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 June 30, 2002
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the Transition Period from _____________ to _________________
Commission file number: 0-26915
LEXON, INC.
(Exact name of small business issuer as specified in its charter)
OKLAHOMA 73-1533326
(State or other jurisdiction of incorporation or (IRS Employer I.D. No.)
organization)
9202 South Toledo Avenue
Tulsa, OK 74137
(Address of principal executive officers)
(918) 492-4125
(Issuer's telephone number)
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: There were 17,282,735 shares of
Common Stock, $0.001 par value, outstanding as of August 15, 2002.
PART 1--FINANCIAL INFORMATION
Item 1. Financial Statements
INDEX TO FINANCIAL STATEMENTS
Balance Sheet at June 30, 2002 (Unaudited).............................. 3
Statements of Operations For The Period From Inception
(December 16, 1997) To June 30, 2002 and For The Three
Months and Six Months Ended June 30, 2002 and 2001 (Unaudited).......... 4
Statements of Cash Flows For The Period From Inception
(December 16, 1997) to June 30, 2002 and For The Six
Months Ended June 30, 2002 and 2001 (Unaudited)......................... 5
Notes to the Financial Statements (Unaudited)........................... 6
2
Lexon, Inc.
(A Development Stage Company)
Balance Sheet
June 30, 2002
(Unaudited)
ASSETS
Current assets
Cash $254
-------------
Total current assets 254
-------------
TOTAL ASSETS $254
=============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities $66,407
Accrued salaries payable 600,000
Payable to DOCRO 350,000
Payable to Stony Brook 259,000
Payable to University of Maryland 176,676
Payable to University of South Florida Research Foundation 175,000
Related party payables 171,559
-------------
Total current liabilities 1,798,642
-------------
Shareholders' equity
Preferred stock, $0.001 par value,
5,000,000 shares authorized; no shares
issued and outstanding -
Common stock, $0.001 par value,
45,000,000 shares authorized;
17,282,735 shares issued and outstanding 17,283
Common stock subscribed (749,500)
Paid in capital 8,916,120
Deficit accumulated during the development stage (9,982,291)
--------------
(1,798,388)
--------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $254
==============
The accompanying notes are an integral part of the financial statements.
3
Lexon, Inc.
(A Development Stage Company)
Statements of Operations
From inception (December 16, 1997) through June 30, 2002 and
For the Six Months Ended June 30, 2002 and 2001 and
For the Three Months Ended June 30, 2002 and 2001
(Unaudited)
From inception
(December 16, Six Months Six Months Three Months Three Months
1997) through Ended Ended Ended Ended
June 30, 2002 June 30, 2002 June 30, 2001 June 30, 2002 June 30, 2001
-------------- ------------- ------------- ------------- -------------
Revenue $ - $ - $ - $ - $ -
-------------- ------------- ------------- ------------- -------------
Expenses:
Research and development 1,719,383 127,853 94,299 127,853 39,175
General and administrative 7,848,956 623,087 297,160 244,528 124,040
-------------- ------------- ------------- ------------- -------------
Total operating expenses 9,568,339 750,940 391,459 372,381 163,215
Operating loss (9,568,339) (750,940) (391,459) (372,381) (163,215)
Interest expense 413,952 250 6,095 110 2,554
-------------- ------------- ------------- ------------- -------------
Net loss $ (9,982,291) $ (751,190) $ (397,554) $ (372,491) $ (165,769)
============== ============= ============= ============= =============
Weighted average shares outstanding 9,160,583 17,282,735 11,915,553 17,282,735 13,120,054
============== ============= ============= ============= =============
Loss per share $ (1.09) $ (0.04) $ (0.03) $ (0.02) $ (0.01)
============== ============= ============= ============= =============
The accompanying notes are an integral part of the financial statements.
4
Lexon, Inc.
(A Development Stage Company)
Statements of Cash Flows
From Inception (December 16, 1997) through June 30, 2002 and
For the Six Months Ended June 30, 2002 and 2001
(Unaudited)
From inception
(December 16, Six Months Six Months
1997) through Ended Ended
June 30, 2002 June 30, 2002 June 30, 2001
-------------- ------------- -------------
Operating activities:
Net loss $ (9,982,291) $ (751,190) $ (397,554)
Plus non-cash charges to earnings:
Amortization of license and sponsored research agreements 796,789 127,853 69,602
Value of options granted to non-employees for services 1,299,218 - -
Amortization of Stock Options Issued to Non-employee Lenders 356,346 - -
Value of services contributed by employees 1,111,479 - -
Value of stock issued for services 3,430,836 - -
Change in working capital accounts: -
Decrease (increase) in prepaid expenses - 9,375 -
Increase in other receivables - - 6,532
Increase (decrease) in accounts payable and accrued liabilities 66,407 26,957 (1,613)
Increase in accrued salaries 600,000 200,000 200,000
Increase (decrease) in interest payable 8,080 - 3,985
Increase in payable to Stony Brook 259,000 259,000 -
Increase in payable to Univ. of Maryland 52,139 - -
Increase in payable to DOCRO 350,000 - -
Increase in payable to Univ. of South Florida 175,000 100,000 -
-------------- ------------- -------------
Total operating activities (1,476,997) (28,005) (119,048)
-------------- ------------- -------------
Financing activities:
Loans from related parties 712,950 25,685 -
Repayment of loans from related parties (541,391) - (51,751)
Repayment of promissory notes by employees 500 500 -
Sale of common stock for cash:
To founders 5,000 - -
To third-party investors 1,795,727 - 200,000
Payment of issue costs (174,598) - -
To employees upon exercise of employee stock options 320,313 - -
-------------- ------------- -------------
Total financing activities 2,118,501 26,185 148,249
-------------- ------------- -------------
Investing activities:
Purchase of Cancer Diagnostics Inc. (170,000) - -
Purchase of exclusive licenses (160,000) - -
Payment of sponsored research contract (311,250) - -
-------------- ------------- -------------
Total investing activities (641,250) - -
-------------- ------------- -------------
Change in cash 254 (1,820) 29,201
Cash at beginning of period - 2,074 820
-------------- ------------- -------------
Cash at end of period $ 254 $ 254 $ 30,021
============== ============= =============
The accompanying notes are an integral part of the financial statements.
5
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") owns the exclusive worldwide
license to develop, manufacture, obtain FDA approval for, and market a blood
screening test kit for detecting elevated levels of the Ebaf protein, which has
been linked to colon cancer and certain types of ovarian and testicular cancers.
The Company has been pursuing development of the blood screening test kit since
inception.
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 Assay.
Income Taxes
The Company uses the liability method of accounting for income taxes as
set forth in Statement of Financial Accounting Standards ("SFAS") 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
Prior to January 1, 2001, the Company's sole officer and director and
its other employees served without pay or other non-equity compensation. During
those periods, the fair value of their services was recorded as an expense with
an offsetting entry to paid-in-capital. For the period from inception (December
16, 1997) to June 30, 2002, the estimated value of the services rendered by
Lexon's officer and other employees prior to January 3, 2001 was $1,711,479.
On January 3, 2001, the Company entered into written employment
agreements with its officer and certain employees. These agreements designate
specific salaries for those individuals and require that the salaries be paid in
24 semi-monthly installments. As of June 30, 2002, the accrued liability for the
accumulated salary obligations was $600,000, which consisted of $400,000 accrued
during 2001 and $200,000 accrued during the first half of 2002. The Company has
breached the employment agreements and there is no assurance that the officer
and employees subject to such agreements will continue to serve the Company
without being paid. See Note 5, "Other Commitments and Contingencies."
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" ("SFAS 123"). 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.
6
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting 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.
Research and Development ("R&D") Costs
Costs relating to research and development are expensed as incurred.
The Company also includes amortization of licenses as a cost of R&D.
New Accounting Standards
The Company adopted Statement of Financial Accounting Standard ("SFAS")
No. 133, "Accounting for Derivative Instruments and Hedging Activities" during
the first quarter of 2001. Currently, the Company does not engage in hedging
activities or transactions involving derivatives.
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, "Business Combinations," which supersedes APB Opinion No. 16,
"Business Combinations," and SFAS No. 38, "Accounting for Pre-acquisition
Contingencies of Purchased Enterprises." The provisions of the Statement apply
to all business combinations initiated after June 30, 2001. SFAS No. 141
requires that all business combinations be accounted for by the purchase method
of accounting. This method requires the accounts of an acquired institution to
be included with the acquirer's accounts as of the date of acquisition with any
excess of purchase price over the fair value of the net assets acquired to be
capitalized as goodwill. The Statement also requires that the assets of an
acquired institution be recognized as assets apart from goodwill if they meet
specific criteria presented in the Statement. The Statement ends the use of the
pooling-of-interests method of accounting for business combinations, which
required the restatement of all prior period information for the accounts of the
acquired institution. The Company will account for all mergers and acquisitions
initiated after June 30, 2001, using the purchase method.
In June 2001, the FASB issued SFAS No. 142, "Goodwill And Other Intangible
Assets," and SFAS No. 143, "Accounting For Asset Retirement Obligations." SFAS
No. 142 supersedes APB Opinion No. 17, "Intangible Assets", and primarily
addresses accounting for goodwill and intangible assets subsequent to
acquisition. Under SFAS No. 142, goodwill and separately identified intangible
assets with indefinite lives will no longer be amortized but reviewed annually
(or more frequently if impairment indicators arise) for impairment. Separately
identified intangible assets not deemed to have indefinite lives will continue
to be amortized over their useful lives. SFAS No. 142 applies to all goodwill
and intangible assets acquired after June 30, 2001. For goodwill and intangible
assets acquired prior to July 1, 2001, the Company is required to adopt SFAS No.
142 effective January 1, 2002. The Company adopted SFAS No. 142 on January 1,
2002, and after an evaluation of its effects determined that its intangible
assets were impaired. As such, the license for the Ebaf assay technology through
the University of South Florida was written off at June 30, 2002. (see Note 3).
SFAS No. 143 requires that entities record as a liability obligations
associated with the retirement of a tangible long-lived asset when such
obligations are incurred, and capitalize the cost by increasing the carrying
amount of the related long-lived asset. SFAS No. 143 will be effective for
fiscal years beginning after June 15, 2002, however, earlier application is
encouraged. The Company, which adopted SFAS No. 143 on January 1, 2002, does not
expect a material impact from the adoption of SFAS No. 143 on its financial
statements.
7
In August 2001, the FASB issued SFAS No. 144, "Accounting For The
Impairment Or Disposal Of Long-Lived Assets." SFAS No. 144 supersedes SFAS No.
121, "Accounting For The Impairment Of Long-Lived Assets And For Long-Lived
Assets To Be Disposed Of," and APB Opinion No. 30, "Reporting The Results Of
Operations - Reporting The Effects Of Disposal Of A Segment Of A Business, And
Extraordinary, Unusual And Infrequently Occurring Events And Transactions." SFAS
No. 144 establishes an accounting model based on SFAS No. 121 for long-lived
assets to be disposed of by sale, previously accounted for under APB Opinion No.
30. This Statement is effective for fiscal years beginning after December 15,
2001. The Company, which adopted SFAS No. 144 on January 1, 2002, does not
expect a material impact from the adoption of SFAS No. 144 on its financial
statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, amendment of FASB Statement No. 13, and Technical
Corrections". SFAS No. 145 rescinds SFAS No. 4, which required all gains and
losses from extinguishment of debt to be aggregated and, if material, classified
as an extraordinary item. As a result, the criteria in APB Opinion No. 30 will
now be used to classify those gains and losses. SFAS No. 64 amended SFAS No. 4,
and is no longer necessary because SFAS No. 4 has been rescinded. SFAS No. 44
was issued to establish accounting requirements for the effects of transition to
the provisions of the Motor Carrier Act of 1980. Because the transition has been
completed, SFAS No. 44 is no longer necessary. SFAS No. 145 amends SFAS No. 13
to require that certain lease modifications that have economic effects similar
to sale-leaseback transactions be accounted for in the same manner as
sale-leaseback transactions. SFAS No. 145 also makes technical corrections to
other existing pronouncements. The provisions of SFAS No. 145 are generally
applicable for fiscal years beginning or transactions occurring after May 15,
2002. The Company does not expect a material impact from the adoption of SFAS
No. 145 on its financial statements.
In June 2002, the FASB voted in favor of issuing SFAS No. 146, "Accounting
for Exit or Disposal Activities". SFAS No. 146 addresses significant issues
regarding the recognition, measurement, and reporting of costs that are
associated with exit and disposal activities, including restructuring activities
that are currently accounted for pursuant to the guidance that the EITF has set
forth in EITF Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)". The scope of SFAS No. 146 also includes (1)
costs related to terminating a contract that is not a capital lease and (2)
termination benefits that employees who are involuntarily terminated receive
under the terms of a one-time benefit arrangement that is not an ongoing benefit
arrangement or an individual deferred-compensation contract. The Company will be
required to adopt SFAS No, 146 for exit or disposal activities initiated after
December 31, 2002. The Company does not expect a material impact from the
adoption of SFAS No. 146 on its financial statements.
Note 2-- Uncertainties
Management estimates that the Company must raise approximately
$3,000,000 to continue its operations. Of this amount, $1,495,000 is required by
our agreement with DOCRO to further develop the Ebaf Assay into a commercial
product; $500,000 is the Company's estimate of the cost for the inventor's
continued scientific investigation of ebaf for one year and $800,000 is the
Company's estimate of operating expenses for one year. There is no assurance
that the $3,000,000 will be available to the Company on acceptable terms or at
all. Any additional capital may involve substantial dilution to the interests of
Lexon's existing shareholders. The Company presently has no investment banking
agreements in place or sources of funding available, therefore, the likelihood
of the Company being able to raise the funds it needs is doubtful.
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
$628,073 for the six months ended June 30, 2002. In addition, on September 23,
2002, the Company received a notice from the University of South Florida
Research Foundation ("USFRF") terminating the exclusive license agreement for
non-payment of minimum royalties due. See Note 10. "Subsequent Events."
Consequently, the ability of the Company to continue as a going concern during
the remainder of this year is doubtful.
Note 3-- Licensed Technology
An exclusive license to the Ebaf assay was acquired on July 8, 1998
from the University of South Florida Research Foundation, after 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").
In addition, the Company paid $55,000 to UTEK Corporation for services rendered
in connection with securing the license agreements. On September 23, 2002, the
Company received a notice from the University of South Florida Research
Foundation ("USFRF") terminating the exclusive license agreement for non-payment
of minimum royalties due. See Note 10 "Subsequent Events" for more information.
Pursuant to the receipt of this letter and under the guidelines of SFAS No. 142,
"Goodwill And Other Intangible Assets", the Company determined that the licensed
technology, the net value of which amounted to $125,485 was impaired and
therefore this remaining value was written off at June 30, 2002.
8
Note 4-- Commitments and Contingencies
Future Royalty Obligations Under Exclusive License Agreement--Ebaf Assay
On July 8, 1998, the Company acquired the exclusive license agreement
to the Ebaf assay technology from USFRF. The Company agreed to pay to USFRF a
royalty of five percent (5%) of revenue from the sale of products based on the
licensed technology or minimum royalties ranging from $75,000 in 2001 to
$150,000 per year beginning in 2007. 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. At June 30, 2002, the Company
owed USFRF minimum royalties totaling $175,000. On September 23, 2002, the
Company received a notice from the University of South Florida Research
Foundation ("USFRF") terminating the exclusive license agreement for non-payment
of minimum royalties due. See Note 10. "Subsequent Events" for more information
related to the license agreement.
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.
Obligations Under Exclusive License Agreement--Telomerase Assay
On January 29, 2000, the Company acquired Cancer Diagnostics, Inc.
("CDI"), as a wholly-owned subsidiary. CDI owned the exclusive license agreement
with the University of Maryland-Baltimore ("UMB") for the Telomerase assay, a
technology for the early detection of lung cancer. On September 25, 2001, Lexon
received a progress report from the UMB that stated, "Although the preliminary
data using an assay designed to measure telomerase enzyme activity in plasma was
extremely encouraging; we have been unable, after exhaustive trials, to
replicate these findings." Based on this information, the Company is no longer
pursuing for any further development of the Telomerase Technology. As such, the
Company has written off the unamortized portion of the assets relating to this
technology which amounted to $97,502. Liabilities to UMB in the amount of
$176,676, which consist primarily of license fees, will remain on the Company's
balance sheet until a final resolution with UMB is reached. The Company has
informed UMB that it does not intend to pay the $176,676. The License Agreement
with UMB has been terminated.
Swartz Investment Agreement
Under the terms of an investment agreement dated May 19, 2000 with
Swartz Private Equity, LLC the Company may be obligated to pay a non-usage fee
on an equity line of credit established with Swartz. The equity line was entered
into for the purpose of raising capital through a series of sales of Lexon's
Common Stock ("the Investment Banking Agreement"). The dollar amount of each
sale was limited by the Company's Common Stock's trading volume, and a minimum
period of time must elapse between each sale. The Company raised approximately
$215,000, but because the price and volume of Lexon's common stock were low, the
Company was unable to further access the line of credit. According to the
Agreement, Lexon may be liable to pay a non-usage fee of at least $100,000. The
Company contends that the price/volume conditions related to the equity line
actually prevented the Company from fulfilling its obligation and that the
non-usage fee is thereby void as a matter of law. The Investment Banking
Agreement also contains an early termination clause, however, the Company may be
required to pay a $200,000 fee if it provides Swartz with a notice of
termination.
DOCRO Services Agreement
On June 21, 2000 and August 2, 2000, the Company entered into two
consulting agreements with Diagnostic Oncology CRO, Inc. ("DOCRO"), a company
engaged in providing technology assessment, technology development, and
laboratory and clinical trial services to medical device developers, to conduct
a technology assessment and development program for Lexon's Ebaf and Telomerase
tumor marker technologies, respectively. For these services, Lexon agreed to pay
DOCRO $1,495,000 and $1,858,900, respectively, payable in stages upon
achievement by DOCRO of specific milestones in the operation. As of September
25, 2001, the Company is no longer pursuing the Telomerase technology. See Note
6 for information regarding the basis for this decision and its related
accounting treatment. Management is currently negotiating with DOCRO for a
mutual release from its August 2, 2000, consulting agreement related to
Telomerase.
9
On June 6, 2002, the Company received a letter from DOCRO outlining
what DOCRO considered as due from Lexon under the terms of the Agreements.
According to the analysis, DOCRO believes that the Company owes them $922,500
for Ebaf assay development activities and $550,000 for Telomerase assay
development activities. In addition, DOCRO believes the Company owes them
$427,227 in accrued interest. The Company disputes these amounts. The Company
and DOCRO are attempting to resolve the dispute, however, there is no assurance
that it can be resolved without litigation.
Payments Due Pursuant to Amended Employment Agreements
As of June 30, 2002, the Company owed its officer and its employees a
total of $600,000 pursuant to the amended employment agreements described below.
There is no assurance that the Company's officer and its employees will continue
to serve without being paid. The loss of the services of the Company's officer
and its employees could have a material adverse affect on the Company's
continued operations.
Employment Agreements
On January 3, 2001, the Company entered into written employment
agreements with Lexon's sole officer and director, and certain employees. The
terms of their respective employment agreements are the same, except that the
agreement for Lexon's sole officer and director states he will not compete with
Lexon, Inc. for one-year after he resigns voluntarily or is terminated for
cause. If he is terminated without cause or if he resigns because a change of
control has occurred, then the non-compete clause of his employment agreement
will not be applicable.
The term of each employment agreement is for one year, ending January 3, 2002,
with an automatic and continuous renewal for consecutive two year periods. Each
agreement can be terminated either by the Company or by the employee upon 30
days' written notice. Each agreement provides for an annual salary of at least
$100,000 with an annual salary increase equal to no less than the percentage
increase in the Consumer Price Index during the previous calendar year. Each
employee's salary will be accrued by the Company and paid in whole or in part as
cash is available. If an employee resigns or is terminated for any reason, his
or her accrued and unpaid salary plus severance pay ranging from three (3)
months to twenty-four (24) months, depending on the circumstances of his or her
departure, will be due and payable within 30 days of his or her resignation or
termination. Under each employment agreement, the Company provides certain
fringe benefits, including, but not limited to, participation in pension plans,
profit-sharing plans, employee stock ownership plans, stock appreciation rights,
hospitalization and health insurance, disability and life insurance, paid
vacation and sick leave. Lexon, Inc. will reimburse each employee for any
reasonable and necessary business expenses, including travel and entertainment
expenses that are necessary to carry out his or her duties. Each employee has
the right to participate in other businesses as long as those businesses do not
compete with Lexon, Inc. and so long as the employee devotes the necessary
working time, as determined in his or her sole discretion, to Lexon's business
activities. The Company will indemnify each employee for all legal expenses and
liabilities incurred with any proceeding involving the employee by reason of his
or her being an officer, director, employee or agent of the Company. The Company
will pay reasonable attorney fees and expenses as incurred in the event that, in
the employee's sole judgment, he or she needs to retain counsel or otherwise
expend personal funds for his or her defense. If there is a change in control,
each employee has the right to resign. A change in control is defined as a
change in the majority of Directors within any twelve month period without 2/3
approval of the shares outstanding and entitled to vote, or a merger where less
than 50 percent of the outstanding common stock survives and a majority of the
Board of Directors remains, or the sale of substantially all of the Company's
assets, or if any other person or group acquires more than 50 percent of the
voting capital.
Consulting Agreement with Houlihan Smith
On August 30, 2001, the Company signed an agreement with Houlihan Smith
& Company, Inc ("Houlihan"). Under this agreement, Houlihan agreed to provide
the Company with consulting services including, but not limited to, reviewing
the business, operations and assets of the Company, assisting the Company in
preparing a private placement offering memorandum, and contacting potential
financing sources on behalf of the Company. For the services, Lexon paid
Houlihan a retainer fee in the amount of $50,000 and agreed to pay transaction
fees of 8% of any equity financing raised and warrants to purchase common stock
of the Company equal to 10% of the fully-diluted new shares that are represented
by the financing. The efforts of Houlihan to secure equity financing for the
Company were not successful and on July 26, 2002, the Company received notice
from Houlihan that the agreement was terminated.
10
Consulting Agreement with Inventor of Ebaf Assay Technology
In connection with departure from North Shore of the inventor of the
Ebaf assay technology, the Company signed a consulting agreement with him on
September 1, 2001 to continue the research he began at North Shore. The research
included determining the extent that ebaf is present in colon and ovarian
carcinomas and assessing the extent of correlation between the amount of ebaf in
the body fluids and the degree of differentiation, the extent of invasion and
the stage of colon and ovarian carcinomas. The contract was on a month-to-month
basis with consulting fees valued at $16,666.66 per month. These fees were
classified as R&D costs and were expensed as incurred. When the inventor
accepted his new position with Stony Brook on February 1, 2002 the consulting
agreement with him ended. At June 30, 2002, the Company owed the inventor
$49,999 in accrued consulting fees, for which he has made a demand for payment.
The Company does not have sufficient funds to pay this obligation.
Research Agreement with Stony Brook
On December 5, 2001, the Company signed a funding agreement with
Research Foundation of SUNY Stony Brook ("Stony Brook"). Pursuant to this
agreement, the Company agreed to fund the employment of the inventor of the Ebaf
assay technology through September 1, 2005. The Company's obligation under this
agreement includes a yearly salary of $200,000 for the inventor to be paid in
semi-annual installments. Additionally, the company is required to pay $59,000
annually in semi-annual installments for fringe benefits for the inventor. The
inventor began his employment at Stony Brook on February 1, 2002. As such, the
Company recorded a $259,000 obligation to Stony Brook related to his employment
in accordance with the agreement. Because the Company does not have sufficient
funds to pay the obligation due, it is in default under the terms of the funding
agreement.
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. The inventor's
research was funded in part with grants from the National Institutes of Health.
If the U.S. government decided to make or use the 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.
Note 5-- Related Party Transactions
The Company leases approximately 4,200 square feet of commercial office
space from a related party on a month-to-month basis. The monthly rent for the
office space is $6,300, of which the Company's share is approximately $1,600 per
month. The office space is shared with other companies in which Lexon's officer
and its employees may be officers, directors, employees or shareholders. In
addition to office space, Lexon shares staff and other administrative expenses
with these other companies. From time to time, Lexon and the other companies may
borrow from and/or make cash advances to each other for the payment of rent and
administrative expenses. As of June 30, 2002, Lexon's payable to the other
companies was $171,559 in total.
11
Note 6- Stock Options
A summary of the status of the Company's stock options outstanding at June 30,
2002. is presented below. The were no options granted, exercised or forfeited
during the six months ended June 30, 2002:
June 30, 2002
-------------------------------------
Weighted Average
Exercise Price
Shares
---------------- -------------------
Non-employees:
Outstanding, December 31, 2001 1,866,062 $1.44
Granted or Vested -- --
Exercised -- --
Forfeited -- --
---------------- -------------------
Outstanding, June 30, 2002 1,866,062 $1.44
---------------- -------------------
Exercisable, June 30, 2002 1,866,062 $1.44
---------------- -------------------
The following table summarizes information about fixed stock options outstanding
at June 30, 2002:
Options Outstanding Options Exercisable
------------------------------------------ ------------------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of exercise Outstanding Contractual Exercise Exercisable Exercise Price
prices at 06/30/02 Life Price at 06/30/02
---------------------- -------------- -------------- ------------ -------------- ---------------
Non-employees
$0.4818-$2.062 1,866,062 4.46 years $1.44 1,866,062 $1.44
Note 7-- Income Taxes
The components of deferred income tax are as follows:
Inception
(December 16, 1997)
to June 30, 2002
-----------------------
Net operating loss $1,082,700
Stock-based compensation 562,892
Valuation allowance (1,645,592)
-----------------------
Net deferred tax asset $ ---
-----------------------
From inception to June 30, 2002, the Company had a net operating tax loss
carryforward of approximately $3,184,412, which begins to expire in 2013, and
temporary differences related to stock-based compensation of approximately
$562,892. 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.
12
Note 8-- Earnings per Share
Basic and Diluted EPS Computation: June 30, 2002 June 30, 2001
----------------- -----------------
Net loss applicable to Common Stockholders $(751,190) $(397,554)
----------------- -----------------
Weighted average shares outstanding 17,282,735 11,915,553
------------------ -----------------
Basic and Diluted EPS $ (0.04) $ (0.03)
------------------ -----------------
For the six months ended June 30, 2002 and 2001, all options were
excluded from the EPS calculation, as their effect was anti-dilutive.
Note 9-- Legal Proceedings
On January 25, 2002, the Company, along with other plaintiffs, filed
suit against the Company's former corporate counsel. The petition charges that
former counsel took various actions, which were against the interests of the
plaintiffs, committed a beach of fiduciary duty, and committed a breach of his
duty to exercise reasonable care, skill and diligence on behalf of the
Plaintiffs, which constitutes negligence. The Company is seeking actual punitive
and compensatory damages in excess of $10,000 each. On March 25, 2002, the
defendant filed a counterclaim against the Company and the other plaintiffs
alleging, among other things, breach of contract, conversion and breach of
fiduciary duty. Defendant is seeking actual, exemplary and punitive damages in
excess of $10,000 each plus cost of litigation. The Company believes that
defendant's claims are without merit and intends to vigorously defend itself.
Note 10-- Subsequent Events
On July 26, 2002, the Company received notice from Houlihan-Smith, an
investment banking consultant retained by the Company during 2001, that the
agreement between them and the Company was terminated. The efforts of
Houlihan-Smith to secure funding for the Company were not successful.
On September 23, 2002, the Company received a notice of termination
from the University of South Florida Research Foundation of the license
agreement for non-payment of $175,000 of minimum royalties due. The Company
disputes USF's position and will attempt to resolve the matter. There is no
assurance that the Company will be able to resolve the dispute with USF.
13
Item 2. Management's Discussion and Analysis or Plan of Operation
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
The following discussion should be read in conjunction with our
financial statements and the notes thereto included elsewhere in this Form
10-QSB. This Form 10-QSB contains forward-looking statements regarding the plans
and objectives of management for future operations. This information may involve
known and unknown risks, uncertainties and other factors which may cause our
actual results, performance or achievements to be materially different from
future results, performance or achievements expressed or implied by any
forward-looking statements. Forward-looking statements, which involve
assumptions and describe our future plans, strategies and expectations, are
generally identifiable by use of the words "may," "will," "should," "expect,"
"anticipate," "estimate," "believe," "intend" or "project" or the negative of
these words or other variations on these words or comparable terminology. These
forward-looking statements are based on assumptions that may be incorrect, and
we cannot assure you that these projections included in these forward-looking
statements will come to pass. Our actual results could differ materially from
those expressed or implied by the forward-looking statements as a result of
various factors.
(i) Cash Requirements
As of June 30, 2002, the Company had no cash and owed approximately
$1,800,000 in liabilities. There is substantial doubt as to the Company's
ability to continue operations. The Company's efforts to secure funding for
research and development and its efforts to engage development partners have not
been successful thus far. The Company must complete financing initiatives in
2002 to generate the liquidity necessary to continue its operations. Due to the
current economic conditions, the Company may not be able to secure additional
financing on terms it deems acceptable. If the Company obtains additional funds
by selling any of its equity securities, the percentage ownership of our
stockholders will be reduced, stockholders may experience substantial dilution,
or the equity securities may have rights, preferences or privileges senior to
the common stock. If adequate funds are not available to the Company on
satisfactory terms, the Company's may be required to cease its activities or
otherwise modify its business strategy. Because of these uncertainties, the
auditors have expressed substantial doubt about the Company's ability to
continue as a going concern.
On September 23, 2002, the Company received a notice of termination
from the University of South Florida Research Foundation of the license
agreement for non-payment of $175,000 of minimum royalties due. The Company
disputes USF's position and will attempt to resolve the matter.
Management estimates that the Company must raise approximately
$3,000,000 to continue its operations. Of this amount, $1,495,000 is required by
our agreement with DOCRO to further develop the Ebaf Assay into a commercial
product; $500,000 is the Company's estimate of the cost for the inventor's
continued scientific investigation of ebaf for one year and $800,000 is the
Company's estimate of operating expenses for one year. There is no assurance
that the $3,000,000 will be available to the Company on acceptable terms or at
all. Any additional capital may involve substantial dilution to the interests of
Lexon's existing shareholders. The Company presently has no investment banking
agreements in place or sources of funding available, therefore, the likelihood
of the Company being able to raise the funds it needs is doubtful. If funding
becomes available it will more than likely substantially dilute existing
shareholder's positions.
The cash shortage may force management to consider possible merger or
reverse merger situations. These potential merger or reverse mergers would
also substantially dilute existing shareholder positions.
(ii) Product Development and Research Plan for the Next Twelve Months
Product research and development activities have stopped pending
payment by the Company of the researchers. If the Company raises approximately
$3,000,000 in additional capital, then product development of the Ebaf assay may
be able to resume. There is no assurance that the Company will be able to raise
the capital it needs to continue operating.
(iii) Expected Purchase or Sale of Plant and Significant Equipment
None.
14
(iv) Expected Significant changes in number of employees.
As of June 30, 2002, the Company owed $600,000 pursuant to employment
agreements, of which $200,000 was accrued during the six months ended June
30, 2002, and $400,000 was accrued during the year ended December 31, 2001.
The Company has breached the material terms of the agreements and there is
no assurance that the officer and employees subject to such agreements will
continue to serve the Company without being paid.
PART II--OTHER INFORMATION
Item 1. Legal proceedings
Incorporated herein by reference to Note 8 "Litigation" of the Notes to
Financial Statements included herein as Part I- Financial Information.
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.
99.1 Certification pursuant to Section 902 of the
Sarbanes-Oxley Act of 2002
Reports on Form 8-K
NONE
15
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.
---------------------------------------
Gifford M. Mabie
President
Date: September 25, 2002
16