UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
X QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from ___________ to____________
COMMISSION FILE NUMBER 0-26915
LEXON, INC.
(Name of Small Business Issuer in its charter)
OKLAHOMA 73-1533326
- --------------------------------------- ----------------------------------------
(State or other jurisdiction of (IRS 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 7,252,735 shares of Common
Stock, $0.001 par value, outstanding as of March 31, 2000.
1
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
Balance Sheet at March 31, 2000 (Unaudited) and December 31, 1999............................ 3
Statement of Operations for the period from inception (December 16, 1997) to March 31, 2000
and for the three months ended March 31, 2000 and 1999 (Unaudited)........................... 4
Statement of Cash Flows for the period from inception (December 16, 1997) to March 31, 2000
(Unaudited) and for the three months ended March 31, 2000 and 1999 (Unaudited)............... 5
Notes to Financial Statements (Unaudited).................................................... 6
2
LEXON, INC.
(A Development Stage Company)
BALANCE SHEETS
March 31, 2000 (Unaudited) and December 31, 1999
March 31, 2000 December 31, 1999
ASSETS (Unaudited)
-------------- -----------------
Current assets
Cash $89,656 $10,041
Due from related parties 8,464 9,703
Prepaid consulting expenses 17,031 4,062
-------------- -----------------
Total current assets 115,151 23,806
-------------- -----------------
Other assets
Licensed technology, net 218,254 146,794
Sponsored research, net 257,182 77,813
-------------- -----------------
Total other assets 475,436 224,607
-------------- -----------------
TOTAL ASSETS $590,587 $248,413
============== =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities $49,783 $37,214
Interest payable 1,310 4,900
Payable to North Shore University 27,054 54,108
Payable to University of Maryland 124,537 -
Related party payables 218,250 251,627
-------------- -----------------
Total current liabilities 420,934 347,849
-------------- -----------------
Shareholders' equity
Preferred stock, $0.001 par value,
5,000,000 shares authorized; no shares
issued and outstanding at March 31, 2000 and
December 31, 1999, respectively - -
Common stock, $0.001 par value,
45,000,000 shares authorized;
7,252,735 shares and 6,809,513 shares
issued and outstanding at March 31, 2000 and
December 31, 1999, respectively 7,253 6,810
Paid in capital 3,827,428 3,249,558
Deficit accumulated during the development stage (3,665,028) (3,355,804)
-------------- -----------------
169,653 (99,436)
-------------- -----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $590,587 $248,413
============== =================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
3
LEXON, INC.
(A Development Stage Company)
STATEMENT OF OPERATIONS
For the period from inception (December 16,
1997) to March 31, 2000 and for the three
months ended March 31, 2000 and 1999
(Unaudited)
From inception
(December 16, Three Months Three Months
1997)through Ended Ended
March 31, 2000 March 31, 2000 March 31, 1999
-------------- -------------- --------------
Revenue $ - $ - $ -
Expenses
Research and development 884,159 76,504 413,774
General and administrative 2,528,613 361,866 432,080
-------------- -------------- --------------
Total operating expenses 3,412,772 438,370 845,854
-------------- -------------- --------------
Operating loss (3,412,772) (438,370) (845,854)
Interest expense 384,256 2,854 3,418
-------------- -------------- --------------
Net loss $ (3,797,028) $ (441,224) $ (849,272)
Weighted average shares outstanding 5,627,400 6,853,098 6,366,974
-------------- -------------- --------------
Loss per share $ (0.67) $ (0.06) $ (0.13)
-------------- -------------- --------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
4
LEXON, INC.
(A Development Stage Company)
STATEMENT OF CASH FLOWS
For the period from inception (December 16,
1997) to March 31, 2000 and for the three
months ended March 31, 2000 and 1999
(Unaudited)
From inception
(December 16, Three Months Three Months
1997) through Ended Ended
March 31, 2000 March 31, 2000 March 31, 1999
-------------- -------------- --------------
Operating activities
Net loss $ (3,797,028) $ (441,224) $ (849,272)
Plus non-cash charges to earnings:
Amortization of license and sponsored research agreements 321,353 73,708 41,274
Value of common stock options granted to non-employees for services 1,299,219 - 372,500
Amortization of Stock Options Issued to Non-employee Lenders 356,346 - -
Value of services contributed by employees 566,479 65,000 70,000
Value of stock issued for services 500,738 279,063 284,000
Future Obligation for research and consulting expenses 213,162 - -
Change in working capital accounts:
Increase in prepaid expenses (17,031) (12,968) -
Increase in other receivables (8,464) 1,239 (16,240)
Increase in accounts payable and accrued liabilities 49,782 12,568 (5,251)
Increase (decrease) in interest payable (67) (4,967) (16,739)
Decrease in obligation to North Shore (54,108) (27,054)
-------------- -------------- --------------
Total operating activities (569,619) (54,635) (119,728)
-------------- -------------- --------------
Financing activities
Loans from related parties 399,627 50,000 -
Repayment of loans from related parties (330,000) (100,000) (230,000)
Sale of common stock for cash:
To founders 5,000 -
To third-party investors 926,208 - 473,550
Less: issue costs (140,498) - (72,211)
To employees upon exercise of employee stock options 320,188 234,250 -
-------------- -------------- --------------
Total financing activities 1,180,525 184,250 171,339
-------------- -------------- --------------
Investing activities
Purchase of property and equipment - - (9,014)
Purchase of Cancer Diagnostics Inc. (50,000) (50,000)
Purchase of exclusive licenses (160,000) - -
Payment of sponsored research contract (311,250) - -
-------------- -------------- --------------
Total investing activities (521,250) (50,000) (9,014)
-------------- -------------- --------------
Change in cash 89,656 79,615 42,597
Cash at beginning of period - 10,041 31,164
-------------- -------------- --------------
Cash at end of period $ 89,656 $ 89,656 $ 73,761
============== ============== ==============
Supplemental disclosure of cash flow information:
Cash paid for interest and taxes during the period - 1,544 3,418
-------------- -------------- --------------
Non-cash financing and investing activities:
Common stock issued in Gentest Merger 1,000 - -
-------------- -------------- --------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS
5
LEXON, INC.
(A Development Stage Company)
NOTES TO FINANCIAL
STATEMENTS For the period from inception
(December 16, 1997) to March 31, 2000 and for
the three months ended March 31, 2000 and 1999
(Unaudited)
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
acquires, develops, and markets emerging medical technologies. Lexon owns 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. The Company also owns, through CDI, the
exclusive worldwide license to the Telomerase Assay, a blood screening test for
lung cancer.
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 basis 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 sole officer and director and its other employees serve without
pay or other non-equity compensation. The fair value of these services is
estimated by management and is recognized as a capital contribution. For the
three months ended March 31, 2000 and 1999 and for the period from inception
(December 16, 1997) to March 31, 2000 the Company recorded $65,000, $70,000, and
$556,479, respectively, as a capital contribution by its sole officer and
director and its 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 Board of Directors
determined the fair market value of stock options granted or stock issued as
payment for services.
6
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation arrangements in accordance
with 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 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 for the Ebaf assay over two years, which is the life of the service
agreement. The $249,458 to be paid pursuant to the Sponsored Research Agreement
for the Telomerase assay acquired through the purchase of Cancer Diagnostics,
Inc. is being amortized over two years, which is the life of the service
agreement (See Note 5). Any other costs relating to the development of the Ebaf
and Telomerase Assays 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 during 2000 or 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 Instruments and Hedging Activities" during 2001. 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. The obligations of
Gentest were to pay $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. Lexon paid the obligations in full on July 8, 1998. 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.
7
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
===========
NOTE 3--EXCLUSIVE LICENSE--EBAF ASSAY
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. At March 31, 2000, the amount of accumulated amortization
related to the Exclusive License was $16,574.
NOTE 4--SPONSORED RESEARCH CONTRACT--EBAF ASSAY
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. At March
31, 2000, the amount of accumulated amortization related to the Sponsored
Research Agreement was $272,344.
NOTE 5--PURCHASE OF CANCER DIAGNOSTICS, INC.
On January 29, 2000, Lexon purchased 100% of the common stock of Cancer
Diagnostic, Inc. ("CDI"), a Florida corporation, according to the terms of a
Stock Purchase Agreement. By reason of the stock purchase, CDI became a
wholly-owned subsidiary of Lexon. CDI owns the exclusive worldwide license to
the Telomerase Assay, a patent-pending blood test for lung cancer being
developed at the University of Maryland, Baltimore ("UMB"). CDI is party to 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.
Lexon purchased all of the outstanding common stock of CDI from CDI's
sole shareholder UTEK Corporation ("UTEK") for a total of $200,000. Lexon paid
$50,000 in cash and gave UTEK a secured promissory note for $150,000. The
secured promissory note bears interest at 10% per year and is payable in three
monthly installments of $50,000 each, due on April 30, May 31 and June 30, 2000.
As of May 15, 2000, the Company was current in its obligation to UTEK. The
interest rate will increase to 12% per year on any unpaid principal balance
after June 30, 2000. To secure the promissory note, Lexon pledged all of the
shares of common stock of CDI pursuant to a Pledge and Security Agreement. The
shares were placed in escrow and will be released upon payment in full of
Lexon's obligation to UTEK.
UTEK, a Florida corporation, is a technology merchant that specializes
in the transfer of technology from universities and government research
facilities to the private sector. UTEK has relationships with major universities
and government research facilities in the U.S. and in Europe. UTEK owns
approximately 1,000,000 shares (or about 14.7% of the outstanding shares) of
Lexon Common Stock.
8
NOTE 6--EXCLUSIVE LICENSE--TELOMERASE ASSAY
Lexon owns the exclusive worldwide license to the Telomerase Assay through its
wholly-owned subsidiary CDI. In exchange for the license, CDI agreed to pay UMB
a royalty of 4% of Net Sales of products sold using the Telomerase Assay
technology. The exclusive license is being amortized over 15 years using the
straigh-line method. At March 31, 2000, the amount of accumulated amortization
related to the exclusive license was $1,251.
NOTE 7--SPONSORED RESEARCH CONTRACT--TELOMERASE ASSAY
On August 27, 1999, CDI agreed to pay University of Maryland, Baltimore $249,458
to fund the development of the Telomerase Assay for the ELISA format over a two
year period beginning January 4, 2000 and ending January 3, 2002. CDI paid
$124,921 upon signing the sponsored research agreement. The balance of $124,537
is due on or before January 1, 2001. The Sponsored Research Agreement is being
amortized over 2 years using the straight-line method, with amortization costs
recorded as R&D expenses. At March 31, 2000, of accumulated amortization related
to the Sponsored Research Agreement was $31,182.
NOTE 8--NOTES PAYABLE
During 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. The notes payable and accrued interest were paid in full during 1999.
On October 15, 1998, in connection with these notes, the Board granted 50,000
options to the officer and 180,000 options to the shareholder, each at an
exercise price of $1.20 per share. Details about compensation cost related to
the granting of the options can be found in Note 11 to these financial
statements.
During 1999, the Company borrowed $100,000 and $18,250 from shareholders. The
Company executed notes payable, which are due December 31, 2000 at an interest
rate of 10% per year. As of March 31, 2000, the $100,000 note and accrued
interest was paid in full.
During the first quarter of 2000, the Company borrowed $50,000 from a
shareholder. The Company executed a note payable, which is due December 31, 2000
at an interest rate of 10% per year. As of March 31, 2000, the balance of the
note was $50,000.
NOTE 9--COMMITMENTS AND CONTINGENCIES
FUTURE ROYALTY OBLIGATIONS UNDER EXCLUSIVE LICENSE AGREEMENT--EBAF ASSAY
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.
FUTURE ROYALTY OBLIGATIONS UNDER EXCLUSIVE LICENSE AGREEMENT--TELOMERASE ASSAY
In exchange for the exclusive license agreement, CDI agreed to pay UMB a royalty
of 4% of Net Sales of products sold using the Telomerase Assay technology. The
license agreement provides for minimum annual royalties for the life of the
license agreement, which coincides with the life of the last to expire patent
covering the licensed technology. The minimum annual royalties range from $2,500
per year beginning in 2002 to a maximum of $4,000 per year beginning in 2006 and
continuing each year thereafter for the life of the license agreement. In
addition, the license agreement provides for royalties of 2% of Net Sales of
products sold by sublicensees of CDI and 50% of all consideration received by
CDI for up-front, milestone or other payments from sublicensees.
9
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. As of May 15, 2000, the Company is current in its obligation for
additional funding to North Shore.
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 decided 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. During 1999
and 1998, the Company recorded $9,600 and $11,531, respectively, for rent
expense. The minimum annual lease payments pursuant to the lease agreement and
the Company's estimated share are scheduled as follows:
For the Periods Ended Minimum Annual Lease Company's Estimated
December 31 Payments Share
--------------------- -------------------- -------------------
2000 $44,594 $9,600
2001 45,587 9,600
2002 11,462 2,292
NOTE 10--COMMON STOCK AND PAID IN CAPITAL
During the year ended December 31, 1998, the following common stock transactions
occurred:
o Under the terms of an offering dated April 1, 1998, the Company sold
5,000,000 shares of its common stock to the founders at par value for
$5,000 cash.
o On July 8, 1998, the Company issued 1,000,000 shares of its common stock in
connection with the Gentest merger.
o On May 18, 1998, Lexon commenced its Rule 504 private offering at $2.00 per
share. This price was determined by the Board of Directors. There were
125,205 shares of common stock sold to third-party investors for $250,410
in cash. The $2.00 offering was terminated on July 31, 1998, when Lexon's
15c211 application was filed with the NASD. The Company's common stock
began trading on November 4, 1998 at $2.50 per share. On November 6, 1998,
Lexon commenced a Rule 504 private offering at $3.00 per share, which price
was greater than the closing price of the Company's common stock on
November 6, 1998 (the date of the offering memorandum). There were 39,416
shares of common stock sold to third-party investors for $118,248 in cash.
The Company incurred expenses of $48,287 in connection with the offerings.
On January 18, 1999, the Company terminated the $3.00 offering and
commenced an offering at $1.50 per share, which was equal to the closing
price of the Company's common stock on January 19, 1999. Although there
were no obligations to do so, the Board determined that the investors who
paid cash in the $2.00 and $3.00 private offerings should be treated as if
they had purchased their shares at $1.50 per share. Accordingly, the
Company issued an additional 81,151 shares to those investors (41,735
shares to the $2.00 investors and 39,416 shares to the $3.00 investors).
The issuance of the additional shares was treated as a capital transaction,
with no effect on stockholders' equity.
10
o During 1998, the Company issued 33,541 shares of its Common Stock at $2.00
per share for services rendered in connection with the Offering. The $2.00
per share value was determined by the Board of Directors based on the most
recent offering price of $2.00 per share.
During the year ended December 31, 1999, the following common stock transactions
occurred:
o The Company sold 385,700 shares of common stock to third party investors
for $557,550 in cash.
o The Company issued a total of 89,500 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. An additional 7,500 shares were issued at $2.34 per share
to a public relations specialist in connection with the Company's colon
cancer awareness activities. The remaining 2,000 shares were issued at
$4.875 per share for legal services.
o 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. The exercise price was equal to the closing price of the Company's
common stock on the date the options were granted.
During the three months ended March 31, 2000, the following common stock
transactions occurred:
o The Company issued 150,000 shares of common stock pursuant to the exercise
of employee stock options, for which the Company received $234,250 in cash.
The employees exercised their options at $1.5625 per share. The exercise
price was equal to the closing price of the Company's common stock on the
date the options were granted.
o The Company issued a total of 293,222 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, 190,000 were
issued at $.9375 per share to consultants for services rendered in
connection with accounting and legal services; 65,000 shares were issued at
$.9375 per share for general business consulting services; and 22,222
shares were issued at $1.125 per share to a consultant to develop and
maintain an Internet web site for the Company. In connection with the
issuance of stock for services, the Company recorded $481,157, $281,157 and
$12,000, respectively, as G&A expense for the period from inception
(December 16, 1997) through March 31, 2000, and for the three months ended
March 31, 2000 and 1999.
Lexon is authorized to issue 45,000,000 Shares of Common Stock, par value $0.001
per share, of which 7,252,735 shares were outstanding as of March 31, 2000.
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.
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.
11
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 11--STOCK OPTIONS
EMPLOYEE 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 Board granted 50,000 options to an officer at an
exercise price of $1.20 per share in connection with a loan made by the officer
to the Company. The Company recorded no compensation cost for the options
granted to the officer.
On March 4, 1999, the Board granted 1,692,500 options to purchase common stock
at an exercise price of $1.5625 per share to 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.
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 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 for the
quarter ended March 31, 2000 would have been increased and EPS would have been
reduced to the following pro forma amounts:
From Inception March 31, 2000 March 31, 1999
-------------- -------------- --------------
Net loss:
As reported $ (3,797,028) $ ( 441,244) $ ( 849,272)
Pro forma (5,360,560) (2,004,756) ( 2,412,804)
Basic and diluted EPS:
As reported $ (0.67) $ (0.06) $ (0.13)
Pro forma (0.95) (0.29) (0.38)
NON-EMPLOYEE OPTIONS
On October 15, 1998, the Board granted 300,000 options to a consultant at an
exercise price of $1.20 per share. In exchange for the options, the consultant
provided financial and investment consulting services for a one-year period.
Compensation cost was based on an estimated fair value of $1.98 per share, which
was calculated 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%. During 1998 the Company recorded
$593,910 as a prepaid consulting expense and an increase to paid in capital. The
Company amortized the prepaid expense over a 12-month period, which was the life
of the agreement. Amortization expense included in general and administrative
expense was $494,925 in 1999 and $98,985 in 1998.
12
On October 15, 1998, the Board granted 50,000 options at an exercise price of
$1.20 per share to the inventor of the ebaf screening process. Compensation cost
was based on an estimated fair value of $1.98 per share, which was calculated
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%. The Company recorded the compensation
cost of $98,985 as R&D expense on the date the options were granted.
On October 15, 1998, the Board granted 180,000 options to a shareholder at an
exercise price of $1.20 per share in connection with a loan made by the
shareholder to the Company. Compensation cost was based on an estimated fair
value of $1.98 per share, which was calculated 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%. The Company recorded compensation cost of $356,346 as interest expense on
the date the options were granted.
On November 1, 1998, the Company entered into an agreement with an investor
relations firm whereby the Board granted the firm options to purchase up to
1,000,000 shares of common stock over a two-year period. Amounts and exercise
prices are as follows:
Number of Exercise 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
----------------
Total 1,000,000
----------------
The 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. On June 30, 1999, 70,000 options exercisable at $1.50
per share became vested. To determine compensation cost, the 70,000 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 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%. During the year ended December 31, 1999, 260,000
options at exercise prices ranging from $1.20 to $2.00 per share were forfeited
and during the three months ended March 31, 2000, 135,000 options at an exercise
price of $2.25 per share were forfeited.
On March 4, 1999, the Board 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%.
13
A summary of the status of the Company's stock options at March 31, 2000, and
changes during the three months then ended is presented below:
March 31, 2000
-------------------------
Weighted
Average
Exercise
Shares Price
----------- -----------
EMPLOYEES
Outstanding, beginning of period 1,687,500 $1.5518
Granted --- $1.5518
Exercised (150,000) $1.5518
Forfeited --- ---
----------- -----------
Outstanding, March 31, 2000 1,537,500 $1.5518
----------- -----------
Exercisable, March 31, 2000 1,537,500 $1.5518
-----------
-----------
Weighted average fair value of options granted $1.49
-----------
March 31, 2000
-------------------------
Weighted
Average
Exercise
Shares Price
----------- -----------
NON-EMPLOYEES
Outstanding, beginning of period 1,520,000 $1.89
Granted or Vested --- ---
Exercised --- ---
Forfeited (395,000) $1.93
----------- -----------
Outstanding, March 31, 2000 1,520,000 $1.9152
Exercisable, March 31, 2000 1,125,000 $1.3313
-----------
-----------
Weighted average fair value of options granted $1.49
-----------
The following table summarizes information about fixed stock options outstanding
at March 31, 2000:
Options Outstanding Options Exercisable
------------------------------------------ ------------------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of exercise Outstanding Contractual Exercise Exercisable Exercise
prices at 03/31/00 Life Price at 03/31/00 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 1,520,000 9.41 years $1.9152 1,125,000 $1.3313
14
NOTE 12--INCOME TAXES
The components of deferred income tax are as follows:
Inception
(December
16, 1997)
to March Three Months Three Months
31, 2000 Ended Ended
March 31, 2000 March 31, 2000
----------- -------------- --------------
Net operating loss $ 368,644 $ (341,390) $ (20,075)
Stock-based compensation 562,892 374,425 188,467
Valuation allowance (931,536) ( 33,035) (168,392)
----------- -------------- --------------
Net deferred tax asset $ 0 $ 0 $ 0
----------- -------------- --------------
From inception to March 31, 2000 the Company had a net operating tax loss of
approximately $3,787,028, which expires 2019 and 2020, and temporary differences
related to stock-based compensation of $1,655,565. 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 13--EARNINGS PER SHARE
March 31, March 31,
2000 1999
--------- ---------
BASIC AND DILUTED EPS COMPUTATION:
Net loss applicable to common stockholders $(441,224) $(849,272)
--------- ---------
Weighted average shares outstanding 6,853,089 6,366,974
--------- ---------
Basic and Diluted EPS $ (0.06) $ (0.13)
--------- ---------
For the three months ended March 31, 2000 and 1999, all options were excluded
from the EPS calculation, as their effect was anti-dilutive.
NOTE 14--UNCERTAINTIES
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. The Company is in the early stages of
development and has not established sources of revenues sufficient to fund the
development of business and pay operating expenses, resulting in a net loss of
$3,787,028 for the three months ended March 31, 2000. Management intends to
provide the necessary development and operating capital through sales of its
common stock and increasing revenues by gaining FDA approval for the Ebaf Assay
test kit and marketing the test kit to laboratories, research institutions,
hospitals, clinics, doctors and other medical professionals throughout the
world. The ability of the Company to continue as a going concern during the next
year depends on the successful completion of the Company's efforts to raise
capital and gain FDA approval. The financial statements do not include any
adjustments that might be necessary if the Company is unable to continue as a
going concern.
NOTE 15--RELATED PARTY TRANSACTIONS
On August 4, 1999, the Company entered into a consulting agreement with UTEK
Corporation for their services in identifying, evaluating and recommending
potential cancer diagnostic testing technologies. UTEK, a technology merchant,
owns 1,000,000 shares of common stock of Lexon. The agreement required Lexon to
pay UTEK $132,000, either in cash or in stock during the year 2000. No payments
were made On January 28, 2000, this agreement was canceled by mutual consent of
the parties.
15
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. We assume no obligation to update any forward-looking statements or
reason why actual results might differ.
PLAN OF OPERATION OVER THE NEXT TWELVE MONTHS
We have no operating history prior to December 16, 1997. We have no
revenues from the sale of products to date and have funded our activities
through the sale of our common stock and through loans by our shareholders.
During 2000, we plan to raise additional capital to complete the
development of the Ebaf Assay and to fund the gathering of data for FDA
approval, and to seek strategic alliances or business combination partners.
We plan to seek business alliance partners in the pharmaceutical industry
with existing manufacturing, distribution and marketing capabilities. We have no
such partners at this time. There is no assurance that we will be successful in
making acceptable arrangements for business alliances.
CASH REQUIREMENTS
We require substantial additional working capital to finish development of
the Ebaf Assay, to begin collecting data, and to commence and complete clinical
trials required for FDA approval. We estimate that we will require approximately
$5.0 million in additional capital during the year 2000. There is no assurance
that the additional capital required will be available to us on acceptable terms
when needed, if at all. Any additional capital may involve substantial dilution
to the interests of our then existing shareholders.
PRODUCT DEVELOPMENT AND RESEARCH PLAN FOR THE NEXT TWELVE MONTHS
EBAF ASSAY
During the next 12 months, Dr. Tabibzadeh will make a small number of
Ebaf Assay ELISA test kits and will sample the blood of persons who have colon
cancer and of persons who do not have colon cancer. The blood samples will then
be tested using the Western Blot method and the ELISA method to determine
whether the ELISA method produces results similar to the Western Blot method. We
estimate that the comparative analysis of tests using the Western Blot and ELISA
methods will be completed by the end of the third quarter of 2000. The data from
these tests will then be used as the basis for our preliminary proposal for
clinical trials to the FDA. We do not know how much data the FDA will require
and consequently, how long the clinical trials will take.
TELOMERASE ASSAY
During the next 12 months, Dr. Highsmith and his team will develop a
series of monoclonal antibodies to telomerase (estimated time to complete: 8-10
months) and will develop an immunoassay (ELISA format test) to detect telomerase
in human blood (estimated time complete: 2-4 months after development of the
monoclonal antibodies)
EXPECTED PURCHASE OR SALE OF PLANT AND SIGNIFICANT EQUIPMENT
None.
EXPECTED SIGNIFICANT CHANGES IN NUMBER OF EMPLOYEES.
None.
16
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
None
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
27.0 Financial Data Schedule (for electronic filers only)
REPORTS ON FORM 8-K
On February 14, 2000, we filed a report on Form 8-K regarding our purchase
of 100% of the common stock of Cancer Diagnostic, Inc. ("CDI") on January 29,
2000. CDI owns the exclusive worldwide license to the Telomerase Assay, a
patent-pending blood test for lung cancer being developed at the University of
Maryland, Baltimore
17
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: May 22, 2000