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 September 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 (IRS Employer I.D. No.)
incorporation or 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 November 15, 2002.
1
PART 1--FINANCIAL INFORMATION
Item 1. Financial Statements
INDEX TO FINANCIAL STATEMENTS
Balance Sheet at September 30, 2002 (Unaudited)..................................................... 3
Statements of Operations For The Period From Inception (December 16, 1997) To September 30, 2002 and
For The Three Months and Nine Months Ended September 30, 2002 and 2001 (Unaudited).................. 4
Statements of Cash Flows For The Period From Inception (December 16, 1997) to September 30, 2002 and
For The Nine 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
September 30, 2002 (Unaudited)
ASSETS
Current assets
Cash $298
----------
Total current assets 298
----------
TOTAL ASSETS $298
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities $72,900
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 173,857
----------
Total current liabilities 1,807,433
----------
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 (744,500)
Paid in capital 8,916,120
Deficit accumulated during the development stage (9,996,038)
----------
(1,807,135)
----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $298
==========
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 September 30, 2002 and
For the Nine Months Ended September 30, 2002 and 2001 and
For the Three Months Ended September 30, 2002 and 2001 (Unaudited)
From inception
(December 16, Nine Months Ended September 30, Three Months Ended September 30,
1997) through ------------------------------- --------------------------------
September 30, 2002 2002 2001 2002 2001
------------------ ----------- ---------- ----------- ----------
Revenue $ - $ - $ - $ - $ -
Expenses
Research and development 1,593,898 2,368 102,046 - 7,747
General and administrative 7,988,009 762,140 652,318 13,568 355,158
------------------ ----------- ---------- ----------- ----------
Total operating expenses 9,581,907 764,508 754,364 13,568 362,905
------------------ ----------- ---------- ----------- ----------
Operating loss (9,581,907) (764,508) (754,364) (13,568) (362,905)
Interest expense 414,131 429 7,809 179 1,714
------------------ ----------- ---------- ----------- ----------
Net loss $ (9,996,038) $ (764,937) $ (762,173) $ (13,747) $ (364,619)
------------------ ----------- ---------- ----------- ----------
Weighted average shares outstanding 9,587,820 17,282,735 12,867,072 17,282,735 14,739,083
Loss per share $ (1.04) $ (0.04) $ (0.06) $ (0.00) $ (0.02)
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 September 30, 2002 and
For the Nine Months Ended September 30, 2002 and 2001 (Unaudited)
From inception
(December 16, Nine Months Ended
1997) through ----------------------------------------
September 30, 2002 September 30, 2002 September 30, 2001
------------------ ------------------ ------------------
Operating activities
Net loss $ (9,996,038) $ (764,937) $ (762,173)
Plus non-cash charges to earnings:
Amortization of license and sponsored
research agreements 796,789 127,853 201,905
Value of common stock 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 - 37,500
Change in working capital accounts: -
Decrease (increase) in prepaid expenses - 9,375 (28,125)
Increase in other receivables - - 6,532
Increase (decrease) in accounts payable
and accrued liabilities 72,900 33,450 (72,504)
Increase in accrued salaries 600,000 200,000 100,000
Increase (decrease) in interest payable 8,080 - (3,575)
Increase in payable to Stony Brook 259,000 259,000 -
Increase in payable to Univ. of Maryland 52,139 - 52,139
Increase in payable to DOCRO 350,000 - -
Increase in payable to Univ. of South Florida 175,000 100,000 -
Increase (decrease) in payable to North Shore - - 13,946
------------------ ------------------ ------------------
Total operating activities (1,484,251) (35,259) (454,355)
------------------ ------------------ ------------------
Financing activities
Loans from related parties 715,248 27,983 22,783
Repayment of loans from related parties (541,391) - -
Repayment of promissory notes by employees 5,500 5,500 -
Sale of common stock for cash:
To founders 5,000 - -
To third-party investors 1,795,727 - 491,000
Payment of issue costs (174,598) - -
To employees upon exercise of
employee stock options 320,313 - -
------------------ ------------------ ------------------
Total financing activities 2,125,799 33,483 513,783
------------------ ------------------ ------------------
Investing activities
Purchase of bladder cancer test license agreement - - (41,000)
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) - (41,000)
------------------ ------------------ ------------------
Change in cash 298 (1,776) 18,428
Cash at beginning of period - 2,074 820
------------------ ------------------ ------------------
Cash at end of period $ 298 $ 298 $ 19,248
------------------ ------------------ ------------------
Supplemental disclosure of cash flow information:
Cash paid for interest during the period $ 21,389 $ - $ 3,575
Non-cash financing and investing activities:
Common stock issued in Gentest Merger $ 1,000 $ - $ -
Sponsored Research Agreement for Telomerase Technology 124,537 - -
Common stock issued to employees upon exercise
of their options 750,000 - 750,000
Common stock subscribed through promissory notes (750,000) - (750,000)
Common stock issued as payment of liabilities
incurred in CDI transactions 38,080 - 38,080
The accompanying notes are an integral part of the financial statements.
5
Lexon, Inc.
(A Development Stage Company)
Notes to Financial Statements
For the Nine Months Ended September 30, 2002
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
Prior to September 2002 Lexon, Inc. ("Lexon" or "the Company") owned 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.
On September 23, 2002, the Company received a notice of termination from
the University of South Florida Research Foundation ("USFRF") of the license
agreement for non-payment of $175,000 of minimum royalties due among other
items. The Company disputes USFRF's position and plans to attempt to resolve the
matter.
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 September 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 September 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. There is no assurance that the
officer and employees subject to such agreements will return to serve the
Company or that the Company will be able to pay past or future salaries. 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 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, "Accounting for Asset Retirement Obligations," 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.
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.
7
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
The Company presently has no cash. The Company must raise additional
capital to continue its operations. There is no assurance that additional
capital 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 nine months ended September 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 among other items. The Company disputes
USFRF's position and plans to attempt to resolve the matter. The ability of the
Company to continue as a going concern depends on the successful resolution of
the matter in the Company's favor. Other than the write down of the exclusive
license for impairment, the financial statements do not include any adjustments
that might be necessary if the Company is unable to continue as a going concern.
Note 3-- Licensed Technology
An exclusive license to the Ebaf assay was acquired on July 8, 1998, from
USFRF, after the Company paid USFRF $100,000 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 USFRF terminating the exclusive license agreement for
non-payment of minimum royalties due. The Company disputes USFRF's position and
plans to attempt to resolve the matter. 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 September 30, 2002, the
Company owed USFRF minimum royalties totaling $175,000. On September 23, 2002,
the Company received a notice from USFRF terminating the exclusive license
agreement for non-payment of minimum royalties due among other items. The
Company disputes USFRF's position and plans to attempt to resolve the matter.
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 wrote 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 Investment
Banking 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
discussion above 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 September 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 $16,667 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 September 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.
On September 26, 2002, the Company received notice from Stony Brook that
they were withdrawing from the agreement. Pursuant to the agreement, the Company
has 180 days to pay its outstanding obligation or the agreement will be
terminated. The Company is attempting to resolve this matter.
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 September 30, 2002, Lexon's payable to the other
companies was $173,857 in total.
11
Note 6- Stock Options
A summary of the status of the Company's stock options outstanding at
September 30, 2002, is presented below. The were no options granted, exercised
or forfeited during the nine months ended September 30, 2002:
September 30, 2002
---------------------------------
Weighted Average
Shares Exercise Price
------------- -------------------
Non-employees
Outstanding, December 31, 2001 1,866,062 $1.44
Granted or Vested -- --
Exercised -- --
Forfeited -- --
------------- -------------------
Outstanding, September 30, 2002 1,866,062 $1.44
------------- -------------------
Exercisable, September 30, 2002 1,866,062 $1.44
------------- -------------------
Weighted average fair value
of options granted $--
-------------
The following table summarizes information about fixed stock options
outstanding at September 30, 2002:
Options Outstanding Options Exercisable
------------------------------------------ ------------------------------
Weighted
Average Weighted
Number Remaining Average Number Weighted
Range of exercise Outstanding Contractual Exercise Exercisable Average
prices at 09/30/02 Life Price at 09/30/02 Exercise Price
- ---------------------- -------------- -------------- ------------ -------------- ---------------
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 September 30, 2002
-----------------------
Net operating loss $1,087,374
Stock-based compensation 562,892
Valuation allowance (1,650,266)
-----------------------
Net deferred tax asset $ ---
-----------------------
From inception to September 30, 2002, the Company had a net operating tax
loss carryforward of approximately $3,198,159, 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
SFAS 109.
12
Note 8-- Earnings per Share
Basic and Diluted EPS Computation: September 30, 2002 September 30, 2001
------------------ ------------------
Net loss applicable to Common Stockholders $(764,937) $(762,173)
------------------ ------------------
Weighted average shares outstanding 17,282,735 12,867,072
------------------ ------------------
Basic and Diluted EPS $ (0.04) $ (0.06)
------------------ ------------------
For the nine months ended September 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.
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 September 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 ("USFRF") of the license
agreement for non-payment of $175,000 of minimum royalties due among other
items. The Company disputes USFRF's position and plans to attempt to resolve the
matter.
Management estimates that the Company must raise additional capital to
continue its operations. There is no assurance that the additional capital 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.
(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. There is no assurance that the Company will be
able to raise the capital it needs to continue operating or that product
development activities can resume.
(iii) Expected Purchase or Sale of Plant and Significant Equipment
None.
14
(iv) Expected Significant changes in number of employees.
As of September 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. No
accrual was made during the three months ended September 30, 2002. 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.
Item 3. Controls and Procedures
The Company's Chief Executive Officer and Chief Financial Officer have
evaluated the effectiveness of the Company's disclosure controls and procedures
(as such term is defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) as of a date within 90
days prior to the filing date of this quarterly report. Based on such
evaluation, such officers have concluded that the Company's disclosure controls
and procedures are effective in alerting them on a timely basis to material
information relating to the Company (including its consolidated subsidiaries)
required to be included in the Company's periodic filings under the Exchange
Act. There have not been any significant changes in the Company's internal
controls or in other factors that could significantly affect such controls
subsequent to the date of this evaluation.
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.
/s/ Gifford M. Mabie
----------------------------------
Gifford M. Mabie
President
Date: November 15, 2002
16
I, Gifford M. Mabie., certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Lexon, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. I am responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. I have disclosed, based on our most recent evaluation, to the registrant's
auditors and the audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. I have indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 15, 2002
/s/ Gifford M. Mabie
-------------------------------
Gifford M. Mabie
CEO and CFO
17