2006 (the "October 13, 2006 8-K").
(15) Incorporated by reference to Exhibit 4.2 to the January 25, 2006 8-K.
(16) Incorporated by reference to Exhibit 10.3 to the October 13, 2006 8-K.
(17) Incorporated by reference to Exhibit 4.3 to the January 25, 2006 8-K.
(18) Incorporated by reference to Exhibit 10.4 to the October 13, 2006 8-K.
(19) Incorporated by reference to Exhibit 4.2 to the October 13, 2006 8-K.
(20) Incorporated by reference to Exhibit 4.3 to the October 13, 2006 8-K.
(21) Incorporated by reference to Exhibit 4.4 to the October 13, 2006 8-K.
(22) Incorporated by reference to Exhibit 4.1 to Form 8-K filed February 27,
2007 (the "february 27,2007 8-K")
(23) Incorporated by reference to Appendix A to Proxy Statement filed on
Schedule 14A on June 28, 2005.
(24) Incorporated by reference to Appendix A to Proxy Statement filed on
Schedule 14A on June 21, 2006.
(25) Incorporated by reference to Exhibit 2.4 to the 2005 10-KSB.
(26) Incorporated by reference to Exhibit 4.10 to the 2005 10-KSB.
(27) Incorporated by reference to Exhibit 4.20 to the 2005 10-KSB.
(28) Incorporated by reference to Exhibit 4.5 to Form 10-Q for the period ended
August 31, 2005.
(29) Incorporated by reference to Exhibit 4.1 to the October 13, 2006 8-K.
(30) Incorporated by reference to Exhibit 10.1 to the October 13, 2006 8-K.
(31) Incorporated by reference to Exhibit 10.1 to the February 27, 2007 8-K.
(32) Incorporated by reference to Exhibit 10.50 to Registration Statement on
Form SB-2 (File No. 333-109592) filed on October 9, 2003.
(33) Incorporated by reference to Exhibit 10.28 to Amendment No. 2 to
Registration Statement on Form SB-2/A (File No. 333-102526) filed on May 1,
2003.
(34) Incorporated by reference to Exhibit 10.23 to Amendment No. 1 to
Registration Statement on Form SB-2/A (File No. 333-102526) filed on March 14,
2003.
(35) Incorporated by reference to Exhibit 10.46 to the amended 2005 10-KSB.
(36) Incorporated by reference to Exhibit 10.2 to Amended Form 10-Q for the
period ended August 31, 2005, filed January 9, 2006.
(37) Incorporated by reference to Exhibit 10.48 to the 2005 10-KSB.
(38) Incorporated by reference to Exhibit 10.1 to the Q3'05 10-Q.
(39) Incorporated by reference to Exhibit 10.2 to the Q3'05 10-Q.
(40) Incorporated by reference to Exhibit 10.1 to Form 8-K filed on December 8,
2006.
(41) Incorporated by reference to Exhibit 10.54 to Amendment No. 2 to
Registration Statement on Form SB-2 (File No. 333-112678) filed on April 9,
2004.
(42) Incorporated by reference to Exhibit 99.1 to Form 8-K filed on June 3,
2004.
(43) Incorporated by reference to Exhibit 10.19 to Amendment No. 1 to
Registration Statement on Form SB-2/A (File No. 333-102526) filed on
March 14, 2003.
(44) Incorporated by reference to Exhibit 10.1 to Form 8-K filed on
November 9, 2006.
(45) Incorporated by reference to Exhibit 10.2 to the February 27, 2007 8-K.
(46) Incorporated by reference to Exhibit 10.7 to Form 10-QSB for the period
ended May 31, 2002 (the "Q1'02 10-QSB").
(47) Incorporated by reference to Exhibit 10.8 to the Q1'02 10-QSB.
(48) Incorporated by reference to Exhibit 10.9 to the Q1'02 10-QSB.
(49) Incorporated by reference to Exhibit 10.49 to the 2005 10-KSB.
(50) Incorporated by reference to Exhibit 10.1 to Form 8-K filed
January 26, 2006.
(51) Incorporated by reference to Exhibit 10.2 to Form 8-K filed
January 26, 2006.
(52) Incorporated by reference to Exhibit 10.47 to the 2005 10-KSB.
(53) Included in Exhibit 5.1.