UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended February 28, 2007
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 0-26057
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BIOPHAN TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
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NEVADA 82-0507874
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
15 SCHOEN PLACE
PITTSFORD, NEW YORK 14534
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (585) 267 - 4800
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $.005 par value
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Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act. Yes |_| No |X|
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes |_| No |X|
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
Indicate by check mark whether the Registrant is a large accelerated
filer, an accelerated filer or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act (Check one):
Large Accelerated Filer |_| Accelerated Filer |X| Non-Accelerated Filer |_|
Indicate by check mark whether the Registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
The aggregate market value of the voting stock held by non-affiliates of
the Registrant based on the the average bid and asked price reported on the OTC
Bulletin Board as of August 31, 2006 was $52,575,296.
The number of shares outstanding of the registrant's common stock, $0.005
par value, as of April 25, 2007 was 83,431,699 shares.
Documents Incorporated By Reference
Not applicable.
TABLE OF CONTENTS
Item No. Page
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PART I
1 Business 3
1A Risk Factors 19
1B Unresolved Staff Comments 24
2 Properties 24
3 Legal Proceedings 24
4 Submission of Matters to a Vote of Security Holders 25
PART II
5 Market for Registrant's Common Equity; Related Stockholder
Matters and Issued Purchases of Equity Securities 25
6 Selected Financial Data 27
7 Management's Discussion and Analysis of Financial Condition
and Results of Operations 28
7A Quantitative and Qualitative Disclosures About Market Risk 43
8 Financial Statements and Supplementary Data F-1
9 Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure 44
9A Controls and Procedures 46
9B Other Information 46
PART III
10 Directors and Executive Officers of the Registrant 47
11 Executive Compensation 57
12 Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 68
13 Certain Relationships and Related Transactions 70
14 Principal Accountant Fees and Services 72
15 Exhibits and Financial Statement Schedules 72
ii
CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING STATEMENTS
This annual report on Form 10-K contains statements that are considered
forward-looking statements. Forward-looking statements give the Company's
current expectations and forecasts of future events. All statements other than
statements of current or historical fact contained in this annual report,
including statements regarding the Company's future financial position, business
strategy, budgets, projected costs and plans and objectives of management for
future operations, are forward-looking statements. The words "anticipate,"
"believe," "continue," "estimate," "expect," "intend," "may," "plan," and
similar expressions, as they relate to the Company, are intended to identify
forward-looking statements. These statements are based on the Company's current
plans, and the Company's actual future activities and results of operations may
be materially different from those set forth in the forward-looking statements.
These forward-looking statements are subject to risks and uncertainties that
could cause actual results to differ materially from the statements made. Any or
all of the forward-looking statements in this annual report may turn out to be
inaccurate. The Company has based these forward-looking statements largely on
its current expectations and projections about future events and financial
trends that it believes may affect its financial condition, results of
operations, business strategy and financial needs. The forward-looking
statements can be affected by inaccurate assumptions or by known or unknown
risks, uncertainties and assumptions. The Company undertakes no obligation to
publicly revise these forward-looking statements to reflect events occurring
after the date hereof. All subsequent written and oral forward-looking
statements attributable to the Company or persons acting on its behalf are
expressly qualified in their entirety by the cautionary statements contained in
this annual report.
PART I
ITEM 1. BUSINESS
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).
3
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. Our total U.S. portfolio of patents owned as well as exclusively
licensed inclusive 61 issued patents and over 60 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.
4
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. Boston Scientific renewed its license in
January 2007, with a $250,000 payment.
MYOTECH MYO-VAD (in the future, Biophan will refer to this product as the
Myotech Circulatory Support System (CSS)).
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, often
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 resulting in an allocation of $1 million 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.
5
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.
6
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.
7
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;
8
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.
9
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:
10
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 a blood vessel 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, and overcome the Faraday
Cage effect, 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.
11
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.
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.
12
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.
13
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.
14
COMPETITION
In this paragraph - LC and tank are both resonant circuits, thus redundant;
arryuthmia is always rapid, thus redundant. In the area of MRI Safety, the
Company has developed and filed numerous patents on solutions to solve the two
critical problems that are the cause of devices being contraindicated. At this
time Medtronic has announced that they are testing a solution to the heating
problem, and other manufacturers are in a competitive race to get MRI safe
devices to market. Biophan has pending patents dating back to 2001 on its
solutions for resonant circuits and filters for solving the heating problem, and
for an "anti-antenna" solution for induced voltages which can cause arrythmias,
which can potentially be fatal. Biophan holds the exclusive rights to
implantable uses of a technology for pacemakers and ECG lead safety, licensed
from Johns Hopkins. This patent was issued in 1993, and pre-dates all other
known solutions.
Companies thought to be working on solutions for MRI safe implantable devices
include Medtronic, St. Jude, Biotronik, Cyberonics, ANS, and others, as well as
Biophan's licensee, Boston Scientific, and their divisions Guidant and Advanced
Bionics. In addition, Greatbatch, Inc. and Surgivision, Inc. have limited
solutions available to improve the MRI safety of devices including pacemakers
and ICDs.
Biophan is in a Collaborative Research and Development Agreement (CRADA) with
the U.S. FDA to establish recommended guidelines and methods for measuring
heating and induced voltages. Multiple manufacturers have participated in the
workshops held by Biophan and the FDA, indicating industry wide interest in
bringing solutions to market. Biophan believes that each company is in the
process of understanding the problems and potential solutions and that each
company represents both competition and a prospective licensee as the companies
design solutions to allow them to bring MRI safe products to market. The
strength of the Biophan patent portfolio may influence whether each company
becomes a competitor or a customer.
15
This also doesn't deal directly with identifying the competition.
In the area of devices that can be imaged non-invasively under MRI, such as
imaging restenosis inside stents, or visualizing blood flow in heart valves, the
Company holds fundamental issued patents on its solutions, including resonant
circuits (which overcome Faraday cage effects of stents). Other companies have
filed patents on alternative designs, but Biophan and its licensors have the
only known solutions demonstrated to enable visualizing inside stents and heart
valves under MRI.
In the area of cardiovascular support, there are several manufacturers of
circulatory support systems, including Abiomed, Thoratec, World Heart, and
others. In the area of acute heart failure, where restoration of cardiac output
is needed for an arrested heart, there are no circulatory systems known to the
Company that can provide full systolic and diastolic support to an arrested
heart, without blood contact, as quickly as the Myotech circulatory support
system. PPA Technologies AG, in Germany, is developing a device that provides
non-blood contacting support, their patents are not widely filed outside of
Germany and do not cover many of the features and full range of capabilities of
the Myotech CSS.
In the area of power systems powered by body heat, vs. chemical batteries, the
Company knows of at least one competitor, Research Technologies Institute in
North Carolina, which has spun off a company to develop materials with improved
energy conversion properties, and has identified implantable medical devices as
a target market. There are other research activities in this area underway at
several research organizations within universities.
Biophan's TE-Bio subsidiary holds exclusive licenses to several implantable
biothermal battery patents. The TE-Bio subsidiary was co-founded with the
original patent owner, Biomed Solutions, prior to Biophan entering the power
systems business. NASA is also working in the area, and is collaborating with
Biophan under the Space Act program. Biophan recently won an SBIR grant for
using the technology for Homeland Security, which is helping to further the
collaboration and development. Biophan has certain rights to NASA related
developments.
16
INTELLECTUAL PROPERTY
MRI Related Technologies
Biophan controls, directly or through exclusive licenses, 61 issued U.S.
patents, and over 60 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, or coatings having similar behavior, that create resonant effects
that offset or eliminate unwanted MRI-induced effects.
17
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.
18
Employees
As of May 1, 2007, we had 22 full-time employees, 20 of whom are in the US
and two of whom are in Europe. We anticipate some reduction in personnel as we
refocus our business over the next six months of the fiscal year beginning March
1, 2007. We believe that we have a good relationship with our employees.
AVAILABLE INFORMATION
Information about the Company's products and services, stockholder information,
press releases, and filings with the Securities and Exchange Commission (SEC)
can be found on the Company's website at www.biophan.com. The Company's annual
reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K, and other SEC filings, and any amendments to such reports and filings, are
made available, free of charge, on the Investor Relations section of such
website as soon as reasonably practical after such material is filed with, or
furnished to, the SEC. Also, copies of the Company's Annual Report to
Stockholders and Proxy Statement, to be issued in connection with its 2007
Annual Meeting of Stockholders, will be made available, free of charge, upon
written request submitted to Biophan Technologies, Inc., c/o Investor Relations,
15 Schoen Place, Pittsford, New York 14534.
ITEM 1A. RISK FACTORS
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.
19
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, 2007, 2006 and 2005, we incurred
net losses of $17,722,411, $14,484,384, $5,793,547, respectively. We have
incurred cumulative net losses from inception through February 28, 2007 of
$49,692,069. 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.
20
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 and Myovad 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.
21
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 61
issued U.S. patents and over 60 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 that
currently permit the investors to purchase an aggregate of 18,034,830 shares of
our common stock at an exercise price of $0.51 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.
22
BECAUSE OUR CEO IS AN EQUITY OWNER AND MANAGER OF BIOMED SOLUTIONS, LLC, A
SIGNIFICANT CREDITOR OF BIOPHAN, AND BECAUSE A FEW 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. 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 board of Myotech, LLC, an entity in which Biomed is a 13%
owner. Mr. Weiner, as well 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.
Because of the nature of our business and the business of these other entities,
the relationships of Messrs. Weiner 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.
23
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
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 believe that this facility will be adequate
for our current and anticipated future needs through the lease expiration date.
ITEM 3. LEGAL PROCEEDINGS
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.
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.
On April 5, 2007, SBI Brightline LLC and SBI Brightline XI, LLC brought
suit against us and Biomed Solutions, LLC in the Superior Court of Orange
County, California. The suit alleges, among other things, that in September 2006
we entered into an oral agreement to terminate the Stock Purchase Agreement
dated as of May 27, 2005 and amended on January 8, 2006, between us and SBI
Brightline XI, LLC, and seeks unspecified monetary damages and an order by the
Court deeming the Stock Purchase Agreement to be terminated. We believe the
allegations made by SBI are without basis in fact and we intend to defend the
lawsuit vigorously. Because of the potential costs of litigation and the
anticipated demands that our defense may place on the time and attention of our
management our defense of this matter, regardless of the outcome, could have a
material adverse effect on our business and operations.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY; RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
MARKET INFORMATION
Our common stock is listed on the OTC Bulletin Board under the symbol BIPH. The
following table sets forth, for the fiscal quarters indicated, the high and low
bid prices. These quotations reflect inter-dealer prices, without mark-up,
mark-down or commission, and may not represent actual transactions.
Quarter Ended High Low
------------- -------- --------
May 31, 2005 $ 3.50 $ 1.36
August 31, 2005 $ 3.13 $ 2.21
November 30, 2005 $ 2.63 $ 1.45
February 28, 2006 $ 1.98 $ 1.47
May 31, 2006 $ 1.75 $ 1.03
August 31, 2006 $ 1.33 $ .64
November 30, 2006 $ .95 $ .40
February 28, 2007 $ .67 $ .40
As of February 28, 2007, we had 83,431,699 shares of our common stock
outstanding which were held by 234 stockholders of record and approximately
9,400 beneficial stockholders.
DIVIDEND POLICY
We have never paid cash dividends and have no plans to do so in the foreseeable
future. Our future dividend policy will be determined by our Board of Directors
and will depend upon a number of factors, including our financial condition and
performance, our cash needs and expansion plans, income tax consequences, and
the restrictions that applicable laws and our credit arrangements then impose.
RECENT SALES OF UNREGISTERED SECURITIES
The following securities were issued or sold by Biophan during the year ended
February 28, 2007, without registration under the Securities Act of 1933, and
have been modified since previously reported on a quarterly report on Form 10-Q:
25
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").
26
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. The
warrants and any shares issued upon exercise of warrants or any election to
convert outstanding debt are exempt from registration pursuant to Sections 3(a)9
and 4(2) of the Securities Act.
ITEM 6. SELECTED FINANCIAL DATA
The following consolidated statements of operations data for the years ended
February 28, 2007, 2006 and 2005 and the consolidated balance sheet data as of
February 28, 2007 and 2006 have been derived from our audited consolidated
financial statements and related notes, which are included elsewhere in this
Annual Report on Form 10-K. The statements of operations data for the years
ended February 29, 2004 and February 28, 2003 and the balance sheet data as of
February 28, 2005, February 29, 2004 and February 28, 2003 have been derived
from our audited consolidated financial statements that do not appear in this
Form 10-K. 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 Form 10-K. The historical
results are not necessarily indicative of the results to be expected for any
future period.
Year ended Year ended Year ended Year ended Year ended
February 28, February 28, February 28, February 29, February 28,
Operating Data: 2007 2006 2005 2004 2003
--------------------------------- ------------ ------------ ------------ ------------ ------------
Revenues $ 989,529 $ 1,044,861 $ -0- $ 75,000 $ -0-
Research and development expenses 7,190,975 6,829,142 2,629,980 1,240,430 1,373,124
General and administrative
expenses 6,824,945 8,451,886 3,337,185 1,911,003 1,792,593
Other Income (expense) (6,721,659) (854,376) 173,618 (642,128) (272,535)
Minority interest in
Myotech, LLC 2,025,639 606,159 -0- -0- -0-
------------ ------------ ----------- ----------- -----------
Net loss $(17,722,411) $(14,484,384) $(5,793,547) $(3,718,570) $(3,438,252)
------------ ------------ ----------- ----------- -----------
Loss per common share - basic
and diluted $ (.23) $ (.19) $ (.08) $ (.08) $ (.11)
------------ ------------ ----------- ----------- -----------
Weighted average shares
outstanding 77,864,738 75,787,052 69,263,893 44,017,010 31,731,051
------------ ------------ ----------- ----------- -----------
February 28, February 28, February 28, February 29, February 28,
Balance Sheet Data: 2007 2006 2005 2004 2003
--------------------------------- ------------ ------------ ------------ ------------ ------------
Current assets $ 2,631,520 $ 1,880,826 $2,007,181 $2,077,307 $ 476,353
Intagible assets, net 24,396,805 25,854,850 -0- -0- -0-
Total assets 28,896,251 27,968,066 3,181,370 2,231,345 683,056
Current liabilities 7,418,579 3,231,158 1,462,103 254,058 796,187
Long-term liabilities 11,548,195 -0- -0- -0- 83,333
Minority interest 13,139,882 15,189,109 -0- -0- -0-
Stockholder' equity(deficiency) (3,210,405) 9,547,799 1,719,267 1,977,287 (196,464)
Working capital (deficiency) (4,787,059) (1,350,332) 545,078 1,823,249 (319,834)
27
ITEM 7. 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 Annual Report on Form
10-K. 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 Form 10-K, 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 61 issued U.S. patents and over 60 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.
28
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.
29
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 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
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109" ("FIN 46"). FIN 46 clarifies the
accounting for uncertainty in income taxes recognized in a company's financial
statements in accordance with SFAS No. 109, "Accounting for Income Taxes." FIN
48 prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. FIN 46 is effective for fiscal years
beginning after December 15, 2006. The Company is currently evaluating the
effect, if any, that FIN 46 will have on its consolidated financial position or
results of operations.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS No. 157"). SFAS No. 157 defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles, and expands
disclosures about fair value measurements. SFAS No. 157 applies under other
accounting standards that require or permit fair value measurements.
Accordingly, SFAS No. 157 does not require any new fair value measurement. SFAS
No. 157 emphasizes that fair value is a market-based measurement that should be
determined based on the assumptions that market participants would use in
pricing an asset or liability. Companies will be required to disclose the extent
to which fair value is used to measure assets and liabilities, the inputs used
to develop the measurements and the effect of certain of the measurements on
earnings (or changes in net assets) for the period. SFAS No. 157 is effective
for financial statements issued for fiscal years beginning after November 15,
2007, and interim periods within those fiscal years. The Company is currently
evaluating the effect, if any, that SFAS No. 157 will have on its consolidated
financial position or results of operations.
30
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities". SFAS No. 159 permits entities to
choose to measure many financial instruments and certain other items at fair
value. Most of the provisions of SFAS No. 159 apply only to entities that elect
the fair value option. We do not believe the adoption of this standard will have
a material impact on our Consolidated Financial Statements. This standard will
become effective for us in the first quarter of fiscal 2008.
In September 2006, the SEC issued Staff Accounting Bulletin No. 108 "Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements" ("SAB No. 108"). SAB No. 108 provides
guidance on the consideration of the effects of prior year misstatements in
quantifying current year misstatements for the purpose of determining whether
the current year's financial statements are materially misstated. SAB No. 108 is
effective as of the end of the Company's 2006 fiscal year, allowing a one-time
transitional cumulative effect adjustment to beginning retained earnings as of
January 1, 2006, for errors that were not previously deemed material, but are
material under the guidance in SAB No. 108. The Company does not believe that
SAB No. 108 had a material effect on its consolidated financial position or
results of operations for the year ended February 28, 2007.
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 payment 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 will adopt this EITF in the first quarter
of 2007 in connection with the issuance of the Senior Secured Convertible Notes
and related warrants. See Note 11, "Senior Secured Convertible Notes" in the
accompanying financial statements.
Management does not believe that any other recently issued, but not yet
effective, accounting standards if currently adopted would have a material
effect on the accompanying financial statements.
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 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. The balance of
borrowings on the line was $3,930,000 at February 28, 2007. 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.
31
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 February 28, 2007.
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 in Note 13 under the heading "Stockholders'
Equity" in the "Notes to the 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. On April 5, 2007, SBI
brought suit against us in Orange County, California, alleging that in September
2006 we entered into an oral settlement agreement pursuant to which the SBI
Agreement was terminated and SBI's obligation to purchase shares was
extinguished. We believe that SBI's claim is without basis in fact and we intend
to defend the lawsuit vigorously.
32
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 year ended February 28, 2007, 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 $1,994,349 to Myotech against Milestone 2 during the
year ended February 28, 2007 for 726,963 issued Class A units, which increased
our ownership to 43.7%. Additional investments of $105,175 against Milestone 2
have been made since February 28, 2007 for 38,337 additional issued Class A
units, which raised our ownership percentage to 43.8% to date.
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.
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.
33
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 agreed to 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 was accounted for as a
modification of the Original Warrants, we recorded an expense in the period
ended February 28, 2007 which is included in the caption "Change in fair value
of warrant liabity" in the statement of operations for the year 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 recorded 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.
The fair value of these instruments are included in "Fair value of warrant
liability" on the February 28, 2007 balance sheet.
Based on our current cash, anticipated licensing revenues and anticipated
expenditures, we believe that we have adequate working capital resources for the
upcoming two to three months of operation.
As presented in the accompanying financial statements, we have been in the
development stage since inception, incurring recurring losses from operations,
and as of February 28, 2007, our current liabilities exceeded its current assets
by $4,787,059 and the Company has a stockholders' deficiency of $3,210,405.
These factors raise potential doubt about the our ability to continue as a going
concern.
34
In order to address the current situation, management has instituted a cost
reduction program that included a reduction in monthly costs from approximately
$1,100,000 at this time last year to under $500,000 per month currently. In
addition, we have reduced our investments in several product lines and pursued
alternative funding vehicles. For example, the Company has reorganized its
efforts on the Myotech cardiac assist device development program while keeping
core functions operational and maintaining intellectual property and designs.
Other actions that are being implemented are:
o We have reoriented our development path to address the large unmet
market of acute heart failure. The standard of care, CPR,
defibrillation and drugs, often does not revive the patient, and
there are no known alternatives that can be implanted in time and
restore full cardiac output. The Myotech technology represents a
market opportunity for in hospital cardiac arrest plus acute
myocardial infarction with cardiogenic shock, of over 300,000
patients per year, with a reimbursement potential of up to $40,000
per unit. We anticipate transactions with U.S. and offshore
distributors to gain distribution rights before we are approved.
o We have also developed solutions for making medical devices
including pacemakers, defibrillators and neurostimulators safe for
MRI. In addition to offering solutions to the heating problem, we
have been granted two patents for solutions to the the induced
voltage problem which can cause potentially fatal induced voltages
to rapidly pace the heart, or throw it into fibrillation.
o We continue development work on non-invasive detection of in-stent
restenosis and clotting, for which we have the potential to generate
$3 million in milestone payments and a royalty of 3% on drug coated
stents under out agreement with Boston Scientific. In the fourth
quarter Boston Scientific renewed its license by making its annual
payment of $250,000.
o Development of the biothermal battery with NASA was curtailed during
the fourth quarter of fiscal 2007 but we pursued an SBIR grant for
$100,000 for a Homeland Security application and we were successful
in winning the award. The grant leverages the biothermal battery
core technology into an application for powering ground sensors. We
have filed grant applications for additional funding.
o We are in discussions with a major biomedical device company
regarding a potential business arrangement for the Myotech
technology, which could take the form of an exclusive license or a
possible acquisition, either of which has the potential to provide
working capital.
o We are also expanding our pursuit of grant funding for the Myotech
device. We were approved for $1.4 million in funding from Congress
in 2006. $1 million was funded and $400,000 was not funded when
Congress reviewed the overall budget and cut back certain funding.
o We have applied for several grants with several leading medical
centers and anticipate additional funds from those sources.
We believe these factors and actions will contribute toward obtaining sufficient
financing for the near term and ultimate profitability.
Accounting Requirements Resulting from the Securities Purchase Agreement dated
October 11, 2006
35
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
$10.5 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 of $175,970 was recorded
on the new debt and fully amortized during the year ended February 28, 2007.
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
February 28, 2007 of $49,692,069. We plan to use our net operating loss
carryforwards to offset our future taxable net income until the accumulated net
operating losses are exhausted.
36
Overview of Results of Operations
The following table sets forth our results of operations for the periods shown:
Year Ended February 28,
---------------------------------------
2007 2006 2005
------------ ------------ -----------
Revenues:
Development payments $ -- $ 225,000 $ --
License fees 562,600 479,166 --
Testing services and
consulting fees 427,029 340,695 --
------------ ------------ -----------
989,529 1,044,861 --
Operating expenses:
Research and development 7,190,975 6,829,142 2,629,980
General and administrative 6,824,945 8,451,886 3,337,185
Write-down of intellectual
property rights -- -- --
------------ ------------ -----------
14,015,920 15,281,028 5,967,165
------------ ------------ -----------
Operating loss (13,026,391) (14,236,167) (5,967,165)
Other income(expense):
Interest income 82,224 70,701 11,869
Interest expense (4,303,543) (1,140,866) --
Additional expense related to
warrants (7,304,105) -- --
Change in fair value of warrant
liability 5,318,064 -- --
Loss on extinguishment of debt -
related party (670,053) -- --
Other income 161,196 215,789 161,749
Other expense (5,442) -- --
------------ ------------ -----------
(6,721,659) (854,376) 173,618
Loss from continuing operations
before minority interest
in Myotech, LLC (19,748,050) (15,090,543) (5,793,547)
Minority interest in
Myotech, LLC 2,025,639 606,159 --
------------ ------------ -----------
Loss from continuing operations (17,722,411) (14,484,384) (5,793,547)
Loss from discontinued operations -- -- --
------------ ------------ -----------
Net loss $(17,722,411) $(14,484,384) $(5,793,547)
============ ============ ===========
Loss per common share - basic
and diluted $ (0.23) $ (0.19) $ (0.08)
============ ============ ===========
Weighted average shares
outstanding 77,864,738 75,787,052 69,263,893
============ ============ ===========
37
Tabular Disclosure of Contractual Obligations
The following table sets forth information, as of February 28, 2007, 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 $ 7,250,000 $2,856,060 $4,393,940 $ -0- $ -0-
Capital Lease Obligations $ 27,049 $ 7,445 19,604 $ -0- $ -0-
Operating Lease Obligations $ 2,301,550 $ 102,891 $ 286,094 $ 311,626 $1,600,939
Cooperative Research and Development
Agreement (CRADA) $ 112,500 $ 75,000 $ 37,500 $ -0- $ -0-
License Agreements $ 5,447,500 $ 337,500 $ 737,500 $ 690,000 $3,682,500
Employment Agreements $ 313,750 $ 218,750 $ 95,000 $ -- $ --
----------- ---------- ---------- ---------- ----------
Total $15,452,349 $3,597,646 $5,569,638 $1,001,626 $5,283,439
=========== ========== ========== ========== ==========
38
Lease Obligation
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 occupied the premises on a month-to-month basis
until February 9, 2007. The Company has entered into new operating leases for
office space commencing March 2007 and expiring April 30, 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
------------- ----------
2008 $ 102,891
2009 139,558
2010 146,536
2011 153,636
2012 157,990
Thereafter 1,600,939
----------
$2,301,550
==========
Rent expense, net of subrentals, charged to operations under these operating
lease aggregated $113,161, $70,775 and $58,546 for the years ended February 28,
2007, 2006, and 2005, respectively. Rent expense, net of subrentals, charged to
operations for the period from August 1, 1968 (Date of Inception) to February
28, 2006 was $368,626.
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 $5,447,500.
License/royalty expense charged to operations was $152,410, $594,890, and
$89,880 for the years ended February 28, 2007, 2006 and 2005 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,
2007, excluding bonuses and other awards approximates $313,750.
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.
39
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 2007, 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
$1,994,349 to Myotech against milestone 2 in the year ended February 28, 2007
for 726,963 newly issued Class A units, which increased our ownership to 43.7%.
Additional investments of $105,175 against milestone 2 have been made since
February 28, 2007 for 38,337 additional newly issued Class A units, which raised
our ownership percentage to 43.8% to date.
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.
Additional Expense Related to Warrants.
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 incurred this expense issuance of convertible notes and
warrants on October 12, 2006 to record the total fair value of derivative
liability, originally recorded at $15,309,980. This amount is adjusted
quarterly. The adjustment is recorded under a separate caption "Change in Fair
Value of Warrant Liability".
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
$10,157,937 for the fair value of the warrants related to the Senior Secured
Convertible Notes at February 28, 2007 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 $336,069 at February 28, 2007. The Company expects to
seek stockholder approval to increase the authorized shares at a Special Meeting
scheduled for May 8, 2007. The total fair value of derivative liability,
originally recorded at $15,309,980 on October 12, 2006, was adjusted by
$4,815,974 to $10,494,006 at February 28, 2007. The fair value of the derivative
liability pertaining to the warrants 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 consolidated financial statements
under the heading 'Fair Value of Warrant Liability'.
40
Comparison of the Years Ended February 28, 2007 and 2006
Revenues
Revenues for the year ended February 28, 2007 were $0.990 million compared to
$1.045 in 2006. Our 2007 revenues pertain to $0.563 million in license fees from
our licensing agreement with Boston Scientific Scimed, Inc. and $0.427 million
from our MRI testing services and consulting fees in Biophan Europe. 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, 2007, these expenses increased
by 5.3%, or $0.362 million, to $7.191 million compared to $6.829 million for
2006. Because we consolidated Myotech, LLC at November 30, 2005, the fourth
quarter of 2006 included $0.443 million of Myotech operational expenses and
$0.344 of Myotech intangible assets amortization. We consolidated Myotech LLC
for the fiscal year.The most significant changes in this category of expenses
include a decrease in non-cash stock option compensation expense of $1.5 million
due primarily to a 2006 expense of $ 1.948 million of non-cash expense from the
vesting of contingent stock options that vested upon the achievement of
specified performance-based milestones, which was partially offset by 0.1
million for additional professional staff and salary increases. In addition, we
increased our funding of various research and development projects by $1.3
million and we incurred $1.0 million of increased noncash patent amortization
expense related to the Myotech intangible assets, which was partially offset by
$0.6 million of decreased spending for outside professional services related to
licenses and patent maintenance.
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, 2007, these expenses
declined by 19%, or $1.627 million to $6.825 million compared to $8.452 million
for 2006. Because we consolidated Myotech LLC at November 30, 2005, the fourth
quarter of 2006 included $0.165 million of Myotech operational expenses. We
consolidated Myotech LLC for the fiscal year 2007. The most significant changes
in this category of expenses include a decrease in non-cash stock option
compensation expense of $1.7 million due primarily to a 2006 expense of $ 2.296
million of non-cash expense from the vesting of contingent stock options that
vested upon the achievement of specified performance-based milestones, which was
partially offset by 0.5 million for additional professional staff and salary
increases; increased outside professional services of $0.6 million primarily
related to audit, first-year Sarbanes Oxley compliance, and financial
consulting. These cost increases were offset by decreased spending by $1.0
million for other expenses.
41
Other Income (Expense)
Interest Expense. We incurred interest expense amounting to approximately $4.304
million for the year February 28, 2007 compared to $1.141 million of expense for
the year ended February 28, 2006. The increased expense (noncash) is attributed
to $2.3 million in interest under provisions of the $7.25 million Senior Secured
Convertible Notes held by Iroquois Master Fund Ltd and other investors; the
write-off of $1.1 million of the remaining unamortized discount on a note to
Biomed Solutions, LLC; and approximately $0.9 million of interest payable on
borrowings under lines of credit with Biomed Solutions, LLC.
Change in Fair Value of Warrant Liability. We adjusted this liability of $10.494
million primarily related to the Senior Secured Convertible Notes at February
28, 2007, or a decrease in expense of $5.318 million from our initial recording
of this derivative liability of $15.309 million at the closing date of October
12, 2006.
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 Myotech LLC. The loss of $2.026 million is a pro rata share
of the loss incurred by Myotech, LLC attributable to minority interests for the
year ended February 28, 2007. The loss of $0.606 million is the pro rata share
of the loss incurred by Myotech from November 30, 2005 (date of acquisition)
through February 28, 2006. As further described under the heading "Business
Combinations" in the "Notes to Consolidated Financial Statements" the Company
holds a 43.7% interest in Myotech LLC, valued on our balance sheet at February
28, 2007 at $12.687 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.
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 3 in the Notes to the
Consolidated Financial Statements.
42
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We do not participate in any derivative financial instruments, or other
financial and commodity instruments for which fair value disclosure would be
required under SFAS No. 107.
Our primary market risk exposures are in the areas of interest rate risk and
foreign currency exchange rate risk. The Company's investment portfolio of cash
equivalents is subject to interest rate fluctuations, but the Company believes
this risk is immaterial due to the short-term nature of these investments. For
the year ended February 28, 2007, foreign currency translation gains were
approximately $2,000 as a result of consolidating our foreign subsidiaries.
During the year, we did not engage in any foreign currency hedging activities.
43
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
BIOPHAN TECHNOLOGIES, INC.
FINANCIAL STATEMENTS
CONTENTS
Report of Independent Registered Public Accounting Firm F-2
Consolidated Financial Statements:
Balance Sheet F-3
Statement of Operations F-4
Statement of Stockholders' Equity (Deficiency) F-5
Statement of Cash Flows F-9
Notes to Consolidated Financial Statements F-12
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, 2007 and 2006 and the related consolidated statements of operations,
stockholders' equity (deficiency), and cash flows for each of the three years in
the period ended February 28, 2007, and the amounts in the cumulative column in
the consolidated statements of operations, stockholders' equity (deficiency),
and cash flows for the period from March 1, 2000 to February 28, 2007. 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, 2007 and 2006 and the
results of its operations and its cash flows for each of the three years in the
period ended February 28, 2007 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, 2007 are fairly presented, in
all material respects, in conformity with United States generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations
and has a net capital deficiency that raise substantial doubt about its ability
to continue as a going concern. Management's plan in regard to these matters is
also described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
As discussed in Notes 1 and 17 to the consolidated financial statements,
effective March 1, 2006, the Company adopted the fair value method of accounting
for stock-based compensation as required by Statement of Financial Accounting
Standards No. 123(R), Share-Based Payment.
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, 2007, based on
criteria established in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report
dated May 4, 2007 expressed an unqualified opinion thereon.
/S/ Goldstein Golub Kessler LLP
GOLDSTEIN GOLUB KESSLER LLP
New York, New York
May 4, 2007
F-2
BIOPHAN TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEET
February 28,
---------------------------
2007 2006
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,418,551 $ 1,477,716
Accounts receivable 21,448 170,058
Due from related parties -- 4,801
Prepaid expenses 166,171 147,203
Other current assets 25,350 81,048
------------ ------------
Total current assets 2,631,520 1,880,826
Property and equipment, net 418,362 126,341
Other assets:
Intangible assets, net of amortization:
Myotech, LLC 23,074,028 24,451,580
Other 1,322,777 1,403,270
Deferred financing costs, net of amortization
of $186,350 1,345,860 --
Investment in New Scale Technologies, Inc. 100,000 100,000
Deposits 3,704 6,049
Deferred tax asset, net of valuation allowance
of $12,784,000 and $7,560,000, respectively -- --
------------ ------------
25,846,369 25,960,899
------------ ------------
Total Assets $ 28,896,251 $ 27,968,066
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Current portion of capital lease obligation $ 7,445 $ --
Current portion of senior secured convertible notes
payable, net of discount of $2,183,580 672,481 --
Accounts payable and accrued expenses 1,942,033 1,191,812
Note payable 78,007 15,886
Line of credit - related party, net of discount
of $-0- and $1,323,921, respectively 4,430,000 1,476,079
Due to related parties 80,280 26,548
Deferred revenue 208,333 520,833
------------ ------------
Total current liabilities 7,418,579 3,231,158
Long-term debt:
Capital lease obligation 19,604 --
Senior secured convertible notes payable, less
discount of $3,359,354 1,034,585 --
Fair value of warrant liability 10,494,006 --
------------ ------------
Total liabilities 18,966,774 3,231,158
Minority interest 13,139,882 15,189,109
Stockholders' equity (deficiency):
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 54,532,204 49,576,129
------------ ------------
54,949,362 49,985,155
Less treasury stock, 4,923,080 shares (8,467,698) (8,467,698)
------------ ------------
46,481,664 41,517,457
Deficit accumulated during the development stage (49,692,069) (31,969,658)
------------ ------------
Total stockholders' equity (deficiency) (3,210,405) 9,547,799
------------ ------------
Total liabilities and stockholders'
equity (deficiency) $ 28,896,251 $ 27,968,066
============ ============
The accompanying notes should be read in conjunction with the consolidated
financial statements
F-3
BIOPHAN TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF OPERATIONS
Period from August
Year Ended February 28, 1, 1968 (date of
----------------------------------------- inception) to
2007 2006 2005 February 28, 2007
------------ ------------ ----------- ------------------
Revenues:
Development payments $ -- $ 225,000 $ -- $ 300,000
License fees 562,500 479,166 -- 1,041,666
Testing services and
consulting fees 427,029 340,695 -- 767,724
------------ ------------ ----------- ------------
989,529 1,044,861 -- 2,109,390
Operating expenses:
Research and development 7,190,975 6,829,142 2,629,980 20,210,394
General and administrative 6,824,945 8,451,886 3,337,185 24,766,317
Write-down of intellectual
property rights -- -- -- 530,000
------------ ------------ ----------- ------------
14,015,920 15,281,028 5,967,165 45,506,711
------------ ------------ ----------- ------------
Operating loss (13,026,391) (14,236,167) (5,967,165) (43,397,321)
------------ ------------ ----------- ------------
Other income(expense):
Interest income 82,224 70,701 11,869 211,372
Interest expense (4,303,543) (1,140,866) -- (7,175,332)
Additional expense related to
warrants (7,304,105) -- -- (7,304,105)
Change in fair value of warrant
liability 5,318,064 -- -- 5,318,064
Loss on extinguishment of debt -
related party (670,053) -- -- (670,053)
Other income 161,196 215,789 161,749 853,393
Other expense (5,442) -- -- (70,528)
------------ ------------ ----------- ------------
(6,721,659) (854,376) 173,618 (8,837,189)
------------ ------------ ----------- ------------
Loss from continuing operations
before minority interest in
Myotech, LLC (19,748,050) (15,090,543) (5,793,547) (52,234,510)
Minority interest in
Myotech, LLC 2,025,639 606,159 -- 2,631,798
------------ ------------ ----------- ------------
Loss from continuing operations (17,722,411) (14,484,384) (5,793,547) (49,602,712)
Loss from discontinued operations -- -- -- (89,357)
------------ ------------ ----------- ------------
Net loss $(17,722,411) $(14,484,384) $(5,793,547) $(49,692,069)
============ ============ =========== ============
Loss per common share - basic
and diluted $ (0.23) $ (0.19) $ (0.08)
============ ============ ===========
Weighted average shares
outstanding 77,864,738 75,787,052 69,263,893
============ ============ ===========
The accompanying notes should be read in conjunction with the 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, 2007
Deficit
Accumulated
Number Additional Stock During the Stockholders'
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, 2007
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, 2007
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, 2007
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 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
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 -- -- 1,444,780 -- -- -- 1,444,780
Net loss for the year ended
February 28, 2007 -- -- -- -- -- (17,722,411) (17,722,411)
---------- -------- ----------- ----------- -------- ------------ ------------
Balance at February 28, 2007 78,508,619 $417,158 $54,532,204 $(8,467,698) -- $(49,692,069) $ (3,210,405)
========== ======== =========== =========== ======== ============ ============
The accompanying notes should be read in conjunction with the consolidated
financial statements
F-8
BIOPHAN TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOWS
Period from
August 1,
1968 (date of
Year Ended February 28, inception) to,
----------------------------------------- February 28,
2007 2006 2005 2007
------------ ------------ ----------- ---------------
Cash flows used for operating activities:
Net loss $(17,722,411) $(14,484,384) $(5,793,547) $(49,692,069)
Adjustments to reconcile net loss to net cash
used in operating activities:
Amortization of intangible assets 1,458,045 405,441 -- 1,863,486
Amortization of deferred financing costs 186,350 -- -- 186,350
Depreciation and amortization 95,368 47,241 28,020 234,802
Loss on disposal of equipment 9,094 1,505 -- 10,599
Additional expenses related to warrants 7,304,105 -- -- 7,304,105
Change in fair value of derivative liability (5,318,064) -- -- (5,318,064)
Realized and unrealized losses on marketable
securities -- -- -- 66,948
Loss on debt 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 1,707,066 -- -- 2,758,016
Write-down of intellectual property rights -- -- -- 530,000
Amortization of discount on payable to related
party 1,740,991 1,071,564 -- 2,887,555
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 1,444,780 4,609,778 201,000 8,008,358
Expenses paid by stockholder -- -- -- 2,640
Minority interest (2,049,227) (536,616) -- (2,585,843)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable 148,610 (162,558) -- (13,948)
(Increase) decrease in due from related parties 4,801 156,858 (186,737) (59,300)
(Increase) decrease in prepaid expenses (18,968) (55,607) (22,411) (166,171)
(Increase) decrease in other current assets 55,698 (39,710) -- 15,988
(Increase) decrease in deposits 2,345 (867) -- (1,455)
Increase (decrease) in accounts payable and
accrued expenses 750,221 (14,742) 405,821 1,382,027
Increase (decrease) in due to related parties 53,732 26,548 -- 36,784
Increase (decrease) in deferred revenues (312,500) 295,833 225,000 208,333
------------ ------------ ----------- ------------
Net cash used in operating activities (9,789,911) (8,622,370) (4,874,854) (30,763,531)
F-9
BIOPHAN TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
Period from
August 1,
1968 (date of
Year Ended February 28, inception) to,
-------------------------------------- February 28,
2007 2006 2005 2007
----------- ----------- ---------- ---------------
Cash flows used for investing activities:
Purchases of property and equipment (369,434) (70,521) (39,302) (604,644)
Sales of marketable securities -- -- 1,150,000 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 -- -- -- (2,436,218)
----------- ----------- ---------- -----------
Net cash provided by (used in) investing activities (369,434) (817,698) 751,824 (1,777,643)
Cash flows provided by financing activities:
Proceeds of bridge loans -- -- -- 986,500
Loan from stockholder -- -- -- 143,570
Line of credit borrowing from related party 3,130,000 4,300,000 -- 7,980,950
Line of credit payments (1,500,000) (500,000) -- (2,072,500)
Proceeds of convertible notes payable 7,250,000 -- -- 7,250,000
Notes payable 62,121 (184,114) -- (121,993)
Proceeds from sales of capital stock 3,175,000 6,050,000 2,850,000 19,438,849
Exercise of options 13,179 182,541 34,900 658,467
Exercise of warrants -- 20,707 788,900 1,142,451
Swing profits -- 295,362 400,725 696,087
Deferred financing costs (1,030,120) -- -- (1,030,120)
Deferred equity placement costs -- -- (22,107) (112,536)
----------- ----------- ---------- -----------
Net cash provided by financing activities 11,100,180 10,164,496 4,052,418 34,959,725
----------- ----------- ---------- -----------
Net increase (decrease) in cash and equivalents 940,835 724,428 (70,612) 2,418,551
Cash and equivalents, beginning 1,477,716 753,288 823,900 --
----------- ----------- ---------- -----------
Cash and equivalents, ending $ 2,418,551 $ 1,477,716 $ 753,288 $ 2,418,551
=========== =========== ========== ===========
Supplemental schedule of cash paid for:
Interest $ 30,000 $ 9,800 $ -- $ 39,800
=========== =========== ========== ===========
CONTINUED ON FOLLOWING PAGE
F-10
BIOPHAN TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
Period from
August 1,
1968 (date of
Year Ended February 28, inception) to,
------------------------------------ February 28,
2007 2006 2005 2007
---------- ---------- ---------- --------------
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 $ 2,395,485 $ -- $2,812,555
========== =========== ========== ==========
Allocation of proceeds from notes payable and warrants $7,250,000 $ -- $ -- $7,250,000
========== =========== ========== ==========
Change in fair value of warrants reclassified from equity
to warrants liability $ 755,876 $ -- $ -- $ 755,876
========== =========== ========== ==========
Capital lease obligation $ 27,049 $ -- $ -- $ 27,049
========== =========== ========== ==========
Issuance of common stock upon conversion
of LOC loans $ -- $ 1,000,000 $ -- $1,978,450
========== =========== ========== ==========
Issuance of common stock for the acquisition of
initial 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 $ -- $ -- $ -- $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
========== =========== ========== ==========
The accompanying notes should be read in conjunction with the 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.
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.
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.
Leasehold improvements are amortized over the lesser of the assets' useful lives
or the remaining term of the lease.
The estimated useful lives for significant property and equipment categories are
as follows:
Computers 5 year
Furniture and equipment 5 to 7 years
Internet website 7 years
Leasehold improvements 15 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 OPTION PLANS
On March 1, 2006 the Company adopted the fair value based method of accounting
prescribed in FASB Statement of Financial Accounting Standards No. 123R
(Share-Based Payment) for its employee stock option plans.
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.
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 2005 have been reclassified to conform to the presentation
used for fiscal 2007 and 2006. These reclassifications had no effect on
previously reported results of operations or accumulated deficit.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109" ("FIN 46"). FIN 46 clarifies the
accounting for uncertainty in income taxes recognized in a company's financial
statements in accordance with SFAS No. 109, "Accounting for Income Taxes." FIN
48 prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. FIN 46 is effective for fiscal years
beginning after December 15, 2006. The Company is currently evaluating the
effect, if any, that FIN 46 will have on its consolidated financial position or
results of operations.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS No. 157"). SFAS No. 157 defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles, and expands
disclosures about fair value measurements. SFAS No. 157 applies under other
accounting standards that require or permit fair value measurements.
Accordingly, SFAS No. 157 does not require any new fair value measurement. SFAS
No. 157 emphasizes that fair value is a market-based measurement that should be
determined based on the assumptions that market participants would use in
pricing an asset or liability. Companies will be required to disclose the extent
to which fair value is used to measure assets and liabilities, the inputs used
to develop the measurements and the effect of certain of the measurements on
earnings (or changes in net assets) for the period. SFAS No. 157 is effective
for financial statements issued for fiscal years beginning after November 15,
2007, and interim periods within those fiscal years. The Company is currently
evaluating the effect, if any, that SFAS No. 157 will have on its consolidated
financial position or results of operations.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities". SFAS No. 159 permits entities to
choose to measure many financial instruments and certain other items at fair
value. Most of the provisions of SFAS No. 159 apply only to entities that elect
the fair value option. We do not believe the adoption of this standard will have
a material impact on our Consolidated Financial Statements. This standard will
become effective for us in the first fiscal quarter of 2008.
In September 2006, the SEC issued Staff Accounting Bulletin No. 108 "Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements" ("SAB No. 108"). SAB No. 108 provides
guidance on the consideration of the effects of prior year misstatements in
quantifying current year misstatements for the purpose of determining whether
the current year's financial statements are materially misstated. SAB No. 108 is
effective as of the end of the Company's 2006 fiscal year, allowing a one-time
transitional cumulative effect adjustment to beginning retained earnings as of
January 1, 2006, for errors that were not previously deemed material, but are
material under the guidance in SAB No. 108. The Company does not believe that
SAB No. 108 had a material effect on its consolidated financial position or
results of operations for the year ended February 28, 2007.
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 payment 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 will adopt this FSP in the first quarter of
fiscal 2008 in connection with the issuance of the Senior Secured Convertible
Notes and related warrants. See Note 11, "Senior Secured Convertible Notes."
Management does not believe that any other recently issued, but not yet
effective, accounting standards if currently adopted would have a material
effect on the accompanying financial statements.
2. GOING CONCERN:
As presented in the accompanying financial statements, the Company has been in
the development stage since inception, incurring recurring losses from
operations, and as of February 28, 2007, the Company's current liabilities
exceeded its current assets by $4,787,059 and the Company has a stockholders'
deficiency of $3,210,045. These factors raise potential doubt about the
Company's ability to continue as a going concern. Management is taking several
actions to ensure that the Company will continue as a going concern.
The Company is in regular contact with its current investors and prospective new
investors, and believes that it will be able to raise additional capital on the
warrants that are currently being registered with the Securities and Exchange
Commission and that it will be able to service its debt using the warrant shares
that are being registered for this purpose.
Further, in order to address the current situation, management has instituted a
cost reduction program that included a reduction in monthly costs from
approximately $1,100,000 at this time last year to under $500,000 per month
currently. In addition, the Company has reduced its investments in several
product lines and pursued alternative funding vehicles. The Company has
reorganized its efforts on the Myotech cardiac assist device development while
keeping core functions operational and maintaining intellectual property and
designs.
Management believes these factors and actions will contribute toward obtaining
sufficient financing for the near term and ultimate profitability. The
accompanying financial statements do not include any adjustments that might be
necessary if the Company is unable to continue as a going concern.
3. 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 beginning June 3, 2004 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-14
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
===========
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
year ended February 28, 2007, 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 $1,994,349 to Myotech against milestone 2
in the year ended February 28, 2007 for 726,963 newly issued Class A units,
which increased our ownership to 43.7%. Additional investments of $105,175
against milestone 2 have been made since February 28, 2007 for 38,337 additional
newly issued Class A units, which raised our ownership percentage to 43.8% to
date.
F-15
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.
The following is selected financial data for Myotech, LLC at February 28, 2007
and 2006, respectively:
For the For the Three
Year Ended Months Ended
February 28, 2007 February 28, 2006
----------------- -----------------
Total current assets $ 338,548 $ 59,608
Intangible assets, net of amortization 23,074,028 24,451,580
Other assets 196,915 37,156
----------------- -----------------
Total assets $ 23,609,491 $ 24,548,344
================= =================
Current liabilities $ 352,072 $ 169,948
Equity 23,257,419 24,378,396
----------------- -----------------
$ 23,609,491 $ 24,548,344
================= =================
Net loss from operations $ (4,163,326) $ (992,026)
================= =================
F-16
BIOPHAN TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. PREPAID EXPENSES:
Prepaid expenses consist of the following:
February 28,
-------------------
2007 2006
-------- --------
Prepaid insurance $ 36,812 $ 33,403
Prepaid license fees - related company 10,000 15,000
Prepaid legal fees 30,000 30,000
Prepaid rent 22,492 --
Prepaid royalties - related company 35,000 35,000
Prepaid conference fees -- 29,400
Other 31,867 4,400
-------- --------
$166,171 $147,203
======== ========
5. PROPERTY AND EQUIPMENT:
Property and equipment, at cost, consists of the following:
February 28,
---------------------
2007 2006
--------- ---------
Furniture and Equipment $ 349,298 $ 123,664
Computers 143,543 85,843
Internet Website 54,159 54,159
Leasehold Improvements 75,700 --
--------- ---------
622,700 263,666
Less accumulated depreciation (204,338) (137,325)
--------- ---------
$ 418,362 $ 126,341
========= =========
Property and equipment includes amounts acquired under capital leases of $27,049
and $0 at February 28, 2007 and 2006, respectively, with accumulated
depreciation of approximately $5,400 and $0, respectively.
Depreciation and amortization expense for the years ended February 28, 2007,
2006, and 2005 amounted to $95,368, $47,241 and $28,020, respectively.
Depreciation expense for the period from August 1, 1968 (date of inception) to
February 28, 2007 was $234,802.
6. 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
---------------------------- ----------
2008 $1,458,045
2009 1,458,045
2010 1,458,045
2011 1,458,045
2012 1,458,045
Amortization expense for the year ended February 28, 2007 and 2006 was
$1,458,045 and $405,441, respectively. Amortization expense for the period from
August 1, 1968 (date of inception) to February 28, 2007 was $1,863,486.
F-17
BIOPHAN TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. INVESTMENT:
The investment in New Scale Technologies, Inc. represents a 10% investment in
it's common stock, a non-public company, stated at cost.
8. 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 February 28, 2007.
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.
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 and fully amortized on the new debt
of $175,970 during the year ended February 28, 2007. The balance of the
borrowings of the line was $3,930,000 at February 28, 2007. The fair value of
the note is not readily determinable as there is a limited market for such
related party debt.
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,
-----------------------
2007 2006
---------- ----------
Accounts payable $1,010,060 $ 793,873
Bonuses - Biophan-Europe 75,000 150,000
Accrued payroll and related expenses 152,395 76,977
Accounting fees 75,000 --
Consulting fees 30,000 --
Interest payable 504,078 34,112
License fees -- 70,000
Other 95,500 66,850
---------- ----------
$1,942,033 $1,191,812
========== ==========
10. CAPITAL LEASE OBLIGATION:
The Company leases equipment under a capital lease that expires in 2010. The
lease requires monthly payments of $934 including interest at 14.75% per annum.
Future minimum lease payments required under the capital lease are as follows:
Year Ending
February 28, Amount
------------ --------
2008 $ 11,212
2009 11,212
2010 11,212
--------
$ 33,636
========
Less amount representing interest (6,587)
--------
27,049
Less current maturities (7,445)
--------
Long-term debt, less maturities $ 19,604
========
11. 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").
F-19
BIOPHAN TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, it will automatically adjust the
exercise price of the 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 discount amortization
through February 28, 2007 amounted to $1,707,066 and has been included in
interest expense. In addition, 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
additional expense related to warrants in the accompanying 2007 statement of
operations.
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 is accounted for as a
modification of the Original Warrants, we recorded an expense for this
modification in the period ended February 28, 2007 of which is included in the
caption "Change in fair value of warrant liability" in the statement of
operations for the year ended February 28, 2007.
12. 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 $10,157,937 for the fair
value of the warrants related to the Senior Secured Convertible Notes at
February 28, 2007 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 $336,069
at February 28, 2007. The Company expects to seek stockholder approval to
increase the authorized shares at a Special Meeting to be scheduled on May 8,
2007. The total fair value of derivative liability, originally recorded at
$15,309,980 on October 12, 2006, was adjusted by $4,815,974 to $10,494,006 at
February 28, 2007 resulting in a net non-cash income adjustment of $1,986,041
during the year ended February 28, 2007.
F-20
BIOPHAN TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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;
$0.41/share at February 28, 2007,
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.
While most of these factors changed during the period of October 12, 2006 to
February 28, 2007, the most significant factor impacting the change in fair
value were the change in stock price and the repricing of the original warrants
to $0.51 per share as further described in Note 11.
13. 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 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.
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
(See Note 11) 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.
SBI has alleged that in September 2006 the Company and SBI entered into an oral
settlement agreement pursuant to which the Stock Purchase Agreement was
terminated and SBI's obligation to purchase the shares was extinguished. The
Company believes that SBI's claim is without basis in fact.
On February 24, 2005, in connection with the acquisition of Biophan Europe (see
Note 3), 100,000 shares of restricted stock, valued at $134,000, were issued,
fully charged and accrued to intellectual property rights; 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 year ended
February 28, 2005.
F-21
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 3), 100,000 shares of restricted stock, valued at $134,000, were issued in
satisfaction of accounts payable in the accompanying consolidated balance sheet
at February 28, 2006.
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, 2007, 2006 and 2005, the Company issued no
shares, 84,074 and 1,903,775 shares of stock upon the exercise of warrants for
total proceeds of $0, $20,707 and $788,900, respectively. As of February 28,
2007 and 2006, warrants to purchase 33,229,318 and 3,247,920 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 $.64 per share. In
addition, during the years ended February 28, 2007, 2006 and 2005, 38,956,
224,165 and 94,999 shares of stock were issued upon the exercise of options for
total proceeds of $13,179, $182,541 and $34,900, respectively.
Additional paid-in capital was further increased by $1,444,780, $4,609,778 and
$201,000 of expense related to stock options issued for services during the
years ended February 28, 2007, 2006 and 2005, respectively. Also, $-0-, $295,362
and $400,725 of profits were received during the years ended February 28, 2007,
2006 and 2005, respectively, from a related company owed pursuant to the "short
swing profit" rules of the Securities Exchange Act of 1934.
14. 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 $7,190,975, $6,829,142, and $2,629,980 for the years
ended February 28, 2007, 2006, and 2005, respectively.
15. COMMITMENTS:
Lease Obligation
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 the Company continued on a month-to-month basis until
it vacated the premises on February 9, 2007. The Company has entered into new
operating leases for office space commencing March 2007 and expiring April 30,
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
------------ ----------
2008 $ 102,891
2009 139,558
2010 146,536
2011 153,636
2012 157,990
Thereafter 1,600,939
----------
$2,301,550
==========
Rent expense, net of subrentals, charged to operations under these operating
lease aggregated $113,161, $70,775 and $58,546 for the years ended February 28,
2007, 2006, and 2005, respectively. Rent expense, net of subrentals, charged to
operations for the period from August 1, 1968 (Date of Inception) to February
28, 2006 was $368,626.
Cooperative Research and Development Agreement (CRADA):
In March 2006, the Company entered into a Cooperative Research and Development
Agreement (CRADA) with the Food and Drug Administration to evaluate the safety
of medical implants in the presence of electromagnetic fields from magnetic
resonance imaging for a term of 2.5 years. Pursuant to the Agreement, the
Company is committed to a total of $187,500 of which $75,000 has been paid at
February 28, 2007.
F-22
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 $5,447,500.
License/royalty expense charged to operations was $152,410, $594,890 and $89,880
for the years ended February 28, 2007, 2006 and 2005, 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,
2007, excluding bonuses and other awards approximates $313,750.
16. 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, 2007, 2006, and 2005, the Company charged Biomed and Myotech
(through November 30, 2005) for services of certain Company personnel. The total
of these charges was $197,362, $156,647 and $161,014, respectively. The Company
also charges Biomed, TI and Myotech (through November 30, 2005) for expenses
allocable to and paid on their behalf. During the years ended February 28, 2007,
2006, and 2005, expenses paid by the Company on their behalf was approximately
$175,220, $647,000, and $240,000, respectively. At February 28, 2007, the
combined balances due from these related parties was $16,301. The amounts do not
bear interest and the Company received payment within forty-five days.
During the years ended February 28, 2007, 2006 and 2005, the Company was billed
$35,290, $93,000 and $9,000, respectively, for legal services provided by
Bramson & Pressman of which Robert S. Bramson, a former director of the Company,
is a partner. Mr. Bramson resigned July 18, 2006.
Steven Katz & Associates, Inc. of which Steven Katz, a former director of the
Company is an owner, billed the Company $183,500 and $110,500 during the years
ended February 28, 2007 and 2006, respectively, for consulting services. The
firm did not bill us for services during the year ended February 28, 2005. Mr.
Katz resigned March 9, 2007.
17. SHARE-BASED COMPENSATION PLAN:
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.
F-23
BIOPHAN TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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 year ended February 28, 2007 were $1,206,640
($.015 per share) higher 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 years ended February 28:
2006 2005
------------ -----------
Net loss - as reported $(14,484,384) $(5,793,547)
Add: Stock-based employee compensation
expense included in reported net loss,
net of related tax effects 4,384,530 201,000
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)
------------ -----------
Net loss - pro forma $(16,620,716) $(5,934,547)
============ ===========
Basic and diluted loss per share - as reported $ (0.19) $ (0.08)
============ ===========
Basic and diluted loss per share - pro forma $ (0.22) $ (0.08)
============ ===========
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 years
ended February 28:
2007 2006 2005
------------ ----------- -----------
Expected volatility 71%-122% 60%-103% 88%-150%
Risk-free interest rate 4.54%-5.35% 4.50%-4.60% 4.04%-4.50%
Expected life of options (years) 3.75-8 years 5-10 years 5-10 years
Expected dividends -0- -0- -0-
F-24
BIOPHAN TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 February 28, 2007, there was $1,249,419 of unrecognized compensation cost
related to stock-based payments which is expected to be recognized over a
weighted-average period of 1.23 years.
The following table represents stock option activity for the years ended
February 28, 2005 through 2007:
Weighted-
Weighted- Average
Number Average Remaining
of Exercise Contract
Shares Price Life (years)
--------- --------- ------------
Outstanding options at 2/28/04 3,869,993 $ .39
Granted 4,149,859 $ .96
Exercised (94,999) $ .37
---------
Outstanding options at 2/28/05 7,924,853 $ .69
Granted 1,968,331 $1.88
Forfeited (74,999) $ .83
Exercised (224,165) $ .81
---------
Outstanding options at 2/28/06 9,594,020 $ .95
Granted 354,997 $ .96
Exercised (38,956) $ .34
Forfeited (367,000) $ .47
Expired (114,999) $ .50
---------
Outstanding options at 2/28/07 9,428,062 $ .96 6.74
========= ===== ====
Outstanding exercisable at 2/28/07 7,433,479 $ .86 6.39
========= ===== ====
At February 28, 2007, shares available for future stock option grants to
employees and others under our 2001 Stock Option Plan were 597,981 and shares
available for future stock option grants to employees and others under our 2006
Incentive Stock Plan were 7,265,003.
At February 28, 2007, the aggregate intrinsic value of shares outstanding was
$302,550, and the aggregate intrinsic value of options exercisable was $302,550.
Total intrinsic value of options exercised was $ 17,223 for the year ended
February 28, 2007.
The following table summarizes our non-vested stock option activity for the year
ended February 28, 2007:
Weighted-Average
Number of Grant-Date Fair
Shares Value
---------- ----------------
Non-vested stock options at 2/28/06 3,048,750 $1.31
Granted 160,000 $ .86
Vested (1,032,167) $1.09
Forfeited/Expired (182,000) $ .93
----------
Non-vested stock options at 2/28/07 1,994,583 $ .62
==========
18. 401(K) SAVINGS PLAN
The Company maintains a tax-qualified retirement plan that provides all eligible
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 the Company. 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 the Company when made.
F-25
BIOPHAN TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For eligible employees, our Investing Plans likewise use base and lump-sum merit
pay as components of "eligible compensation" under the applicable plans
(incentive plan awards are not part of "eligible compensation"). In addition,
our "qualified" plans are subject to applicable IRS limits.
Company matching contributions to the Plan totaled $51,892, $53,242 and $6,240
for the years ended February 28, 2007, 2006, and 2005, respectively. No
discretionary contributions were made in 2007, 2006 or 2005.
19. INCOME TAXES:
As of February 28, 2007, the Company had net operating loss carryforwards of
approximately $22,124,000 for federal income tax purposes, which expire through
2027.
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,
-------------------
2007 2006 2005
---- ---- ----
Tax benefit at U.S. statutory rates (34%) (34%) (34%)
Increase in valuation allowance 34% 34% 34%
--- --- ---
0% 0% 0%
=== === ===
February 28,
---------------------------
2007 2006
------------ -----------
Deferred tax asset is comprised of the following:
Net operating loss carryforwards $ 10,224,000 $ 7,400,000
Write-down of intellectual property rights 160,000 160,000
Stock option expense 2,400,000 --
------------ -----------
Total deferred tax asset 12,784,000 7,560,000
Valuation allowance $(12,784,000) $(7,560,000)
============ ===========
20. 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.
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.
On April 5, 2007, SBI Brightline LLC and SBI Brightline XI, LLC brought suit
against us and Biomed Solutions, LLC in the Superior Court of Orange County,
California. The suit alleges, among other things, that in September 2006 we
entered into an oral agreement to terminate the Stock Purchase Agreement dated
as of May 27, 2005 and amended on January 8, 2006, between us and SBI Brightline
XI, LLC, and seeks unspecified monetary damages and an order by the Court
deeming the Stock Purchase Agreement to be terminated. We believe the
allegations made by SBI are without basis in fact and we intend to defend the
lawsuit vigorously. Because of the potential costs of litigation and the
anticipated demands that our defense may place on the time and attention of our
management our defense of this matter, regardless of the outcome, could have a
material adverse effect on our business and operations.
F-26
BIOPHAN TECHNOLOGIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
21. QUARTERLY STATEMENTS OF OPERATIONS (UNAUDITED)
Year Ended February 28, 2007*
-----------------------------------------------------
May 31 August 31 November 30 February 28
----------- ----------- ----------- -----------
Quarter ended:
Revenues $ 344,922 $ 310,099 $ 226,094 $ 108,414
Research and development expenses 2,588,408 1,941,513 1,737,351 923,703
General and administrative expenses 2,086,191 1,573,434 1,264,228 1,901,092
Other income (expense) (249,592) (329,508) (3,061,966) (3,080,593)
Minority interest in Myotech, LLC 695,825 520,095 470,674 339,045
----------- ----------- ----------- -----------
Net loss $(3,883,444) $(3,014,261) $(5,366,777) $(5,457,929)
=========== =========== =========== ===========
Loss per common share - basic and diluted $ (.05) $ (.04) $ (.07) $ (.07)
Weighted average shares outstanding 76,893,764 77,893,673 77,654,013 77,864,738
Year Ended February 28, 2006*
-----------------------------------------------------
May 31 August 31 November 30 February 28
----------- ----------- ----------- -----------
Quarter ended:
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) (188,590)
Minority interest in Myotech, LLC -- -- -- 606,159
----------- ----------- ----------- -----------
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
22. VALUATION AND QUALIFYING ACCOUNTS
Years ended February 28, 2007, 2006 and 2005
----------------------------------------------------------------
Balance at Additions charged Balance at
Description beginning of year to expense (*) Deductions end of year
--------------------------------------- ----------------- ----------------- ---------- -----------
Year ended February 28, 2007:
Valuation allowance- deferred tax asset $7,560,000 $5,224,000 $-0- $12,784,000
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
(*) Offset to tax benefit of net operating losses.
F-27
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of Biophan Technologies, Inc. (the "Company") is responsible for
establishing and maintaining an adequate system of internal control over
financial reporting as such term is defined in Rules 13a-15(f) and 15d-15(f)
under the Securities Exchange Act of 1934, as amended ("Exchange Act"). The
Company's internal control over financial reporting is designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of the consolidated financial statements. Our internal control over
financial reporting is supported by a program of appropriate reviews by
management, written policies and guidelines, careful selection and training of
qualified personnel, and a written Code of Business Conduct adopted by our
Company's Board of Directors, applicable to all Company Directors and all
officers and employees of our Company.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements and even when determined to be
effective, can only provide reasonable assurance with respect to financial
statement preparation and presentation. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
The Audit Committee of our Company's Board of Directors meets with the
independent public accountants and management periodically to discuss internal
control over financial reporting and auditing and financial reporting matters.
The Audit Committee reviews with the independent public accountants the scope
and results of the audit effort. The Audit Committee also meets periodically
with the independent public accountants without management present to ensure
that the independent public accountants have free access to the Audit Committee.
The Audit Committee's Report can be found in the Definitive Proxy Statement to
be issued in connection with the Company's 2007 Annual Meeting of Stockholders.
Management assessed the effectiveness of the Company's internal control over
financial reporting as of February 28, 2007. In making this assessment,
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control --
Integrated Framework. Based on our assessment, management believes that the
Company maintained effective internal control over financial reporting as of
February 28, 2007.
The Company's independent public accountants, Goldstein Golub Kessler LLP, a
registered public accounting firm, are appointed by the Audit Committee of the
Company's Board of Directors. Goldstein Golub Kessler LLP has audited and
reported on the consolidated financial statements of Biophan Technologies, Inc.,
management's assessment of the effectiveness of the Company's internal control
over financial reporting and the effectiveness of the Company's internal control
over financial reporting. The reports of the independent public accountants are
contained in this Annual Report on Form 10-K.
/s/ Michael L. Weiner
------------------------
Michael L. Weiner
Chief Executive Officer
/s/ Darryl L. Canfield
-------------------------
Darryl L. Canfield
Chief Financial Officer
44
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Biophan Technologies, Inc.
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control over Financial Reporting, that Biophan
Technologies, Inc. maintained effective internal control over financial
reporting as of February 28, 2007, based on criteria established in Internal
Control -- Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Biophan Technologies, Inc.'s
management is responsible for maintaining effective internal control over
financial reporting and for its assessment about the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the company's
internal control over financial reporting based on our audit.
We conducted our audit 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 effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that Biophan Technologies, Inc.
maintained effective internal control over financial reporting as of February
28, 2007, is fairly stated, in all material respects, based on criteria
established in Internal Control--Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Also, in our
opinion, Biophan Technologies, Inc. maintained, in all material respects,
effective internal control over financial reporting as of February 28, 2007,
based on criteria established in Internal Control--Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
Biophan Technologies, Inc. as of February 28, 2007 and 2006, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended February 28, 2007 and the amounts in
the cumulative column in the consolidated statement of operations, stockholders'
equity and cash flows for the period March 1, 2000 to February 28, 2007 and our
report dated May 4, 2007 expressed an unqualified opinion thereon, and contained
an explanatory paragraph regarding the Company's ability to continue as a going
concern.
/s/ GOLDSTEIN GOLUB KESSLER LLP
New York, New York
May 4, 2007
45
Disclosure Controls and Procedures and Internal Control Over Financial
Reporting:
Disclosure controls and procedures are designed with the objective of ensuring
that information required to be disclosed in the Company's reports filed under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), such as
this report, is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules and forms.
Disclosure controls and procedures are also designed with the objective of
ensuring that such information is accumulated and communicated to the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure.
Evaluation of Disclosure Controls and Procedures:
As of the end of the period covered by this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
Chief Executive Officer and Chief Financial Officer, of the effectiveness of
disclosure controls and procedures as defined in Rules l3a-15(e) and l5d-15(e)
of the Exchange Act. Based on such evaluation, the Company's Chief Executive
Officer and Chief Financial Officer have concluded that as of the end of the
period covered by this report, the Company's disclosure controls and procedures
were effective at meeting their objectives.
Changes in Internal Controls:
There were no changes in the Company's internal controls over financial
reporting that occurred during the Company's most recently completed fiscal
quarter that materially affected, or are reasonably likely to materially affect,
the Company's internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
Not applicable.
46
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
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
Theodore A. Greenberg 47 Director
Bonita L. Labosky 64 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 58 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.
47
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.
Bonita L. Labosky has, since December 2006, been President and CEO of
Cardiac Concepts, Inc., a Minneapolis-based company developing new medical
device technologies. From 2000 until December 2006, she was Group Vice President
and member of the Executive Committee of Welch Allyn, Inc., a provider of
innovative medical diagnostic devices, patient monitoring systems, and external
defibrillators. During her tenure at Welch Allyn, Inc., Ms. Labosky also served
as a member of the firm's Executive Committee. From 1993 until 2000, she was a
Vice President of Medtronic, Inc., serving as General Manager for Heart Failure
Management from 1997 through 2000, General Manager for Micro Interventional
Systems from 1996 through 1997, and General Manager of the Promeon Division from
1993 through 1997. From 1989 through 1993, she was a research and development
director at Medtronic and from 1978 through 1988 she held various management
positions (including Vice President and General Manager) with SPSS, Inc. Ms.
Labosky joined our Board of Directors in March 2007.
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.
48
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.
49
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, Mr. Yakatan, and
Ms. Labosky 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.
50
The Board held nine (9) meetings during our fiscal year ended February 28, 2007.
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. 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 for a response. During fiscal 2007, each of the
incumbent directors, during his period of service, attended at least 75% of the
total number of meetings held by the Board.
Audit Committee.
The Audit Committee is composed of Dr. Jaensch and Mr. Greenberg. The
responsibilities of the Audit Committee as more fully set forth in the Audit
Committee Charter adopted in July 2003 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 five (5) times during our fiscal year
ended February 28, 2007. During that fiscal year, the Audit Committee was
composed at various times of Dr. Jaensch, Mr. Bramson, Mr. Kenzie, Mr.
Greenberg, Mr. Yakatan and Mr. Katz. On the occasion of two of the four meetings
held by the Committee during his tenure, Mr. Yakatan was absent. Otherwise, each
member of the Audit Committee attended all of the meetings. The Board has
determined that each of Dr. Jaensch and Mr. Greenberg 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 Ms. Labosky and Mr. Yakatan. The
responsibilities of the Compensation Committee as more fully set forth in the
Compensation Committee Charter adopted in June 2005 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 informally several times during our fiscal year ended
February 28, 2007. During that fiscal year, the Compensation Committee was
composed at various times of Dr. Jaensch, Mr. Kenzie, Mr. Bramson, Mr. Yakatan
and Mr. Katz. Each member of the Compensation Committee attended all of the
meetings during his or her tenure on the Committee. 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.
51
Director Compensation
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, receive an annual cash fee of $8,000. Dr.
Jaensch receives an additional $30,000 for serving as Chairman of the Board. In
addition, non-employee directors receive options under our 2006 Incentive Stock
Plan. All directors receive reimbursement for their reasonable expenses incurred
in attending Board meetings. An additional $3,000 per year is paid to the
Chairman of the Audit Committee. Otherwise, no additional compensation is paid
to any director for serving as a member of any committee of the Board. We
maintain directors and officers liability insurance.
The following table shows compensation to directors for the fiscal year ended
February 28, 2007:
DIRECTOR COMPENSATION (1)
-------------------------------------------------------------------------------------------------------------
Fees Earned or Option Awards ($) All Other
Name Paid in Cash ($) (2) Compensation ($) Total ($)
---------------------------- ------------------- -------------------- -------------------- ------------------
Guenter H. Jaensch $38,000 (3) $24,834 (9) $ 0 $62,834
---------------------------- ------------ ------ --------------- ---- -------------- ----- ------------------
Steven Katz 8,000 (4) 24,834 (10) 183,500 (16) 216,334
---------------------------- ------------ ------ --------------- ---- -------------- ----- ------------------
Theodore A. Greenberg 6,000 (5) 24,834 (11) 0 30,834
---------------------------- ------------ ------ --------------- ---- -------------- ----- ------------------
Stan Yakatan 2,000 (6) 5,165 (12) 0 7,165
---------------------------- ------------ ------ --------------- ---- -------------- ----- ------------------
Michael Friebe 0 (7) 0 (13) 27,984 (17) 27,984
---------------------------- ------------ ------ --------------- ---- -------------- ----- ------------------
Robert S. Bramson 2,000 (7) 0 (14) 34,607 (18) 36,607
---------------------------- ------------ ------ --------------- ---- -------------- ----- ------------------
Ross B. Kenzie 6,000 (8) 24,834 (15) 0 30,834
---------------------------- ------------ ------ --------------- ---- -------------- ----- ------------------
(1) Certain columnar information required by Item 402(k)(2) of Regulation S-K
has been omitted for categories where there was no compensation awarded
to, or paid to, the named directors during the fiscal year ended February
28, 2007.
(2) The reported amounts reflect the dollar amounts recognized for financial
statement reporting purposes for the fiscal year ended February 28, 2007,
in accordance with FAS 123R, of awards pursuant to our Stock Incentive
Plan and may include amounts from awards granted both in and prior to the
fiscal year ended February 28, 2007. As required, the amounts shown
exclude the impact of any forfeitures related to service-based vesting
conditions. The actual amount realized by the director will likely vary
based on a number of factors, including the Company's performance, stock
price fluctuations and applicable vesting.
(3) Includes a $30,000 fee for service as Chairman of the Board and an $8,000
fee for service on the Board.
(4) Resigned in March 2007.
(5) Elected to the Board in April 2006.
(6) Elected to the Board in December 2006.
(7) Term expired in July 2006.
(8) Resigned in October 2006.
52
(9) An option for the purchase of 40,000 shares of common stock at an exercise
price of $1.06 per share was granted to Dr. Jaensch on July 18, 2006. This
option becomes fully vested and exercisable on the earlier of (i)
completion of one year of service as a director measured from the date of
grant or (ii) continuation of such service through the day immediately
preceding the first annual shareholders meeting following the date of
grant. This option has a termination date of July 18, 2016. At February
28, 2007, Dr. Jaensch held options for the purchase of an aggregate of
715,000 shares of common stock, of which options for the purchase of
627,500 shares were exercisable.
(10) An option for the purchase of 40,000 shares of common stock at an exercise
price of $1.06 per share was granted to Mr. Katz on July 18, 2006. This
option becomes fully vested and exercisable on the earlier of (i)
completion of one year of service as a director measured from the date of
grant or (ii) continuation of such service through the day immediately
preceding the first annual shareholders meeting following the date of
grant. This option has a termination date of July 18, 2016. At February
28, 2007, Mr. Katz held options for the purchase of an aggregate of
420,000 shares of common stock, of which options for the purchase of
332,500 shares were exercisable.
(11) An option for the purchase of 40,000 shares of common stock at an exercise
price of $1.06 per share was granted to Mr. Greenberg on July 18, 2006.
This option becomes fully vested and exercisable on the earlier of (i)
completion of one year of service as a director measured from the date of
grant or (ii) continuation of such service through the day immediately
preceding the first annual shareholders meeting following the date of
grant. This option has a termination date of July 18, 2016. At February
28, 2007, Mr. Greenberg held options for the purchase of an aggregate of
40,000 shares of common stock, none of which were exercisable.
(12) An option for the purchase of 40,000 shares of common stock at an exercise
price of $0.45 per share was granted to Mr. Yakatan on December 1, 2006.
This option becomes fully vested and exercisable on the earlier of (i)
completion of one year of service as a director measured from the date of
grant or (ii) continuation of such service through the day immediately
preceding the first annual shareholders meeting following the date of
grant. This option has a termination date of December 1, 2016. At February
28, 2007, Mr. Yakatan held options for the purchase of an aggregate of
40,000 shares of common stock, none of which were exercisable.
(13) Dr. Friebe held no options at February 28, 2007.
(14) At February 28, 2007, Mr. Bramson held options for the purchase of an
aggregate of 365,000 shares, of which options for the purchase of 277,500
shares were exercisable.
(15) An option for the purchase of 40,000 shares of common stock at an exercise
price of $1.06 per share was granted to Mr. Kenzie on July 18, 2006. This
option required (i) completion of one year of service as a director
measured from the date of grant or (ii) continuation of such service
through the day immediately preceding the first annual shareholders
meeting following the date of grant. Because Mr. Kenzie resigned on
October 31, 2006 before satisfaction of the vesting requirements, this
option terminated without becoming exercisable. At February 28, 2007, Mr.
Kenzie held options for the purchase of an aggregate of 245,000 shares of
common stock, of which options for the purchase of 197,500 shares were
exercisable.
(16) Other compensation consists of fees for consulting services performed by
Mr. Katz.
(17) Other compensation consists of salary as an employee of our subsidiary,
Biophan Europe GmbH, through May 2006 and fees for consulting services
through September 2006.
(18) Other compensation consists of fees for legal services provided by Bramson
& Pressman, of which Mr. Bramson is a partner.
53
CODE OF ETHICS
The Company has 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.
POTENTIAL CONFLICTS OF INTEREST
Messrs. MacDonald, Helfer, Canfield and other of our employees from time to time
spend a portion of their time on the business affairs of Biomed or its
affiliates, for which Biomed reimburses us a percentage of their salary and
benefits. Our Board of Directors reviews this arrangement on a regular basis.
Currently, Biomed reimburses us for less than 50% of the payroll costs of
Messrs. MacDonald, Helfer, Canfield and others. The Board of Directors does not
believe that any conflicts of interest arise as a result of this policy, but it
monitors the relationship on an ongoing basis.
Michael Weiner devotes the majority of his time to our company. His employment
agreement with us requires a majority of his time, allowing him to attend to
certain administrative duties of Technology Innovations, its subsidiary, Biomed,
and Speech Compression Technologies, LP, an R&D partnership holding certain
assets. Mr. Weiner is a member and the manager of Biomed and of Technology
Innovations. Ross Kenzie, one of the Biophan directors, is on the Board of
Members of each of Technology Innovations and Biomed. Biomed is in the business
of identifying and acquiring technologies in the biomedical field for
exploitation.
Further, Mr. Weiner is on the board of Nanoset, LLC, an entity owned in part by
Biomed and with which we have entered into a technology license agreement, and
Myotech, LLC, an entity in which Biomed is a 12.53% owner and Biophan is a
43.7% owner. Messrs. MacDonald and Helfer also serve on the board of managers
of Myotech. Myotech is developing a biomedical device that does not compete with
those being developed by us.
Messrs Weiner and Lanzafame, are also on the Board of NaturalNano, Inc., the
principal owner of which is Technology Innovations, LLC. NaturalNano has entered
into a research and development agreement with us for drug eluting technology.
Biomed has agreed that all intellectual property developed by the employees of
Biomed that is in the area of MRI Safe and/or Image Compatible Technology (MRI
Technology) and HIV Antisense will be assigned to us. Per this agreement, MRI
Technology means the technology necessary to enable medical devices to be
resistant to radio frequency and static and gradient electromagnetic fields
produced by MRI machines. HIV Antisense is a method of treating HIV.
Our independent directors will make all determinations and decisions relating to
the issue involving Biomed and its affiliates described above, without the vote
of Mr. Weiner. In addition, the Board will act to ensure that Mr. Weiner
discharge their obligations to us in accordance with their fiduciary duties to
us.
54
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.
55
SCIENTIFIC ADVISORY BOARD
From time to time, we call upon the advice of members of our Scientific Advisory
Board who currently serve without fixed cash compensation but are each entitled
to receive 8,333 options upon completion of each full year of membership. The
members of our Board are:
BRADFORD C. BERK, M.D., PH.D. - Since 1998, Dr. Berk has been Director, Center
of Cardiovascular Research; Paul N. Yu Professor and Chief of Cardiology;
Charles A. Dewey Professor and Chairman of Medicine, University of Rochester
Medical Center. Dr. Berk has clinical expertise in adult cardiology and
scientific expertise in cardiovascular medicine, particularly vascular biology.
DAVID A. GLOCKER, PH.D. - Dr. Glocker is President of Isoflux Incorporated, a
manufacturer of sputter coating equipment. Prior to founding Isoflux in 1993 he
led a group at the Eastman Kodak Company that was responsible for the
development of coating processes for many Kodak products. He has published
numerous articles on coating technology and holds more than 25 patents in the
field.
HERBERT A. HAUPTMAN, PH.D. - In 1970, Dr. Hauptman joined the crystallographic
group of the Hauptman-Woodward Medical Research Institute (formerly the Medical
Foundation of Buffalo) of which he became Research Director in 1972. He
currently serves as President of the Hauptman-Woodward Medical Research
Institute as well as Research Professor in the Department of Biophysical
Sciences and Adjunct Professor in the Department of Computer Science at the
University of Buffalo. He was awarded the 1985 Nobel Prize in Chemistry and was
elected to the National Academy of Sciences in 1988.
RAY KURZWEIL, B.S. - Founder, Chairman, and CEO of Kurzweil Technologies, Inc.,
a technology development company, since 1995. President Clinton awarded Mr.
Kurzweil the National Medal of Technology in 1999, for his invention of the
Kurzweil Reading Machine for the Blind. Mr. Kurzweil was inducted into the
National Inventor's Hall of Fame in 2002, and received the Lemelson-MIT Prize in
2001. Mr. Kurzweil also developed Kurzweil Voice Recognition System, and
Kurzweil Music Synthesizer. He is a renowned best-selling author and lecturer.
ANDREAS MELZER, M.D. - Dr. Melzer is Professor of applied biomedical
engineering, Director and Chairman of the Board at the Institute for Medical
Technologies and Management in Medicine INSITE med. at the University of Applied
Sciences in Gelsenkirchen, Germany. He also holds a clinical position as
part-time staff radiologist at the Department of Diagnostic and Interventional
Radiology at St. Mary's Hospital Buer in Gelsenkirchen, Germany. He has
co-invented more than 30 patents and has authored over 150 publications.
Additionally, Dr. Melzer is engaged as co-organizer, chairman, and invited
speaker of various medical conferences, and is a board member of several medical
societies, as well as professional committees.
KEVIN PARKER, M.S., PH.D. - Dean Parker is a Professor of Electrical and
Computer Engineering, Radiology, and Bioengineering at the University of
Rochester. In 1998, Dr. Parker was named Dean of the School of Engineering and
Applied Sciences.
FRANK G. SHELLOCK, PH.D. - Dr. Shellock is Adjunct Clinical Professor of
Radiology and Medicine at the Keck School of Medicine, University of Southern
California and the Founder of the Institute for Magnetic Resonance Safety,
Education, and Research (www.IMRSER.org); Dr. Shellock is a world-renowned
expert on MRI safety. He created the internationally popular website,
www.MRIsafety.com. Dr. Shellock has authored five medical textbooks, over 60
book chapters, and more than 190 peer-reviewed articles. In 2004, the
International Society for Magnetic Resonance in Medicine recognized the
significant contributions Dr. Shellock has made to the scientific and
educational mission of the ISMRM by designating him a Fellow of the Society.
56
HENRY M. SPOTNITZ, M.D. - Since 1994, Dr. Spotnitz has been Vice-Chairman,
Research and Information Systems Department of Surgery at Columbia Presbyterian
Medical Center.
JIANHUI ZHONG, PH.D. - Professor Zhong joined the University of Rochester in
1997 and is currently an Associate Professor of Radiology, Physics, and
Biomedical Engineering, and Director of the MRI Research Group at the University
Medical Center.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act") requires our executive officers and directors and persons who own more
than ten percent of our common stock to file reports of ownership and changes in
ownership with the SEC. Such executive officers, directors and greater than ten
percent stockholders are also required by SEC rules to furnish us with copies of
all Section 16(a) forms they file. Based solely on representations from certain
reporting persons, we believe that, with respect to the year ended February 28,
2007, the following transactions applicable to our executive officers, directors
and ten percent stockholders required by Section 16(a) were not reported timely.
On July 18, 2006, the date of our Annual Stockholders Meeting, Messrs. Jaensch,
Kenzie, Katz and Greenberg were elected non-management directors and each was
granted 40,000 options. On December 1, 2006, Stan Yakatan was elected as a
non-management director and was granted 40,000 options.
ITEM 11. EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
General Compensation Philosophy
The objectives of the Company's executive compensation policies are (i) to
be competitive with pay practices of other companies of comparable size and
status, including those in the biotechnology industry and (ii) to attract,
motivate and retain key executives who are vital to the long-term success of the
Company. The Company's executive compensation currently consists of both fixed
annual salary and stock based compensation which align the interests of the
Company's executives with the interests of its stockholders.
Executive Compensation Guiding Principles
Our general compensation philosophy is further guided by the following
principles specific to our executives:
o A strong link between pay and Company performance
o Executives aligned with stockholders and managing from the
perspective of owners with a meaningful equity stake in Biophan in
the form of grants of stock options and restricted stock.
o A competitive compensation package that will enable the Company to
attract and motivate high-performing talent and that is strongly
competitive with other biotechnology companies in our industry.
o A simple and cost-efficient program design
The Compensation Committee of our Board of Directors determines the base
salary (and any bonus and equity-based compensation) for each executive officer
annually. Michael Weiner, our Chief Executive Officer, confers with members of
the Compensation Committee, and makes recommendations, regarding the
compensation of all executive officers other than himself. He does not
participate in the Compensation Committee's deliberations regarding his own
compensation. In determining the compensation of our executive officers, the
Compensation Committee consults the annual Bioworld Executive Compensation
Report, but does not engage in any benchmarking of total compensation or any
material element of compensation.
The Compensation Committee believes that it is important that the
interests of our executive officers be aligned as closely as possible with those
of our shareholders, and in that regard reviews on an annual basis the number of
stock options and other equity interests held by each of our executive officers.
57
Components of Biophan's Compensation Program
The compensation program for our Named Executive Officers consists of:
(1) Base salary;
(2) Long-term incentive compensation, including:
(i) Stock Options, Restricted Stock, and Restricted Stock Units,
(ii) Stock Appreciation Rights, and Other Stock-Based Awards,
(iii) Broad-based Employee Benefits
(1) Base Salary
With respect to annual compensation, the fundamental objective in setting
base salary levels for the Company's senior management is to pay competitive
rates to attract and retain high quality, competent executives. Competitive pay
levels are determined based upon proxy disclosures, individual leadership, level
of responsibility, management skills and industry activities. The Company does
not currently have a bonus program for its executives.
(2) Long Term Incentive Compensation
(i) Stock Options, Restricted Stock, and Restricted Stock Units.
The Company has two equity-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 employees,
and the grant of non-qualified options to consultants and to directors and
advisory board members. In addition, various other types of stock-based awards,
such a stock appreciation rights, may be granted under the Plans. The Plans are
administered by the Compensation Committee of our Board of Directors, which
determines the individuals eligible 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
Plans. Under the 2006 Plan, non-employee directors receive automatic grants of
options for the purchase of 40,000 shares of common stock (i) upon the initial
election to the Board of Directors and (ii) at each successive Annual Meeting at
which they are re-elected to the Board. Under the 2001 Plan, 13,000,000 shares
of our common stock were reserved for issuance pursuant to options or restricted
stock awards; at February 28, 2007, 597,981 shares were available for future
option grants and awards. Under the 2006 Plan, 7,500,000 shares of our common
stock were reserved for issuance pursuant to options or restricted stock awards;
at February 28, 2007, 7,265,003 shares were available for future option grants
and awards.
To date, awards have been solely in the form of non-qualified stock
options granted under the Plans. The Compensation Committee grant these
stock-based incentive awards from time to time for the purpose of attracting and
retaining key executives, motivating them to attain the Company's long-range
financial objectives, and closely aligning their financial interests with
long-term stockholder interests and share value.
Restricted stock awards entitle recipients to acquire shares of common
stock, subject to our right to repurchase all or part of such shares from the
recipient in the event that the conditions specified in the applicable award are
not satisfied prior to the end of the applicable restriction period established
for such award. Restricted stock unit awards entitle the recipient to receive
shares of common stock to be delivered in the future subject to such terms and
conditions on the delivery of the shares as the Board of Directors may
determine.
Restricted stock and restricted stock unit awards granted under the 2006
Plan may vest (a) solely on the basis of passage of time, (b) solely based on
achievement of specified performance criteria or (c) upon the passage of time,
subject to accelerated vesting if specified performance criteria are met. The
Board of Directors may determine, at the time of grant, that restricted stock or
restricted stock unit award being made to an officer will vest solely upon
achievement of specified performance criteria designed to qualify for deduction
under Section 162(m) of the Code. The performance criteria for each restricted
stock or restricted stock unit award intended to so qualify
58
for purposes of Section 162(m) of the Code will be based on one or more of the
following measures: sales, earnings per share, return on net assets, return on
equity, and customer service levels.
Except as noted below, (a) restricted stock and restricted stock units
that vest solely on the basis of passage of time may vest no faster than ratably
over three years; and (b) restricted stock and restricted stock units that vest
based on achievement of specified performance criteria, or provide for
accelerated vesting based upon achievement of specified performance criteria,
may not vest earlier than the first anniversary of the date of grant. These
vesting restrictions do not apply to restricted stock and restricted stock unit
awards collectively with respect to up to 5% of the total number of shares of
common stock covered by the 2006 Plan. In addition, the Board of Directors may
make exceptions to the vesting limitations described above in the event of the
recipient's death, a change in control or other extraordinary circumstances
specified in the 2006 Plan.
(ii) Stock Appreciation Rights and Other Stock-Based Awards
A stock appreciation right, or SAR, is an award entitling the holder on
exercise to receive, at the election of the Board of Directors, an amount in
cash or common stock or a combination thereof determined in whole or in part by
reference to appreciation, from and after the date of grant, in the fair market
value of a share of common stock. SARs may be based solely on appreciation in
the fair market value of common stock or on a comparison of such appreciation
with some other measure of market growth such as (but not limited to)
appreciation in a recognized market index. Under the 2006 Plan, the Board of
Directors has the right to grant other awards of common stock or awards
otherwise based upon common stock or other property, including without
limitation rights to purchase shares of common stock, having such terms and
conditions as the board may determine.
The Company believes that, through the use of stock options, restricted
stock, restricted stock units, stock appreciation rights, and other stock-based
awards, executives' interests are directly tied to enhanced stockholder value.
The Compensation Committee has the flexibility of awarding any of these
incentives to executives. This flexibility enables the Company to fine-tune its
grants in order to maximize the alignment of the interests of the stockholders
and management.
(iii) Broad-based Employee Benefits
As employees, our Named Executive Officers have the opportunity to
participate in a number of benefits programs that are generally available to all
eligible employees. These benefits include:
o Healthcare Plans-- includes medical benefits, dental benefits,
behavioral health program, vision and hearing care program, and
wellness programs.
o Disability Plans-- includes short-term and long-term disability
income plans.
o Investing Plans-- includes a 401(k) plan.
Qualified Retirement Plan
We maintain a tax-qualified retirement plan that provides all eligible
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.
For eligible employees, our Investing Plans likewise use base and lump-sum
merit pay as components of "eligible compensation" under the applicable plans
(incentive plan awards are not part of "eligible compensation"). In addition,
our "qualified" plans are subject to applicale IRS limits.
59
SUMMARY COMPENSATION TABLE (1)
The table set forth below summarizes the compensation paid to our named
executive officers during the year ended February 28, 2007.
Name and All
Principal Stock Option Other
Position Year Salary Bonus(2) Awards(3) Awards(4) Compensation Total
---------------------------------------------------------------------------------------------------------------
Michael L. Weiner
President and CEO 2007 $260,000 0 0 0 $11,758 $271,758
Darryl L. Canfield
CFO 2007 $180,000 0 0 0 0 $180,000
John F. Lanzafame
Vice-President and COO 2007 $188,077 0 0 0 0 $188,077
Stuart G. MacDonald
Vice-President -
Research 2007 $175,000 0 0 0 0 $175,000
Jeffrey L. Helfer
Vice-President
-Engineering 2007 $180,000 0 0 0 0 $180,000
---------------------------------------------------------------------------------------------------------------
----------
(1) Certain columnar information required by Item 402(c)(2) of Regulation S-K
has been omitted for categories where there has been no compensation
awarded to, or paid to, the named executive officers required to be
reported in the table during fiscal year ended February 28, 2007.
(2) No bonus was paid to any named executive officer. The Company does not
have a formal bonus plan, but the Compensation Committee has, from time to
time on the recommendation of management, awarded cash bonuses to
employees in recognition of exceptional service.
(3) The Company did not issue any stock awards to named executive officers in
the fiscal year ended February 28, 2007.
(4) The Company did not issue any options awards to named executive officers
in the fiscal year ended February 28, 2007.
(5) Unless otherwise indicated, the aggregate amount of perquisites and other
personal benefits given to each of the named executive officers valued at
the actual cost to the Company was less than $10,000. These amounts
consist of contributions made by the Company to the 401(k) Plan and
premiums for long-term disability for each of the officers.
60
Grants of Plan Based Awards
The Company did not grant stock options or stock awards to the named
executive officers during the fiscal year ended February 28, 2007.
Outstanding Equity Awards at Fiscal Year End
The following table presents the number and values of exercisable and
unexercisable options at February 28, 2007:
--------------------------------------------------------------------------------------------------------------
Option Awards (1)
--------------------------------------------------------------------------------------------------------------
Number of Number of
Securities Securities
underlying underlying
Unexercised Unexercised
Options Unearned Options Option
(#) (#) Exercise Option
Exercisable Unexercisable Price Expiration
Name (Vested) (Unvested) ($) Date
---------------------------- ----------- --------------- ----------- -------------
Michael L. Weiner 250,000 (2) 0 $ 0.50 01/01/2011
250,000 (3) 0 0.43 07/16/2012
300,000 (4) 0 0.18 10/31/2013
800,000 200,000 (5) 0.97 05/10/2014
Darryl L. Canfield 300,000 300,000 (6) 1.87 11/09/2015
John F. Lanzafame 75,000 25,000 (7) 0.67 07/19/2014
112,500 37,500 (8) 0.74 09/03/2014
240,000 60,000 (9) 1.80 3/15/2015
91,667 183,333 (10) 1.56 01/06/2016
Stuart G. MacDonald 100,000 (11) 0 0.50 01/01/2011
100,000 (12) 0 0.43 07/16/2012
200,000 (4) 0 0.18 10/31/2013
340,000 85,000 (13) 0.97 05/10/2014
25,000 (14) 0 2.60 05/27/2015
Jeffrey L. Helfer 100,000 (15) 0 0.50 10/15/2011
100,000 (3) 0 0.43 07/16/2012
200,000 (4) 0 0.18 10/31/2013
340,000 85,000 (13) 0.97 05/10/2014
25,000 (14) 0 2.60 05/27/2015
----------
(1) Certain columnar information required by Item 402(f) (2) of Regulation S-K
has been omitted for categories where there has been no compensation
awarded to, or paid to, the named executive officers required to be
reported in the table during fiscal year ended February 28, 2007.
(2) These stock options were granted on January 1, 2001, with 100,000 vesting
and becoming exercisable immediately. The remaining options vested and
became exercisable in three equal annual installments with the first
installment vesting on January 1, 2002.
(3) These stock options were granted on July 16, 2002. This option vested and
became exercisable in three equal annual installments with the first
installment vesting on December 31, 2002.
(4) These stock options were granted on October 31, 2003. This option vested
and became exercisable in four equal annual installments with the first
installment vesting on October 31, 2003.
(5) These stock options were granted on May 10, 2004. This option becomes
vested and exercisable after the following contingencies are met.
a. 400,000 options upon completion of a financing deal,
b. 400,000 options upon completion of a substantial licensing and/or
strategic transaction, and
61
c. 200,000 options upon completion of a listing on a major exchange.
(6) These stock options were granted on November 9, 2005. This option becomes
vested and exercisable in six equal annual installments with the first
installment vesting on November 9, 2005.
(7) These stock options were granted on July 19, 2004. This option becomes
vested and exercisable in four equal annual installments with the first
installment vesting July 19, 2004.
(8) These stock options were granted September 3, 2004. This option becomes
vested and exercisable in four equal annual installments with the first
installment vesting September 3, 2004.
(9) These stock options were granted on March 10, 2005. This option becomes
vested and exercisable after the following contingencies are met.
a. 90,000 options upon completion of a financing deal vest and become
exercisable in three equal semi-annual installments with the first
installment vesting March 15, 2005,
b. 150,000 options upon completion of a substantial licensing and/or
strategic transaction vest and become exercisable in three equal
semi-annual installments with the first installment vesting March
15, 2005, and
c. 60,000 options upon completion of a listing on a major exchange vest
and become exercisable in three equal semi-annual installments with
the first installment vesting on the date of completion.
(10) These stock options were granted on January 6, 2006. This option becomes
vested and exercisable in three equal annual installments with the first
installment vesting on January 6, 2007.
(11) These stock options were granted January 1, 2001. This option vested and
became exercisable in five equal annual installments with the first
installment vesting January 1, 2002.
(12) These stock options were granted July 16, 2002. This option vested and
became exercisable on December 31, 2002.
(13) These stock options were granted on May 10, 2004. This option becomes
vested and exercisable after the following contingencies are met.
a. 127,500 options upon completion of a financing deal,
b. 212,500 options upon completion of a substantial licensing and/or
strategic transaction, and
c. 85,000 options upon completion of a listing on a major exchange.
(14) These stock options were granted May 27, 2005. This option vested and
became exercisable on May 27, 2005.
(15) These stock options were granted October 15, 2001. This option vested and
became exercisable in five equal annual installments with the first
installment vesting October 15, 2002.
62
Options Exercised and Stock Vested
No named executive officer exercised options in the fiscal year ended
February 28, 2007. Options held by the following named executive officer vested
during the year ended February 28, 2007 as follows:
Darryl L. Canfield 200,000
John F. Lanzafame 154,127
Stuart G. MacDonald 50,000
Jeffrey L. Helfer 50,000
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 and General Manager of Cardiovascular Products; 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, Messrs. Canfield, MacDonald
and Lanzafame are entitled to receive severance equal to six months' base
salary, payable in three equal installments within fifteen (15), thirty (30) and
sixty (60) days following termination 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. Mr. Helfer
is entitled to receive severance equal to six months' base salary, payable in
six equal monthly installments for Voluntary Termination with Good Reason. Each
will receive benefit continuation for the period equal to their severance.
63
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.
Termination and Change in Control Tables
The tables below outline the potential payments to our Chief Executive
Officer and other Named Executive Officers upon the occurrence of certain
termination triggering events. For the purposes of the table, below are the
standard definitions for the various types of termination, although exact
definitions may vary by agreement and by person.
"Voluntary termination" means a termination initiated by the executive
officer.
"Voluntary termination for Good Reason" generally means termination
initiated by the executive officer (i) following a change in control as defined
above (ii) due to a material breach by the Company under the employment
agreement or (iii) a significant change in the executive officer's duties.
"Involuntary Termination--Disability" means entitlement to long-term
disability benefits under the Company Disability Income Plan, as amended and any
successor plan, or a determination of a permanent and total disability under a
state workers compensation statute.
"Involuntary Termination-- For Cause" means the occurrence of one or more
of the following events (i) the Executive willfully refuses to obey reasonable
and lawful orders of the CEO or the Board of Directors; (ii) the Executive has
willfully breached or habitually neglected his duty and has failed to correct
his behavior within five (5) days following receipt of written notice of such
concerns; (iii) the Executive has been convicted in a court of law of a crime or
offense which involves dishonesty or fraud; (iv) the Executive has breached any
of the Executive's obligations pursuant to this Agreement; or (v) the Executive
has committed an intentional tort against the Company or its Executives.
"Involuntary Termination-- Not for Cause" means an involuntary termination
for reasons other than "For Cause" as defined above.
64
"Involuntary Termination for Change-in-Control" occurs when a named
executive is terminated after the completion of change in control as described
above in Employment Contracts.
No Named Executive Officer is entitled to a payment in connection with
Involuntary Termination--For Cause.
Only Mr. Helfer is entitled to a payment in connection with a Voluntary
Termination for Good Reason.
Michael L. Weiner
President, Chief Executive Officer, Director
---------------------------------------------------------------------------------------------------------------------
Voluntary
Termination Involuntary Termination
---------------------------------------------------------------------------------------------------------------------
Executive Benefits and Payments Upon Good Reason or Disability or Change in
Termination(1) Retirement Death For Cause Not For Cause Control
---------------------------------------------------------------------------------------------------------------------
Compensation
Severance(2) 0 $260,000 0 $260,000 $260,000
Benefits and Perquisites(3)
401(k) Match(4) 0 9,000 0 9,000 9,000
Health Insurance(5) 0 10,200 0 10,200 10,200
Long-Term Disability premiums(5) 0 1,360 0 1,360 1,360
---------------------------------------------------------------------------------------------------------------------
Darryl L. Canfield
Vice-President, Treasurer, Secretary, Chief Financial Officer
---------------------------------------------------------------------------------------------------------------------
Voluntary
Termination Involuntary Termination
---------------------------------------------------------------------------------------------------------------------
Executive Benefits and Payments Upon Good Reason or Disability or Change in
Termination(1) Retirement Death For Cause Not For Cause Control
---------------------------------------------------------------------------------------------------------------------
Compensation
Severance(2) 0 0 0 0 $90,000
Benefits and Perquisites(3)
401(k) Match(4) 0 0 0 0 3,600
Health Insurance(5) 0 0 0 0 1,930
Long-Term Disability premiums(5) 0 0 0 0 810
---------------------------------------------------------------------------------------------------------------------
John F. Lanzafame
Vice-President - Business Development, Chief Operating Officer
---------------------------------------------------------------------------------------------------------------------
Voluntary
Termination Involuntary Termination
---------------------------------------------------------------------------------------------------------------------
Executive Benefits and Payments Upon Good Reason or Disability or Change in
Termination(1) Retirement Death For Cause Not For Cause Control
---------------------------------------------------------------------------------------------------------------------
Compensation
Severance(2) 0 0 0 0 $90,000
Benefits and Perquisites(3)
401(k) Match(4) 0 0 0 0 3,600
Health Insurance(5) 0 0 0 0 4,500
Long-Term Disability premiums(5) 0 0 0 0 240
---------------------------------------------------------------------------------------------------------------------
Stuart G. MacDonald
Vice-President - Research and Development
---------------------------------------------------------------------------------------------------------------------
Voluntary
Termination Involuntary Termination
---------------------------------------------------------------------------------------------------------------------
Executive Benefits and Payments Upon Good Reason or Disability or Change in
Termination(1) Retirement Death For Cause Not For Cause Control
---------------------------------------------------------------------------------------------------------------------
Compensation
Severance(2) 0 0 0 0 $87,500
65
Benefits and Perquisites(3)
401(k) Match(4) 0 0 0 0 3,500
Health Insurance(5) 0 0 0 0 1,600
Long-Term Disability premiums(5) 0 0 0 0 640
---------------------------------------------------------------------------------------------------------------------
Jeffrey L. Helfer
Vice-President and General Manager-Cardiovascular Products
---------------------------------------------------------------------------------------------------------------------
Voluntary
Termination Involuntary Termination
---------------------------------------------------------------------------------------------------------------------
Executive Benefits and Payments Upon Good Reason or Disability or Change in
Termination(1) Retirement Death For Cause Not For Cause Control
---------------------------------------------------------------------------------------------------------------------
Compensation
Severance(2) 90,000 0 0 0 0
Benefits and Perquisites(3)
401(k) Match(4) 3,600 0 0 0 0
Health Insurance(5) 4,500 0 0 0 0
Long-Term Disability premiums(5) 550 0 0 0 0
---------------------------------------------------------------------------------------------------------------------
--------------
(1) For purposes of this analysis, we assume that the named Executive
Officer's compensation is as follows: Michael Weiner's current base salary
is $260,000; Darryl Canfield, John Lanzafame and Jeffrey Helfer's current
base salaries are $180,000; Stuart MacDonald's current base salary is
$175,000.
(2) Severance is calculated as follows: Michael Weiner receives one (1) year
of base salary for Involuntary Termination-Disability or Death,
Involuntary Termination-Not for Cause and Involuntary Termination-Change
in Control; Darryl Canfield, John Lanzafame and Stuart MacDonald receive
six (6) months of base salary for Involuntary Termination-Change in
Control; Jeffrey Helfer receives six (6) months for Voluntary
Termination-Good Reason.
(3) Payments associated with benefits and perquisites are limited to the items
listed. No other continuation of benefits or perquisites occurs under the
termination scenarios listed.
(4) 401(k) Employer Match is calculated on salary paid as per Safe Harbor
provision of the 401(k) Plan up to the maximum allowable contribution.
(5) Health Insurance and Long-Term Disability continuation is calculated as
follows: Michael Weiner at one (1) year; each of Darryl Canfield, John
Lanzafame, Stuart MacDonald, and Jeffrey Helfer at six (6) months.
66
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.
67
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
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 May 3, 2007, for:
o each person known to us to be the beneficial owner of more than 5%
of our common stock
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 May 3, 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 May 3, 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
Theodore A. Greenberg 0 *
530 F Grand Street
New York, NY 10002
Bonita L. Labosky 0 *
3067 East Lake Road
Skaneateles, NY 13152
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)
19,618,222 (8) 20.73%
68
(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 8,449,369 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)
8,449,369 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
69
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
------------------------------- ---------------------------- ---------------------------- -------------------------
Plan Category Number of securities to be Weighted average exercise Number of securities
issued upon exercise of price of outstanding remaining available for
outstanding options, options, warrants and future issuance under
warrants and rights rights equity compensation plans
(excluding securities
reflected in column (a))
(a) (b) (c)
------------------------------- ---------------------------- ---------------------------- -------------------------
Equity compensation plans
approved by security holders 9,428,062 $.96 7,862,984
------------------------------- ---------------------------- ---------------------------- -------------------------
Equity compensation plans not
approved by security holders -0- -0- -0-
------------------------------- ---------------------------- ---------------------------- -------------------------
Total 9,428,062 $.96 7,862,984
------------------------------- ---------------------------- ---------------------------- -------------------------
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
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 43.7% 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.
70
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 February 28, 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.
We have 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, 2007, 2006, and 2005, the Company charged Biomed and Myotech (through
November 30, 2005) for services of certain Company personnel. The total of these
charges was $197,362, $156,647 and $161,014, respectively. We also charge
Biomed, TI and Myotech (through November 30, 2005) for expenses allocable to and
paid on their behalf. During the years ended February 28, 2007, 2006, and 2005,
expenses paid by the Company on their behalf were approximately $175,220,
$647,000 and $240,000, respectively. At February 28, 2007, the combined balances
due from these related parties was $16,301. The amounts do not bear interest and
the Company received payment within forty-five days.
During the years ended February 28, 2007, 2006 and 2005, we were billed
$35,290, $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 $110,500 for
consulting services provided by Steven Katz, at the time a member of our Board
of Directors. During the year ended February 28, 2007, we were billed $183,500
for consulting services provided by Mr. Katz. These services, and the amount of
fees billed by Mr. Katz for each, are described below:
Service Fee
------------------------------------------------------------------- ---------
Assistance with audit of Biophan Europe GmbH $ 7,500
Assistance with acquisition of interest in Myotech LLC 32,500
Assistance with October 2006 convertible note and warrant financing 131,000
General management assistance 12,500
Pursuant to a policy adopted by resolution of our Board of Directors, all
transactions with affiliates must be approved by the disinterested members of
our Board of Directors, based on a determination that such transactions are on
terms no less favorable to us than would prevail in arms-length transactions
with unaffiliated parties under similar circumstances. All transactions with our
affiliates during the fiscal year ended February 28, 2007 were approved in
accordance with this policy.
71
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Our principal accountant is Goldstein Golub Kessler LLP ("the Firm"). Through
September 30, 2005, the Firm had a continuing relationship with American Express
Tax and Business Services Inc. ("TBS") from which it leased auditing staff who
were full time, permanent employees of TBS and through which its partners
provided non-audit services. Subsequent to September 30, 2005, this relationship
ceased and the Firm established a similar relationship with RSM McGladrey, Inc.
("RSM"). The Firm has no full time employees, and, therefore, none of the audit
services performed were provided by permanent, full-time employees of the Firm.
The Firm manages and supervises the audit and audit staff and is exclusively
responsible for the opinion rendered in connection with its examination. Other
services, which do not include financial information systems design and
implementation fees, have been provided by TBS or RSM.
1) Audit Fees
The aggregate fees billed and expected to be billed by Goldstein Golub Kessler
LLP for professional services rendered for the audit of the Company's annual
financial statements, for the reviews of the financial statements included in
the Company's quarterly reports on Form 10-Q and other services provided in
connection with statutory and regulatory filings during the last two fiscal
years ended February 28, 2007 and February 28, 2006 was $ 363,000 and $248,000,
respectively.
2) Audit-Related Fees
The aggregate fees billed by Goldstein Golub Kessler LLP to perform audit
related services primarily for review of securities registration documents, and
the amendments thereto, reviews of the SEC comments and other document reviews
during the last two fiscal years ended February 28, 2007 and February 28, 2006
was $44,600 and 51,300, respectively
3) Tax Fees
The Company did not engage its principal accountant to provide tax compliance,
tax advice and tax planning services during the last two fiscal years.
4) All Other Fees
The Company did not engage its principal accountant to render services to the
Company during the last two fiscal years, other than as reported above.
5) Pre-approval Policies and Procedures
In accordance with its charter, the Audit Committee is required to approve all
audit and non-audit services provided by the independent auditors and shall not
engage the independent auditors to perform the specific non-audit services
proscribed by law or regulation.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) 1. Financial Statements, Financial Statement Schedules and Exhibits
(1) Financial Statements - as listed in Item 8-Table of Contents
(2) Financial Statement Schedules - as listed in Item 8-Table of Contents
Note: All other schedules are omitted as the required information is not
applicable or the information is presented in the consolidated financial
statements or notes thereto.
72
(3) Pro Forma Financial Information
Not Applicable.
(4) Exhibits
-------------- -------------------------------------------------------------------------------- -------------------
Exhibit No Description Location
-------------- -------------------------------------------------------------------------------- -------------------
3.1 Articles of Incorporation (1)
-------------- -------------------------------------------------------------------------------- -------------------
3.2 Amendment to Articles of (2)
Incorporation
-------------- -------------------------------------------------------------------------------- -------------------
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 (5)
XI, LLC
-------------- -------------------------------------------------------------------------------- -------------------
4.2 Amendment No. 1, dated January 8, 2006, to Stock Purchase Agreement by and (6)
between Biophan and SBI Brightline XI, LLC
-------------- -------------------------------------------------------------------------------- -------------------
4.3 Line of Credit Agreement dated as of May 27, 2005 between Biophan and Biomed (7)
Solutions, LLC
-------------- -------------------------------------------------------------------------------- -------------------
4.4 First Amendment to Line of Credit Agreement between Biophan and Biomed (8)
Solutions, LLC
-------------- -------------------------------------------------------------------------------- -------------------
4.5 Convertible Promissory Note of Biophan in the face amount of $2,000,000 (9)
payable to the order of Biomed Solutions, LLC dated May 27, 2005
-------------- -------------------------------------------------------------------------------- -------------------
4.6 First Amendment to Convertible Promissory (10)
Note
-------------- -------------------------------------------------------------------------------- -------------------
4.7 Stock Purchase Warrant issued to Biomed Solutions, LLC dated May 27, (11)
2005
-------------- -------------------------------------------------------------------------------- -------------------
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 (13)
Biomed Solutions, LLC
-------------- -------------------------------------------------------------------------------- -------------------
4.10 Amendment No. 1, dated October 11, 2006, to Line of Credit Agreement by and (14)
between Biophan Technologies, Inc. and Biomed Solutions, LLC
-------------- -------------------------------------------------------------------------------- -------------------
4.11 Convertible Promissory Note of Biophan in the face amount of $5,000,000 (15)
payable to the order of Biomed Solutions, LLC dated January 24, 2006
-------------- -------------------------------------------------------------------------------- -------------------
4.12 Amended and Restated Convertible Promissory Note of Biophan Technologies, (16)
Inc., in the principal amount of $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 (17)
Stock issued to Biomed Solutions, LLC
-------------- -------------------------------------------------------------------------------- -------------------
4.14 Subordination and Standstill Agreement dated October 11, 2006, by and among (18)
Biophan Technologies, Inc., Biomed Solutions, LLC, and those Purchasers named
therein
-------------- -------------------------------------------------------------------------------- -------------------
4.15 Form of Senior Secured Convertible Notes due October 11, 2009 issued pursuant (19)
to the Securities Purchase 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 (20)
Purchase Agreement, dated 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 (21)
Agreement, dated October 11, 2006, 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 (22)
as of February 16, 2007 by and among Biophan Technologies, Inc. and the Note
Holders named therein.
-------------- -------------------------------------------------------------------------------- -------------------
4.19 Amended and Restated 2001 Stock Option (23)
Plan
-------------- -------------------------------------------------------------------------------- -------------------
4.20 2006 Incentive Stock (24)
Plan
-------------- -------------------------------------------------------------------------------- -------------------
10.1 Agreement dated as of February 24, 2005 among Biophan, aMRIs GmbH, Dr. Michael (25)
Friebe, Tomovation GmbH, 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 (26)
GmbH and Prof. Dr. Andreas Melzer
-------------- -------------------------------------------------------------------------------- -------------------
10.3 Termination of Stock Purchase Agreement between Biophan and SBI Brightline (27)
Consulting, LLC
-------------- -------------------------------------------------------------------------------- -------------------
73
-------------- -------------------------------------------------------------------------------- -------------------
Exhibit No Description Location
-------------- -------------------------------------------------------------------------------- -------------------
10.4 Investment Agreement dated June 30, 2005 between Biophan and Boston Scientific (28)
Scimed, Inc.
-------------- -------------------------------------------------------------------------------- -------------------
10.5 Securities Purchase Agreement, dated October 11, 2006, by and among Biophan (29)
Technologies, Inc. and those Purchasers named therein.
-------------- -------------------------------------------------------------------------------- -------------------
10.6 Security Agreement, dated as of October 11, 2006, by and among Biophan (30)
Technologies, Inc., the Purchasers 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 (31)
Technologies, Inc. and the Note Holders named
therein.
-------------- -------------------------------------------------------------------------------- -------------------
10.8 License Agreement between Biophan, Xingwu Wang and Nanoset, LLC dated January (32)
15, 2004
-------------- -------------------------------------------------------------------------------- -------------------
10.9 Development Agreement between Biophan and Greatbatch Enterprises, Inc. dated (33)
February 28, 2001
-------------- -------------------------------------------------------------------------------- -------------------
10.10 License Agreement between Biophan and Johns Hopkins (34)
University
-------------- -------------------------------------------------------------------------------- -------------------
10.11 AMP-Biophan License Agreement dated February 24, 2005 between Biophan and (35)
aMRIs Patent GmbH (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 (36)
Scimed, Inc.
-------------- -------------------------------------------------------------------------------- -------------------
10.13 Capital Pledge Agreement dated February 24, 2005 among Biophan, TomoVation (37)
GmbH, and Prof. Dr. Andreas Melzer
-------------- -------------------------------------------------------------------------------- -------------------
10.14 Securities Purchase Agreement between Biophan and Myotech, LLC, dated (38)
November 30, 2005
-------------- -------------------------------------------------------------------------------- -------------------
10.15 Letter Agreement, Amendment and Waiver of Certain Conditions to Closing, (39)
between Biophan and Myotech, LLC, dated December 21, 2005
-------------- -------------------------------------------------------------------------------- -------------------
10.16 Amendment No. 2 to Securities Purchase Agreement dated as of November 28, 2006 (40)
between Myotech LLC and Biophan
-------------- -------------------------------------------------------------------------------- -------------------
10.17 Letter Agreement dated August 19, 2002 between Biomed Solutions, LLC and (41)
Biophan
-------------- -------------------------------------------------------------------------------- -------------------
10.18 Payment Agreement dated June 3, 2004 between Biophan and TE Bio (42)
LLC
-------------- -------------------------------------------------------------------------------- -------------------
10.19 Joint Research Agreement between Nanolution, LLC and NaturalNano Inc. dated as (53)
of May 25, 2005, together with Non-Disclosure Agreement
-------------- -------------------------------------------------------------------------------- -------------------
10.20 Lease Agreement between Biophan and High Technology of Rochester, (43)
Inc.
-------------- -------------------------------------------------------------------------------- -------------------
10.21 Lease between Schoen Place LLC and Biophan Technologies, (44)
Inc.
-------------- -------------------------------------------------------------------------------- -------------------
10.22 Amendment No. 1 to Lease between Schoen Place LLC and Biophan Technologies, (45)
Inc.
-------------- -------------------------------------------------------------------------------- -------------------
10.23 Executive Employment Agreement between Biophan and Michael L. Weiner dated (46)
December 1, 2000
-------------- -------------------------------------------------------------------------------- -------------------
10.24 Executive Employment Agreement between Biophan and Jeffrey L. Helfer dated (47)
June 6, 2002
-------------- -------------------------------------------------------------------------------- -------------------
10.25 Executive Employment Agreement between Biophan and Stuart G. MacDonald dated (48)
June 6, 2002
-------------- -------------------------------------------------------------------------------- -------------------
10.26 Executive Employment Agreement between Biophan and John F. Lanzafame (49)
effective as of September 9, 2004
-------------- -------------------------------------------------------------------------------- -------------------
10.27 Executive Employment Agreement dated as of November 9, 2005 between Biophan (50)
and Darryl L. Canfield, together with Employee Confidential Information,
Invention and Non-Competition Agreement
-------------- -------------------------------------------------------------------------------- -------------------
10.28 Executive Employment Agreement dated as of January 1, 2006 between Biophan and (51)
Jeffrey L. Helfer
-------------- -------------------------------------------------------------------------------- -------------------
10.29 Employment Agreement dated February 24, 2005 among aMRIs GmbH, Dr. Michael (52)
Friebe and Biophan
-------------- -------------------------------------------------------------------------------- -------------------
14.1 Code of Ethics for Senior Financial Officers (54)
-------------- -------------------------------------------------------------------------------- -------------------
21.1 Subsidiaries
-------------- -------------------------------------------------------------------------------- -------------------
23.1 Consent of Goldstein Golub Kessler LLP, Independent Registered Public Filed herewith
Accounting Firm
-------------- -------------------------------------------------------------------------------- -------------------
31.1 Certification of C.E.O. pursuant to Rule Filed herewith
13a-14(a)
-------------- -------------------------------------------------------------------------------- -------------------
31.2 Certification of C.F.O. pursuant to Rule Filed herewith
13a-14(a)
-------------- -------------------------------------------------------------------------------- -------------------
32.1 Certification of C.E.O. pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350 Filed herewith
-------------- -------------------------------------------------------------------------------- -------------------
32.2 Certification of C.F.O. pursuant to Rule 13a-14(b) and 18 U.S.C. Section 1350 Filed herewith
-------------- -------------------------------------------------------------------------------- -------------------
74
(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.
75
(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) Incorporated by reference to Exhibit 10.1 to Registration Statement on
Form S-1 (File No. 333-138632) filed on November 13, 2006.
(54) Incorporated by reference to Exhibit 14.1 to the 2005 10-KSB.
76
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BIOPHAN TECHNOLOGIES, INC.
By: /s/ Michael L. Weiner
-----------------------------------
Name: Michael L. Weiner
Title: President, CEO and Director
Dated: May 4, 2007
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Michael L. Weiner President, CEO and Director May 4, 2007
------------------------ (Principal Executive Officer)
Michael L. Weiner
/s/ Darryl L. Canfield Vice President, Secretary, May 4, 2007
------------------------ Treasurer and CFO
Darryl L. Canfield (Principal Financial Officer
and Principal Accounting Officer)
/s/ Guenter H. Jaensch Chairman May 4, 2007
------------------------
Guenter H. Jaensch
/s/ Theodore A. Greenberg Director May 4, 2007
------------------------
Theodore A. Greenberg
/s/ Stan Yakatan Director May 4, 2007
------------------------
Stan Yakatan
/s/ Bonita L. Labosky Director May 4, 2007
------------------------
Bonita L. Labosky
77