United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
Amendment No. 2
X Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 1999
Commission File Number 0-26915
Lexon, Inc.
(Name of Small Business Issuer in its charter)
Oklahoma 73-1533326
------------------------------- ------------------------------
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
8908 South Yale Avenue, Suite 409
Tulsa, Oklahoma 74137-3545
(Address of principal executive offices and Zip Code)
(918) 492-4125
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No __
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
There were 6,802,013 shares of Common Stock, $0.001 par value, outstanding as of
September 30, 1999.
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
Lexon, Inc.
Balance Sheets
September 30, 1999 and December 31, 1998
September 30,
1999 December 31,
ASSETS (unaudited) 1998
---------------------------
Current assets
Cash .............................................. $ 30,318 $ 31,164
Other receivables ................................. 9,703 0
Prepaid consulting expenses ....................... 57,618 494,925
----------- -----------
Total current assets ........................... 97,639 526,089
----------- -----------
Other assets
Licensed technology, net .......................... 149,162 156,265
Sponsored research, net ........................... 116,719 233,437
----------- -----------
Total other assets .......................... 265,881 389,702
----------- -----------
TOTAL ASSETS ...................................... $ 363,520 $ 915,791
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities .......... $ 29,960 $ 25,127
Interest payable .................................. 1,900 16,739
Notes payable to officer and shareholder .......... 0 230,000
Notes payable to shareholder ...................... 100,000 0
Payable to North Shore University ................. 67,635 0
Payable to UTEK Corporation ....................... 132,000 0
----------- -----------
Total current liabilities ...................... 331,495 271,866
----------- -----------
Shareholders' equity
Preferred stock, $0.001 par value,
5,000,000 shares authorized; no shares
issued and outstanding at September 30, 1999 and
December 31, 1998, respectively ................ 0 0
Common stock, $0.001 par value,
45,000,000 shares authorized;
6,802,013 shares and 6,279,313 shares
issued and outstanding at September 30, 1999 and
December 31, 1998, respectively ................ 6,802 6,279
Paid in capital ................................... 3,182,016 1,590,812
Retained earnings ................................. (3,156,793) (953,166)
----------- -----------
Total shareholders' equity ..................... 32,025 643,925
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ........ $ 363,520 $ 915,791
----------- -----------
The accompanying notes are an integral part of these financial statements
2
Lexon, Inc.
Statements of Operations
For the three months and nine months ended September 30, 1999 and 1998
and for the period from Inception (December 17, 1997) to September 30, 1999
From inception
(December 16, Three months Three months Nine months Nine months
1997) through ended ended ended ended
September 30, September 30, September 30, September 30, September 30,
1999 1999 1998 1999 1998
(unaudited) (unaudited) (unaudited) (unaudited) (unaudited)
------------------------------------------------------------------------------------
Revenue $0 $0 $0 $0 $0
Expenses
Research and development 765,375 127,051 41,273 583,842 41,273
General and administrative 2,013,016 430,053 60,996 1,614,467 175,796
------------------------------------------------------------------------------------
Total operating expenses 2,778,391 557,104 102,269 2,198,309 217,069
------------------------------------------------------------------------------------
Operating loss (2,778,391) (557,104) (102,269) (2,198,309) (217,069)
Interest expense 378,402 1,900 6,977 5,318 6,977
------------------------------------------------------------------------------------
Net loss ($3,156,793) ($559,004) ($109,246) ($2,203,627) ($224,046)
------------------------------------------------------------------------------------
Weighted average shares outstanding 5,256,014 6,802,013 5,245,772 6,659,988 3,510,039
------------------------------------------------------------------------------------
Loss per share ($0.60) ($0.08) ($0.02) ($0.33) ($0.06)
------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements
Lexon, Inc.
Statement of Cash Flows
For the three months and nine months ended September 30, 1999 and 1998
and for the period from Inception (December 17, 1997) to September 30, 1999
From inception
(December 16, Nine months Nine months
1997) through ended ended
September 30, September 30, September 30,
1999 1999 1998
(unaudited) (unaudited) (unaudited)
-------------- -------------- --------------
Net loss ..................................................................... ($3,156,793) ($2,203,627) ($224,046)
Plus non-cash charges:
Amortization of license and sponsored research agreements ................. 206,370 123,822 41,273
Value of common stock options granted to non-employees for services ....... 1,244,103 1,046,133 0
Value of common stock options granted to non-employee lenders ............. 356,346 0
Value of services contributed by employees ................................ 431,478 210,000 165,000
Common stock issued for services .......................................... 209,750 209,750 0
Change in working capital accounts:
Increase in prepaid expenses .............................................. (8,125) (8,125) 0
Increase in other receivables ............................................. (9,703) (9,703) 0
Increase in accounts payable and accrued liabilities ...................... 29,960 4,833 13,615
Increase (decrease) in interest payable ................................... 1,900 (14,839) 6,977
Increase in payable to North Shore University ............................. 67,635 67,635 0
Increase (decrease) in interest payable ................................... 132,000 132,000 0
-------------- -------------- --------------
Total operating activities ............................................. (495,078) (442,122) 2,819
-------------- -------------- --------------
Financing activities
Loans from officer and shareholder ........................................... 230,000 0 230,000
Payment of loans from office and shareholder ................................. (230,000) (230,000) 0
Loans from shareholder ....................................................... 100,000 100,000 0
Sale of common stock for cash
To founders ............................................................... 5,000 0 5,000
To third-party investors .................................................. 1,012,145 643,487 250,410
Less: issue costs ........................................................ (120,499) (72,211) (16,144)
-------------- -------------- --------------
Total financing activities ............................................. 996,646 441,276 469,266
-------------- -------------- --------------
Investing activities
Purchase of exclusive licenses ............................................... (160,000) 0 (160,000)
Payment of sponsored research contract ....................................... (311,250) 0 (311,250)
-------------- -------------- --------------
Total investing activities ............................................. (471,250) 0 (471,250)
-------------- -------------- --------------
Change in cash ............................................................... $ 30,318 ($ 846) $ 835
Cash at beginning of period .................................................. $ 0 $ 31,164 $ 0
-------------- -------------- --------------
Cash at end of period ........................................................ $ 30,318 $ 30,318 $ 835
-------------- -------------- --------------
Supplemental disclosure of cash flow information:
Cash paid for interest and taxes during the period ........................ $ 20,156 $ 20,156 $ 0
-------------- -------------- --------------
Non-cash financing and investing activities:
Common stock issued in Gentest Merger ..................................... $ 1,000 $ 0 $ 1,000
-------------- -------------- --------------
The accompanying notes are an integral part of these financial statements
Lexon, Inc.
(A Development Stage Company)
Notes to Financial Statements
September 30, 1999
Note 1- Organization and Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
statements and do not include all information and footnotes required by
generally accepted accounting principles for complete financial statements.
However, the information furnished reflects all adjustments, consisting only of
normal recurring adjustments which are, in the opinion of management, necessary
in order to make the financial statements not misleading.
Organization and Nature of Operations
Lexon, Inc. ("Lexon" or "the Company") is a development stage
corporation that own the exclusive worldwide license to develop, manufacture,
obtain FDA approval for, and market a cancer screening test kit for detecting
the ebaf protein, which allows for early, non-invasive screening for colon
cancer and certain types of ovarian and testicular cancers.
Development Stage Operations
The Company was incorporated on December 16, 1997 under the laws of the
state of Oklahoma. Since inception, the Company's primary focus has been raising
capital and developing the Ebaf blood screening process.
Cash and Cash Equivalents
The Company considers highly liquid investments with maturities of
three months or less to be cash equivalents.
Income Taxes
The Company uses the liability method of accounting for income taxes as
set forth in Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes." Under the liability method, deferred taxes are determined
based on the differences between the financial statements and tax bases of
assets and liabilities at enacted tax rates in effect in the years in which the
differences are expected to reverse.
Compensation of Officers and Employees
The Company's officers and other employees serve without pay or other
non-equity compensation. The fair value of their services, however, is estimated
by management and is recognized as an expense with an offsetting credit to paid
in capital. For the nine months ended September 30, 1999 and 1998 and for the
period from inception (December 16, 1997) to September 30, 1999 the Company
recorded $210,000, $165,000 and $361,479, respectively, as a capital
contribution by the officers and other employees.
Fair Market Value of Stock Options and Stock Issued for Services
The fair market value of stock options granted or stock issued as
payment for services is equal to the closing price of the Company's common stock
on the date options are granted or on the date agreements for services are
signed. On November 4, 1998, the Company's common stock began trading on the OTC
Bulletin Board under the symbol "LXXN". Prior to trading, the fair market value
of stock options granted or stock issued as payment for services was determined
by the Board of Directors.
5
Stock-based Compensation
The Company accounts for stock-based employee compensation arrangements
in accordance with provisions of Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees," and complies with the disclosure
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." Under APB
No. 25, compensation expense is based on the difference, if any, on the date of
the grant, between the fair value of the Company's stock and the exercise price.
The Company accounts for stock issued to non-employees in accordance with the
provisions of SFAS No. 123 and the Emerging Issues Task Force Consensus in Issue
No. 96-18.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Fiscal Year End
The Company's fiscal year ends on December 31.
Research and Development ("R&D") Costs
The Company is amortizing the $311,250 paid pursuant to the Sponsored
Research Agreement over two years, which is the life of the service agreement.
Any other costs related to developing the Ebaf Assay are expensed as incurred.
Compensation cost associated with stock options granted to Dr. Tabibzadeh, the
inventor of the Ebaf Assay, is recorded by the Company as R&D expense.
New Accounting Standards
The Company adopted SFAS No. 130, "Reporting Comprehensive Income" and
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" during 1998. The Company has no comprehensive income items for the
year ended December 31, 1998 and for the nine months ended September 30, 1999.
Therefore, net loss equals comprehensive income. The Company operates in only
one business segment. The Company will adopt SFAS No. 133, "Accounting for
Derivative Investments and Hedging Activities" during 1999. Currently, the
Company does not engage in hedging activities or transactions involving
derivatives.
Note 2- Gentest Merger
On May 11, 1998, the Company entered into an Agreement and Plan of
Merger with Gentest, Inc., a Florida corporation, whereby the Company agreed to
issue 1,000,000 shares of its common stock for all the issued and outstanding
common stock of Gentest, Inc. Gentest was formed in March, 1998 for the purpose
of securing the License Agreement and Sponsored Research Agreement related to
the Ebaf Assay. Under the terms of the Agreement and Plan of Merger, the Company
issued to UTEK Corporation ("UTEK"), the sole shareholder of Gentest, 1,000,000
shares of common stock of Lexon. Gentest ceased to exist by reason of the
merger, and the assets and liabilities of Gentest, including those rights and
obligations associated with the exclusive License Agreement and the Sponsored
Research Agreement, became assets and liabilities of Lexon. On July 8, 1998, the
Company paid $105,000 for the exclusive license, $311,250 to develop the test
kit and $55,000 for services rendered in connection with securing the
agreements. The Gentest merger was accounted for as a purchase. The purchase
price of $1,000 was based on the number of shares issued at par value of $0.001
per share.
Par value per share was used to value the purchase because all previous
share issuances, consisting solely of issuances to founders, were based on par
value, and there was no public market for the Company's stock. Gentest had only
recently been formed for the purpose of entering into the License and Sponsored
Research Agreements. The value assigned to the License and Sponsored Research
Agreements and the related obligations, were therefore based on Gentest's cost.
Since Gentest had no prior operations, no pro forma financial information is
presented.
The Gentest assets acquired and liabilities assumed are summarized as
follows:
License Agreements $161,000
Sponsored Research Agreement 311,250
-----------------
Total Cost of Assets Acquired 472,250
Obligations Assumed (471,250)
-----------------
Purchase Cost $1,000
-----------------
6
Note 3- Exclusive License
On July 8, 1998, the Company paid $100,000 to the University of South
Florida Research Foundation ("USFRF") and $5,000 to North Shore University
Hospital Research Foundation ("North Shore") for the exclusive worldwide license
to develop and market the cancer screening test kits. In addition, the Company
paid $55,000 to UTEK for services rendered in connection with securing the
License agreements. The exclusive license is being amortized over 17 years using
the straight-line method. As of September 30, 1999 and December 31, 1998,
accumulated amortization was $11,838 and $4,735, respectively.
Note 4- Sponsored Research Contract
On July 8, 1998, the Company paid $311,250 to North Shore under the
terms of a Sponsored Research Agreement to develop the cancer screening test
kits. The contract specifies a 24-month development period with costs not to
exceed $311,250. The Sponsored Research Agreement is amortized over 2 years
using the straight-line method, with amortization costs recorded as R&D
expenses. As of September 30, 1999 and December 31, 1998, accumulated
amortization was $194,531 and $77,813, respectively.
Note 5-Notes Payable
On July 1, 1998, the Company borrowed $50,000 from an officer and
$180,000 from a shareholder. The Company executed notes payable which were due
December 31, 1998 at an interest rate of 12% per year, which increased to 14%
per year after the due date. As of September 30, 1999, the notes payable and
accrued interest were paid in full.
In connection with the loans, the Board granted 50,000 options to the
officer and 180,000 options to the shareholder. Because no trading market for
the common stock was yet established, the option exercise price of $1.20 per
share was determined by the Board based on the most recent offering price of
$2.00 per share less a 40% discount. The discount was determined to be
appropriate as stock issued when these options are exercised may be restricted.
The Company recorded no compensation cost for the options granted to
the officer. For the year ended December 31, 1998, the Company recorded $356,346
as interest expense for the options granted to the shareholder based on an
estimated fair value of $1.98 per share. The fair value of $1.98 per share was
estimated on the date of grant using the Black-Scholes option pricing model with
the following assumptions: exercise price of $1.20 per share, stock price of
$2.00 per share, risk-free interest rate of 6.0%, expected dividend yield of
0.0; expected life of ten years; and estimated volatility of 151%.
On August 4, 1999, the Company borrowed $100,000 from a shareholder.
The note accrues interest at 12% per year and is an unsecured obligation of the
Company.
Note 6- Commitments and Contingencies
Future Royalty Obligations Under Exclusive License Agreement
In connection with the exclusive license agreement, the Company agreed
to pay to USFRF a royalty equal to the greater of (a) five percent (5%) of
revenue from the sale of products based on the concept for the diagnosis of
selected adenocarcinomas and any additions, extensions and improvements thereto
or as a minimum (b) zero (0) dollars for the first twenty four (24) months;
$75,000 at the end of year three (3); $100,000 at the end of year four (4);
$125,000 at the end of year five (5); $150,000 at the end of year six (6) and
for each successive year thereafter during the term of the exclusive license
agreement. The royalty obligation will expire after the longer of twenty (20)
years or the expiration of the last to expire patent that covers the licensed
intellectual property. The Company also agreed to pay to North Shore a royalty
equal to one-half percent (0.5%) of revenue from the sale of such products and
ten percent (10%) of any consideration received by the Company from granting
sublicenses. No minimum royalty payments are required under the License
Agreement with North Shore.
7
Future Obligations to North Shore University
On March 8, 1999, the Company agreed to fund an additional $81,162 to
North Shore in six equal installments of $13,257 each, payable on or before
October 1, 1999, December 1, 1999, February 1, 2000, April 1, 2000, June 1, 2000
and August 1, 2000. On September 30, 1999, the Company paid the first
installment of $13,257.
Statutory Rights of the National Institutes of Health ("NIH")
The Patent & Trademark Act (Public Law 96-517), also known as the
Bayh-Dole Act, created a uniform patent policy among Federal agencies that fund
research. Bayh-Dole enables small businesses and non-profit organizations,
including universities, to retain title to materials and products they invent
with Federal funding. In return, the U.S. government retains a nonexclusive
right to make or use the invention for government purposes. Dr. Tabibzadeh's
research was funded in part with grants from the National Institutes of Health.
If the U.S. government decides to make or use Dr. Tabibzadeh's invention for
government purposes, then it would not be obligated to pay license fees or
royalties. In addition, the U.S. government is protected from lawsuits and
infringement claims.
Foreign Patent Protection
The U.S. patent covering the Ebaf Assay does not extend to foreign
countries, and the Company does not presently have any foreign patent protection
for its product.
Leases
The Company's executive office is leased from a third-party under the
terms of a lease agreement that expires March 31, 2002. The office is shared
with other companies controlled by the officers and directors of the Company.
The minimum annual lease payments pursuant to the Agreement and the Company's
estimated share are scheduled as follows:
Minimum Company's
Annual Estimated
Period Lease Payments Share
------------------------------------ --------------- ------------
For the year ended December 31, 1999 $40,265 $13,422
For the year ended December 31, 2000 $44,594 $14,865
For the year ended December 31, 2001 $45,587 $15,196
For the period ended March 31, 2002 $11,462 $3,821
Note 7- Common Stock and Paid in Capital
During the nine months ended September 30, 1999, the following common
stock transactions occurred:
1. The Company sold 385,700 shares of common stock to third-party
investors for $557,549 in cash.
2. The Company issued a total of 82,000 shares of common stock
for services rendered by outside consultants. The shares were
valued based on the closing price of the Company's common stock on
the date the services were rendered or agreements were signed. Of
the shares issued, 80,000 were issued at $2.50 per share to a
consultant to develop and market an Internet web site and to
prepare and distribute via e-mail a detailed profile report on the
Company. The remaining 2,000 shares were issued at $4.875 per
share for legal services. The Company recorded $200,000 and
$9,750, respectively, as G&A expense.
3. The Company issued 55,000 shares of common stock to an
employee who exercised stock options at $1.5625 per share. The
Company received $85,938 in cash when the options were exercised.
The exercise price was equal to the closing price of the Company's
common stock on the date the options were granted.
Lexon is authorized to issue 45,000,000 Shares of Common Stock, par
value $0.001 per share, of which 6,802,013 shares were outstanding as of
September 30, 1999. Lexon is also authorized to issue 5,000,000 shares of
Preferred Stock, par value $0.001 per share, of which there are no shares
presently outstanding. There is no present intent to issue any Preferred Stock.
8
Voting Rights. Holders of shares of Common Stock are entitled to one
vote per share on all matters submitted to a vote of the shareholders. Shares of
Common Stock do not have cumulative voting rights, which means that the holders
of a majority of the shareholder votes eligible to vote and voting for the
election of the Board of Directors can elect all members of the Board of
Directors. Holders of a majority of the issued and outstanding shares of Common
Stock may take action by written consent without a meeting.
Dividend Rights. Holders of record of shares of Common Stock are
entitled to receive dividends when and if declared by the Board of Directors. To
date, Lexon has not paid cash dividends on its Common Stock. Holders of Common
Stock are entitled to receive such dividends as may be declared and paid from
time to time by the Board of Directors out of funds legally available therefor.
Lexon intends to retain any earnings for the operation and expansion of its
business and does not anticipate paying cash dividends in the foreseeable
future. Any future determination as to the payment of cash dividends will depend
upon future earnings, results of operations, capital requirements, Lexon's
financial condition and such other factors as the Board of Directors may
consider.
Liquidation Rights. Upon any liquidation, dissolution or winding up of
Lexon, holders of shares of Common Stock are entitled to receive pro rata all of
the assets of Lexon available for distribution to shareholders after liabilities
are paid and distributions are made to the holders of Lexon's Preferred Stock.
Preemptive Rights. Holders of Common Stock do not have any preemptive
rights to subscribe for or to purchase any stock, obligations or other
securities of Lexon.
Note 8- Stock Options
On August 15, 1998, the Board of Directors and shareholders approved
the adoption of the Lexon Option Plan, pursuant to which 3,000,000 shares of
Common Stock were reserved. Stock options granted under the Plan expire ten
years from the date of grant.
On October 15, 1998, the Company granted 300,000 options to a
consultant at an exercise price of $1.20 per share. In exchange for the options,
the consultant will provide the Company financial consulting services for a one
year period beginning October 29, 1998. The Company recorded $593,910 as a
prepaid consulting expense and an increase to paid in capital for the options
granted to the consultant based on an estimated fair value of $1.98 per share.
The Company is amortizing the expense over a 12 month period. For the nine
months ended September 30, 1999, the Company recorded $445,432 as G&A expense
for the consultant's services.
On March 4, 1999, the Company granted 1,692,500 options to purchase
common stock at an exercise price of $1.5625 per share to certain officers,
directors and employees of the Company. The exercise price was equal to the
closing price of the Company's common stock on the date of grant. No
compensation cost was recorded.
On March 4, 1999, the Company granted 250,000 options to purchase
common stock at an exercise price of $1.5625 per share to Dr. Tabibzadeh,
inventor of the Ebaf Assay screening process. The exercise price was equal to
the closing price of the common stock on the date of grant. The options were
valued at $1.49 per share based on the Black-Scholes option pricing model and
the Company recorded $372,500 as R&D expense. The following assumptions for the
Black-Scholes option pricing model were used: exercise price of $1.5625, market
price of $1.5265, risk-free interest rate of 5.87%, expected dividend yield of
0.0; expected life of ten years; and estimated volatility of 117%
During 1998, the Company entered into an agreement with an investor
relations firm whereby the Board granted them an option to purchase up to
1,000,000 shares of common stock over a two year period. Amounts and exercise
prices are as follows:
Exercise
Number of Price
Vesting Period Options Per Share
-------------- --------- ---------
January 1, 1999 to March 31, 1999...... 45,000 $1.20
April 1, 1999 to June 30, 1999......... 70,000 $1.50
July 1, 1999 to September 30, 1999..... 95,000 $1.75
October 1, 1999 to December 31, 1999... 120,000 $2.00
January 1, 2000 to March 31, 2000...... 135,000 $2.25
April 1, 2000 to June 30, 2000......... 160,000 $2.50
July 1, 2000 to September 30, 2000..... 175,000 $2.75
October 1, 2000 to December 31, 2000... 200,000 $3.00
Options are eligible to vest on a quarterly basis, subject to the
achievement of certain market conditions surrounding the Company's stock. If the
vesting conditions are not met, the options eligible for vesting are forfeited.
Compensation cost will be recorded for the options when and if they become
vested. Only vested options are exercisable. All vested options are exercisable
until October 27, 2008.
During the nine months ended September 30, 1999, 45,000 options at $1.20
per share and 95,000 options at $1.75 were forfeited, and 70,000 options
exercisable at $1.50 per share became vested on June 30, 1999. To determine
compensation cost, the vested options were valued at $3.26 per share based on
the Black-Scholes option pricing model and the Company recorded $228,200 as G&A
expense. The following assumptions for the Black-Scholes option pricing model
were used: exercise price of $1.50 per share, market price on June 30, 1999
(vesting date) of $3.375, risk-free interest rate of 5.87%, expected dividend
yield of 0.0; expected life of ten years; and estimated volatility of 117%.
SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123")
provides an alternative method of determining compensation cost for employee
stock options, which alternative method may be adopted at the
9
option of the Company. Had compensation cost for the 1,692,500 options granted
to employees on March 4, 1999 been determined consistent with SFAS 123, the
Company's net loss and EPS for the period from inception (December 16, 1997)
through September 30, 1999 and for the nine months ended September 30, 1999
would have been reduced to the following pro forma amounts:
From inception
(December 16, For the nine
1997) through months ended
September 30, September 30,
1999 1999
------------------ -----------------
Net income (loss):
As reported ($3,156,793) $(2,203,627)
Pro forma $(4,720,325) $(3,767,159)
Basic and diluted EPS:
As reported $(0.60) $(0.33)
Pro forma $(0.90) $(0.57)
A summary of the status of the Company's stock options at September
30, 1999, and changes during the period then ended is presented below:
Weighted
Average
Period Shares Exercise Price
-------------------------------------- ------------- ----------------
Employees:
Outstanding, beginning of period 50,000 $1.2000
Granted 1,692,500 $1.5625
Exercised (55,000) $1.5625
Canceled --- ---
------------- ----------------
Outstanding, September 30, 1999 1,687,500 $1.5518
------------- ----------------
Exercisable, September 30, 1999 1,687,500 $1.5518
------------- ----------------
Weighted average fair value of
options granted $1.49
----------------
Non-Employees:
Outstanding, beginning of period 1,530,000 $1.95
Granted 250,000 $1.5625
Exercised --- ---
Canceled or Forfeited (140,000) $1.20
--------------- ----------------
Outstanding, September 30, 1999 1,640,000 $1.9248
--------------- ----------------
Exercisable, September 30, 1999 850,000 $1.3313
--------------- ----------------
Weighted average fair value of
options granted $1.49
----------------
The following table summarizes information about fixed stock options
outstanding at September 30, 1999:
Options outstanding Options exercisable
------------------------------------------------------ -----------------------------------
Number Weighted Number
outstanding at average Weighted exercisable at Weighted
Range of exercise September 30, remaining average September 30, average
prices 1999 contractual life exercise price 1999 exercise price
- ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
Employees:
$1.20-$1.5625 1,687,500 9.67 years $1.5518 1,687,500 $1.5518
----------------- ----------------- ----------------- ----------------- -----------------
Non-Employees:
$1.20-$1.5625 1,640,000 9.36 years $1.9248 850,000 $1.3313
----------------- ----------------- ----------------- ----------------- -----------------
10
Note 9- Income Taxes
The components of deferred income tax are as follows:
Nine Nine
Inception months months
to ended ended
Sept 30, Sept 30, Sept 30,
1999 1999 1998
---------- --------- ---------
Net operating loss $311,000 $251,000 $20,000
Stock-based compensation 544,000 356,000 0
Valuation allowance (855,000) (607,000) (20,000)
---------- --------- ---------
Net deferred tax asset $ 0 $ 0 $ 0
---------- --------- ---------
From inception to September 30, 1999 the Company had a net operating tax
loss of approximately $3,167,000, which expires 2014, and temporary differences
related to stock-based compensation of $1,600,000. A valuation allowance fully
offsets the benefit of the net operating loss, since the Company does not meet
the "more probable than not" criteria of FASB 109.
Note 10-Earnings per Share
Basic and diluted EPS for the three months and nine months ended
September 30, 1999 and 1998 and for the period of Inception (December 17, 1997)
to September 30, 1999 were computed as follows:
Inception
(December 17, Three months Three months Nine months Nine months
1997) to ended September ended September ended ended September
September 30, 30, 1999 30, 1998 September 30, 30, 1998
1999 1999
---------------- ----------------- ----------------- ---------------- -----------------
Net income (loss)
applicable to common
stockholders $(3,156,793) $(559,004) $(109,246) $(2,203,627) $(224,046)
Weighted average shares
outstanding 5,256,014 6,802,013 5,245,772 6,659,988 3,510,039
---------------- ----------------- ----------------- ---------------- -----------------
Basic and Diluted EPS $(0.60) $(0.08) $(0.02) $(0.33) $(0.06)
---------------- ----------------- ----------------- ---------------- -----------------
Weighted average shares outstanding were calculated as follows:
Inception
(December 17, Three months Three months Nine months Nine months
1997) to ended ended ended ended
September 30, September 30, September 30, September 30, September 30,
1999 1999 1998 1999 1998
---------------- ----------------- ----------------- ---------------- -----------------
Common stock outstanding
6,802,013 6,802,013 5,245,772 6,802,013 5,245,772
Effect of using weighted
average common and common
equivalent shares
outstanding
(1,545,999) 0 0 (142,025) (1,735,733)
---------------- ----------------- ----------------- ---------------- -----------------
Weighted average shares 5,256,014 6,802,013 5,245,772 6,659,988 3,510,039
outstanding
---------------- ----------------- ----------------- ---------------- -----------------
All options outstanding at September 30, 1999 were not included
in the EPS calculation as their effect was anti-dilutive.
Note 11- Change from Previously Issued Financial Statements
The Company issued financial statements as of the same date and periods
included in these financial statements in its Form 10-QSB for the period ended
September 30, 1999, filed November 15, 1999. The accompanying financial
statements have been adjusted from those originally filed as a result of
additional expenses recorded in 1997 and 1998. The adjustments are as follows:
September 30, December 31,
1999 1998
------------- ------------
Prepaid Consulting Expense as reported in
Form 10-QSB filed November 15, 1999.......... $38,125 $300,000
Record additional 1998 compensation cost
for stock options granted to non-employees
based on change to stock price from $1.20
to $2.00 per share in Black-Scholes
calculation.................................. 194,925 194,925
Expense additional compensation cost
recorded above............................... (175,432) 0
------------- ------------
Prepaid Consulting Expense as reported in
Form 10-QSB Amendment No. 1 filed
December 13, 1999............................ $57,618 $494,925
============= ============
Paid in Capital as reported in
Form 10-QSB filed November 15, 1999.......... $2,768,775 $1,177,571
Accrue additional 1998 compensation cost
for stock options granted to non-employees
based on change to stock price from $1.20 to
$2.00 per share in Black-Scholes calculation:
Prepaid expense (Consultant options)..... 194,925 194,925
R&D expense (Inventor options)........... 38,985 38,985
G&A expense (Consultant options)......... 38,985 38,985
Interest expense (Shareholder loan
options)................................. 140,346 140,346
------------- ------------
Paid in Capital as reported in Form 10-QSB
Amendment No. 1 filed December 13, 1999...... $3,182,016 $1,590,812
============= ============
From
Inception
(12/16/97) Nine Months Nine Months
through Ended Ended
September 30, September 30, September 30,
1999 1999 1998
------------ ------------ ------------
Net loss as reported in Form 10-QSB
filed November 15, 1999............. $(2,763,045) $(2,028,195) $(224,046)
Accrue additional 1998 compensation
cost for stock options granted to
non-employees based on change to stock
price from $1.20 to $2.00 per share
in Black-Scholes calculation:
R&D expense...................... 38,985 0 0
G&A expense...................... 38,985 0 0
G&A expense (Prepaid)............ 175,432 175,432 0
Interest expense................. 140,346 0 0
------------ ------------ ------------
Paid in Capital as reported in
Form 10-QSB Amendment No. 1 filed
December 13, 1999................... $(3,156,793) (1,644,623) (224,046)
============ ============ ============
Note 12- Related Party Transactions
On August 4, 1999, the Company entered into an Agreement with UTEK
CORPORATION ("UTEK"), whereby UTEK will provide technology merchant consulting
services to the Company. Such services include identifying, evaluating and
recommending potential technology acquisitions that are synergistic with Lexon's
existing cancer diagnostic testing technologies. UTEK owns 1,000,000 shares (or
14.7% of the outstanding shares) of Lexon Common Stock.
The $132,000 consulting fee is payable in three equal installments of
$44,000 each, due on April 1, 2000, September 1, 2000 and December 1, 2000. If
Lexon is unable to pay this fee in cash, then Lexon may issue shares of its
restricted common stock to UTEK equal to 200% of the amount owed divided by the
price of the shares on the date the payment is due.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements included in this report which are not historical facts
are forward looking statements, including the information provided with respect
to future business opportunities, expected financing sources and related
matters. These forward looking statements are based on current expectations,
estimates, assumptions and beliefs of management, and words such as "expects",
"anticipates", "intends", "believes", "estimates", and similar expressions are
intended to identify such forward looking statements. Since this information is
based on current expectations that involve risks and uncertainties, actual
results could differ materially from those expressed in the forward looking
statements.
(a) Plan of Operation
1. Plan of Operation Over the Next Twelve Months
Lexon plans to continue to develop and improve the Ebaf Assay, to commence
and complete standardization testing, to complete field testing and data
gathering for its FDA 510(k) application. It is anticipated that a prototype
test will be completed by the first quarter of 2000. Subsequent thereto, the
Company expects to begin collecting data from field tests and anticipates
submitting its FDA pre-clinical application in 2000.
Lexon is seeking to consummate a business combination by way of tax-free
merger, exchange of stock, sale of assets or other business combination with a
pharmaceutical company or manufacturing and distribution company with existing
manufacturing, quality control, marketing, distribution and regulatory
compliance capabilities in place. Alternatively, but simultaneously, Lexon is
seeking strategic alliances with pharmaceutical and other companies willing to
provide Lexon with manufacturing, marketing and distribution capacities. Lexon
has no such agreements at this time. There is no assurance that Lexon will be
successful in making acceptable arrangements for a business combination or
strategic alliances.
(i) Cash Requirements
Management does not believe that Lexon can satisfy its current cash
needs out of available cash and will have to engage in a sale of Lexon's
securities during the next three months. Until such time as the Company
completes a sale of its securities, the officers, directors and employees
may loan the Company funds to cover its operating expenses, however, there
is no assurance that such loans will be made. Lexon intends to engage in an
offering of its common stock to fund the costs associated with required
field tests, file and process applications for FDA approval, identify
manufacturers to mass produce the test kits, and identify and consummate
strategic business alliances. There is no assurance that any additional
capital needed will be available to Lexon on acceptable terms when needed,
if at all. Any additional capital may involve substantial dilution to the
interests of Lexon's then existing stockholders.
(ii) Product Development and Research Plan for the Next Twelve Months
As of September 30, 1999, Lexon has paid North Shore $335,027 and
anticipates spending another $67,635 over the next twelve months to
complete the Ebaf Assay development. The development of the Ebaf Assay for
the ELISA platform requires that both a polyclonal and a monoclonal
antibody to the Ebaf protein be produced. These antibodies must be specific
for Ebaf and must be tested extensively to make sure that they do not react
with any other similar proteins. Dr. Tabibzadeh has identified an adequate
polyclonal antibody for use in the ELISA test. This antibody has been
tested in a comprehensive fashion and will be used as the carrier for the
enzyme ligand in the ELISA test. Dr. Tabibzadeh is currently analyzing
monoclonal antibodies to find the ideal candidate for use in the ELISA
test. The ideal candidate for the monoclonal selection will be a monoclonal
antibody which is highly specific for Ebaf and does not react with any
other proteins. Once the monoclonal antibody is identified and
characterized, a small number of prototype ELISA test kits will be made.
These test kits will be used to collect data for submission of an FDA
application.
(iii) Expected Purchase or Sale of Plant and Significant Equipment
None.
12
(iv) Expected Significant changes in number of employees.
None.
PART II OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
None
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5 OTHER INFORMATION
On August 5, 1999, the Company entered into an Agreement and Plan of Merger
("Merger") with Cancer Diagnostics, Inc. ("CDI"), attached hereto as Exhibit
2.1. The terms of the Merger are for Lexon to issue 500,000 shares of its common
stock in exchange for all of the issued and outstanding common stock of CDI.
UTEK CORPORATION ("UTEK") is the sole shareholder of CDI. UTEK presently owns
1,000,000 shares (or 14.7% of the outstanding shares)of common stock of Lexon,
Inc. The Merger is subject to various conditions, some of which have not yet
occurred, but all of which are expected to be fulfilled by the Closing, which is
expected in early January 2000. There is no assurance that the Merger will
close.
If the Merger is completed, all the assets and liabilities of CDI will
become assets and liabilities of Lexon. The CDI assets consist of an exclusive
worldwide license to a patent-pending blood test for lung cancer, known as the
Telomerase AssayTM, which was developed at the University of Maryland, Baltimore
and a two-year sponsored research agreement to fund the development and
commercialization of the Telomerase Assay for the ELISA format at the University
of Maryland, Baltimore. The liabilities consist of $124,537 payable in cash, on
or before January 1, 2001, to the University of Maryland, Baltimore under the
terms of the sponsored research agreement.
If the Merger is completed, the Company will be obligated to pay a royalty
of 4% of Net Sales of products sold by Lexon under the terms of the exclusive
license agreement ("Agreement"). The Agreement provides for minimum annual
royalties for the life of the Agreement, which coincides with the life of the
last to expire patent covering the licensed technology. Such minimum annual
royalties range from $2,500 per year beginning in year 3 of the Agreement to a
maximum of $4,000 beginning in year 7 and continuing each year thereafter for
the life of the Agreement. In addition, the Agreement provides for royalties of
2% of Net Sales of products sold by sublicensees and 50% of all consideration
received by the Company for up-front, milestone or other payments from
sublicensees.
On August 4, 1999, the Company entered into an Agreement with UTEK
CORPORATION ("UTEK"), whereby UTEK will provide technology merchant consulting
services to the Company. Such services include identifying, evaluating and
recommending potential technology acquisitions that are synergistic with Lexon's
existing cancer diagnostic testing technologies. UTEK owns 1,000,000 shares (or
14.7% of the outstanding shares) of Lexon Common Stock.
The $132,000 consulting fee is payable in three equal installments of
$44,000 each, due on April 1, 2000, September 1, 2000 and December 1, 2000. If
Lexon is unable to pay this fee in cash, then Lexon may issue shares of its
restricted common stock to UTEK equal to 200% of the amount owed divided by the
price of the shares on the date the payment is due.
13
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
Exhibit
2.1 Agreement and Plan of Merger between Registrant and
Cancer Diagnostics, Inc. dated August 5, 1999
10.1 Consulting Agreement between Registrant and UTEK CORPORATION
effective August 4, 1999
27.0 Financial Data Schedule (for electronic filers only)
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
LEXON, INC.
/s/ GIFFORD M. MABIE
----------------------------
President
Date: January 4, 2000
14