UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31, 1999
LEXON, INC.
(Exact name of registrant as specified in its charter)
Oklahoma 0-26915 73-1533326
(State of incorporation) (SEC File Number) (IRS Employer ID Number)
8908 South Yale Avenue
Suite 409
Tulsa, OK 74137
(Address of principal executive offices, including zip code)
(918) 492-4125
(Registrant's Telephone Number, Including Area Code)
(918) 492-2560
(Registrant's Facsimile Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$0.001 par value
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ X ]
State issuer's revenues for its most recent fiscal year: $-0-
State the aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the common
equity was sold, or the average bid and asked price of such common equity, as of
a specified price within the past 60 days. $14,631,838 as of March 31, 2000
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: As of March 31, 2000, we had
7,352,735 shares of common stock, $0.001 par value, outstanding.
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INFORMATION REQUIRED IN REGISTRATION STATEMENT
Certain Forward-Looking Information
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.
PART I
Item 1. Description of Business
(a) Business Development
1. Form and Year of Organization
We are a development stage company incorporated in Oklahoma on December 16,
1997. We own the exclusive worldwide license to the Ebaf Assay, a blood
screening test for colon cancer and certain types of ovarian and testicular
cancers. The Ebaf Assay is being developed for commercial use by scientists at
North Shore University and requires approval by the FDA before it can be sold in
the United States. We also own, through our wholly-owned subsidiary Cancer
Diagnostics, Inc. ("CDI"), the exclusive worldwide license to the Telomerase
Assay, a blood screening test for lung cancer. The Telomerase Assay is presently
being developed for commercial use and requires FDA approval before it can be
sold in the United States.
2. Bankruptcy or Receivership
We have never been in bankruptcy or receivership.
3. Mergers, Reclassifications and Purchases of Assets
GENTEST MERGER AND THE EBAF ASSAY
We acquired the exclusive worldwide license to the Ebaf Assay on July 8,
1998 when we issued 1,000,000 shares of our $0.001 par value common stock in
exchange for all of the outstanding common stock of Gentest, Inc., a Florida
corporation, that previously owned the license. We issued the 1,000,000 shares
of our common stock to UTEK Corporation ("UTEK"), the sole shareholder of
Gentest. Gentest ceased to exist by reason of this transaction.
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. Prior to the Gentest
transaction, UTEK was not affiliated with us. UTEK became an affiliate because
it owns 1,000,000 shares of our common stock as a result of the Gentest
transaction. At December 31, 1999, UTEK owned about 14.69% of our outstanding
common shares.
CANCER DIAGNOSTICS, INC. ("CDI") COMMON STOCK PURCHASE AND THE TELOMERASE
ASSAY
CDI, our wholly-owned subsidiary, owns the exclusive worldwide license
to the Telomerase Assay. We acquired CDI on January 29, 2000 when we purchased
100% of its common stock from its sole shareholder, UTEK, for $50,000 in cash
and 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. To secure the promissory note,
we pledged all of the shares of common stock of CDI. The shares were placed in
escrow and will be released to us upon payment in full of the secured promissory
note to UTEK.
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(b) Business of Issuer
1. Principal Products and Services of Lexon and Their Markets
We have no products or services for sale at this time. We have two products
currently in development. The Ebaf Assay for colon cancer is being developed by
scientists at North Shore Long Island Jewish Medical Center in Manhasset, New
York ("North Shore") and the Telomerase Assay for lung cancer is being developed
by scientists at the University of Maryland, Baltimore ("UMB").
EBAF ASSAY
Colon cancer is the second leading cause of cancer deaths in the United
States. Of the approximately 525,000 people diagnosed with colon cancer
worldwide, more than 50% will die because their cancer was not detected early
enough for surgery to be effective. Most people avoid being tested for colon
cancer because current screening methods, primarily colonoscopy and flexible
sigmoidoscopy, are invasive, embarassing and expensive. Yet colon cancer can be
cured if it is caught early. Unfortunately, there is no effective screening test
other than colonoscopy and most people who should be screened for the disease
(e.g. adults aged 50 and older or adults younger than 50 who have a family
history of the disease) do not get a colonoscopy on a regular basis.
The Ebaf Assay is a blood screening test to indicate whether a person may
require diagnostic testing for colon cancer. It is our belief that most people
who should be tested for colon cancer would be more willing to have a routine
blood test to determine if an invasive procedure like colonoscopy is necessary.
The Ebaf Assay is a simple blood test that is being developed for the ELISA
platform so it can be performed and evaluated by most medical laboratories.
The Ebaf Assay works by detecting elevated levels of the ebaf protein in a
person's blood. The discovery linking the ebaf protein to colon cancer was made
by Dr. Siamak Tabibzadeh, M.D., while he was a professor in the Department of
Pathology at the University of South Florida ("USF") and an attending
pathologist at the Moffitt Cancer Center at USF. Dr. Tabibzadeh tested
approximately 27 types of malignant tumors for the presence of ebaf. The ebaf
protein was not demonstrable in any of the tumors except for colon cancer (and
some forms of ovarian and testicular cancer.) Therefore, the ebaf protein marker
seemed to be unique to colon cancer (and some forms of ovarian and testicular
cancer.)
Dr. Tabibzadeh is now Chief of Experimental Pathology and Professor in
Pathology at North Shore, where he is directing the development of the Ebaf
Assay for the ELISA format. The Enzyme Linked Immunosorbent Assay, or ELISA
format, is a generally recognized and widely used immunological testing platform
currently used to detect HIV, Herpes and a number of other diseases. Detecting
elevated ebaf levels in a person's blood can currently be done using the Western
Blot method. Western Blot, however, is an expensive testing method that can only
be performed with highly sophisticated equipment that most laboratories in
hospitals and clinics do not have. Because ELISA format tests are inexpensive
and can be performed by most hospital and clinic laboratories, we believe this
format is ideal for the Ebaf Assay.
An ELISA-based test involves an ELISA plate which is coated with a
monoclonal antibody. When the plate is exposed to a sample of blood containing
the marker (e.g. ebaf in the case of the colon cancer screening test, or
telomerase in the case of the lung cancer screening test), the monoclonal
antibody captures the marker and locks it onto the surface of the plate. The
plate is then rinsed and exposed to a polyclonal antibody which has an enzyme
ligand attached to it. The polyclonal antibody also binds to the marker if it is
present. This technique is called a "sandwich" ELISA format, because the
substance being analyzed is "sandwiched" between a polyclonal and a monoclonal
antibody. The entire plate is then exposed to an indicator solution which
changes color in the presence of the enzyme ligand. The degree of color change
is dependent on the amount of enzyme present and hence on the amount of the
marker on the surface of the plate. The degree of color change can then be read
in a standard laboratory colorimeter. If the level of the marker in the blood is
increased relative to the base level, further diagnostic testing may be
necessary.
TELOMERASE ASSAY
Lung cancer is the leading cause of cancer deaths in the United States. The
average survival rate for lung cancer that is diagnosed in the early stages,
before it has spread to other organs, is 49%. However, only 15% of lung cancers
are diagnosed in their early stages because no effective early screening test
exists. Usually, a person waits
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until symptoms of lung cancer are present before requesting a chest x-ray,
CAT scan, or similar test. Like colon cancer, lung cancer can grow undetected
and without symptoms. If one waits until symptoms are present, it is generally
too late for a cure.
The Telomerase Assay is based on the discovery of the relationship between
telomerase in the blood and cancerous tumors, and particularly, lung cancer in
humans. Telomerase is present in almost all malignant tumor tissue. Telomerase
has been detected in more than 90% of over 3,000 malignant tumor tissues tested,
making it the most prevalent cancer marker known. Dr. Edward Highsmith, who
leads the team of researchers at UMB, was the first to demonstrate the presence
of telomerase in the blood of lung cancer patients, thus providing the
opportunity for the development of a lung cancer blood screening test. Dr.
Highsmith and his team are developing the Telomerase Assay for ELISA format.
Detecting telomerase in a person's blood can currently be done using a
modified TRAP assay. The TRAP assay, however, is an expensive testing method
that can only be performed with highly sophisticated equipment that most
laboratories in hospitals and clinics do not have. Because ELISA-based tests are
inexpensive and can be performed by most hospital and clinic laboratories, we
believe this format is ideal for the Telomerase Assay.
2. Distribution Method of Products and Services
Our success depends, in part, on our ability to market and distribute our
potential products effectively. We have no experience in the sale or marketing
of medical products. We have no manufacturing, marketing or distribution
capabilities. In the event that we obtain FDA approval for our potential
products, we may require the assistance of one or more experienced
pharmaceutical companies to market and distribute our potential products
effectively. If we seek an alliance with an experienced pharmaceutical company,
we may be unable to find a collaborative partner, enter into an alliance on
favorable terms or enter into an alliance that will be successful. Any partner
to an alliance might, at its discretion, limit the amount and timing of
resources it devotes to marketing our products. Any marketing partner or
licensee may terminate its agreement with us and abandon our products at any
time for any reason without significant payment. If we do not enter into an
alliance with a pharmaceutical company to market and distribute our products, we
may not be successful in entering into alternative arrangements, whether
engaging independent distributors or recruiting, training and retaining a
marketing staff and sales force of our own.
3. Status of Publicly Announced Products or Services
EBAF ASSAY
The Ebaf Assay is still in development. The development plan in our
sponsored research agreement with North Shore calls for a team of researchers,
under the direction of Dr. Tabibzadeh, to:
o Identify and classify a polyclonal antibody to the ebaf protein
o Identify and classify a monoclonal antibody to the ebaf protein
o Make a small number of ELIZA format test kits o Compare and analyze blood
tests using the ELISA and the Western Blot methods
o Determine the normal amounts of the ebaf protein in the blood of normal
individuals
o Determine the amount of ebaf protein in the blood of cancer patients
Dr. Tabibzadeh has identified and classified the monoclonal and polyclonal
antibodies. He is presently making a small number of Ebaf Assay ELISA test kits
and is determining how many tests will be conducted. After the test kits are
made, he 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. The Ebaf Assay requires FDA approval
before it can be sold in the U.S.
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TELOMERASE ASSAY
The Telomerase Assay is still in development. On August 27, 1999, our
wholly-owned subsidiary, CDI, agreed 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 at UMB. The development plan calls for a team of
researchers, under the direction of Dr. Highsmith, to:
o Develop a series of monoclonal antibodies to telomerase (estimated time to
complete: 8-10 months).
o Develop an ELISA format test, using a commercially available polyclonal
antibody and the monoclonal antibodies developed above to test for
telomerase in human blood (estimated time complete: 2-4 months after
development of the monoclonal antibodies).
o Obtain preliminary data demonstrating the clinical utility of telomerase as
a tumor marker in patients with lung cancer (estimated time to complete: 6
months after development of the test kit).
We do not know how much data the FDA will require and consequently, how
long the clinical trials will take. The Telomerase Assay requires FDA approval
before it can be sold in the U.S.
4. Competitive Business Conditions, Competitive Position and Methods of
Competition
Competition in the medical products and services industry is intense.
Although growth in the medical industry in general and sales of medical cancer
screening tests in particular is expected to expand as the population ages and
cancer awareness increases, the number of potential competitors in the
marketplace makes competitive pressures severe. The medical screening and
diagnostic industry has attracted large and sophisticated potential competitors
with established brand names who have already successfully developed and
marketed products and who have greater financial, technical, manufacturing,
marketing, regulatory and distribution resources than we do.
Regulation by governmental authorities in the United States and other
countries could be a significant factor in ongoing research and product
development activities. Lexon's diagnostic products will require regulatory
approval by the FDA and possibly other governmental agencies prior to
commercialization. Various statutes and regulations also govern or influence the
manufacturing, safety, labeling, storage, recordkeeping and marketing of such
products. The lengthy process of seeking these approvals, and the subsequent
compliance with applicable statutes and regulations, requires the expenditure of
substantial resources. Our failure to obtain, or any delay in obtaining,
regulatory approvals could materially adversely affect us.
In the United States and elsewhere, sales of diagnostic, therapeutic and
other pharmaceutical products are dependent, in part, on the availability of
reimbursement to the consumer from third-party payors, such as government and
private insurance plans. Third-party payors are increasingly challenging the
prices charged for medical products and services. There is no assurance that any
of our products will be considered cost effective and that reimbursement to the
consumer will be available, or will be sufficient to allow us to sell our
products on a competitive and profitable basis. Our future revenues and
profitability, if any, may be affected by the continuing efforts of government
and third party payors to contain or reduce the costs of healthcare. While we
cannot predict whether any such legislative or regulatory proposals will be
adopted, the adoption of such proposals could have a material adverse effect on
our company.
Our potential competitors are the major diagnostic pharmaceutical
corporations, such as Abbott Pharmaceuticals, Roche, SmithKlineBeecham, Johnson
& Johnson and Bayer. These companies have substantial marketing, distribution,
regulatory compliance, financial, and research and development capabilities. If
any of these competitors were to develop a colon cancer or lung cancer blood
screening tests not involving the Ebaf Assay or the Telomerase Assay, such an
event may have a material adverse effect on our ability to compete in the
medical screening and diagnostic field.
5. Sources of Raw Materials and the Names of Principal Suppliers
We do not manufacture any products at this time, so we have no raw
materials. The Ebaf Assay and the Telomerase Assay are simple products to
manufacture. Their main components are a plastic plate, monoclonal and
polyclonal antibodies, and various fluorescent markers, each of which is
commercially available.
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6. Dependence on one or a few major customers
Not Applicable
7. Patents, trademarks, licenses, royalty agreements or labor contracts
PATENTS
We do not own any patents. The University of South Florida ("USF") owns the
patent for the Ebaf Assay screening process. The patent was published on June
29, 1999. Any improvements to the patent will be owned by North Shore, where the
Ebaf Assay is being developed.
The Telomerase Assay screening process is owned by the University of
Maryland, Baltimore ("UMB"). A patent application for the Telomerase Assay
screening process was filed on February 16, 1998, however, a patent has not yet
been issued and there is no assurance that a patent will be issued.
We have no information that would lead us to believe that the Ebaf Assay
patent or Telomerase Assay pending-patent infringe the intellectual property
rights of another, but we give no assurance to that effect. The filing,
prosecution and maintenance of all patent rights are within the sole discretion
of the patent owners. We have the right to request that the patent owners seek,
obtain and maintain such patent and other protections to the extent that they
are lawfully entitled to do so, at our sole expense. There is no assurance that
the patent owners will seek, obtain or maintain such patent and other protection
to which they are lawfully entitled and there is no assurance that we will have
sufficient working capital to fund their efforts.
There is presently no foreign patent protection for the Ebaf Assay,
however, an international patent application has been filed by USF. There is no
assurance that any foreign patents will issue. The lack of foreign patent
protection could result in the manufacturing and sale of test kits copied by
competitors who are not obligated to pay royalties. As a result, these
competitors could achieve superior operating margins, which could adversely
affect our ability to compete.
LICENSE AGREEMENT - EBAF ASSAY
We own the exclusive worldwide license to the Ebaf Assay. In exchange for
the license, we agreed to pay the University of South Florida Research
Foundation ("USFRF"), the licensor of USF, 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 through April 9, 2000;
$75,000 at the end of year three; $100,000 at the end of year four; $125,000 at
the end of year five; $150,000 at the end of year six 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. We
also agreed to pay North Shore a royalty equal to one-half of one 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 to North Shore are required.
SPONSORED RESEARCH AGREEMENT - EBAF ASSAY
On July 8, 1998, we paid North Shore $311,250 to fund the development of
the Ebaf Assay for the ELISA format over a two year period beginning July 1,
1998 and ending June 30, 2000. In a letter agreement dated March 24, 1999, we
agreed to pay North Shore an additional $81,162 to add two researchers to Dr.
Tabibzadeh's staff to expedite the development of a prototype ELISA test kit.
The $81,162 is payable in 6 equal installments of $13,527 each, payable
beginning October 1, 1999 and continuing every three months thereafter through
August 1, 2000. As of December 31, 1999, we paid $27,504 and will pay the
balance of $54,108 during 2000. The Company is current in its payments to North
Shore.
LICENSE AGREEMENT - TELOMERASE ASSAY
We own the exclusive worldwide license to the Telomerase Assay through
our 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 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
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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.
SPONSORED RESEARCH AGREEMENT - 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 development plan calls for a
team of researchers, under the direction of Dr. Highsmith, to:
o Develop a series of monoclonal antibodies to telomerase (estimated time to
complete: 8-10 months)
o Develop an immunoassay (ELISA format) to detect telomerase in human blood
(estimated time complete: 2-4 months after development of the monoclonal
antibodies)
o Obtain preliminary data demonstrating the clinical utility of telomerase as
a tumor marker in patients with lung cancer (estimated time to complete: 6
months after development of the test kit)
NATIONAL INSTITUTES OF HEALTH
A portion of the research and development related to the Ebaf Assay and the
Telomerase Assay was funded by grants from the National Institutes of Health
("NIH"). The Patent and Trademark Act (Public Law 96-517), also known as the
Bayh-Dole Act, created a uniform patent policy among federal agencies that fund
research. The Bayh-Dole Act 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
perpetual, non-exclusive right to use for government purposes any invention that
results from its funding without having to pay license fees and royalties. In
addition, the U.S. government is protected from lawsuits and infringement
claims. There is no assurance that the interests of the U.S. government will not
materially adversely affect us or our business.
8. Need for Governmental Approval
Our products are considered medical devices, which are regulated by the
FDA. Medical devices are categorized into one of three classes, depending on the
controls the FDA considers are necessary to reasonably ensure the device's
safety and effectiveness. Class I devices (e.g. dental floss, manual surgical
instruments) are the least risky and least complicated devices. Class I devices
are subject to general controls, which include labeling, premarket notification,
and adherence to Quality System Regulations, which are based on the old Good
Manufacturing Practices regulations. Class II devices (e.g. x-ray machines,
oxygen masks, and many diagnostic assays similar to our products) are subject to
general controls and special controls that relate to performance standards,
post-market surveillance, patient registries, etc.) Class III devices (e.g.
drugs) are the most rigorously regulated and usually require premarket approval
by the FDA to ensure their safety and effectiveness, and which require clinical
testing prior to approval and marketing.
FDA approval is required prior to sale of our products in the United
States. The Ebaf Assay and the Telomerase Assay are considered in-vitro
diagnostic devices. Most in-vitro diagnostic devices on the market today fall
into Class I or Class II, however, a few high-risk diagnostic devices are
subject to the more rigorous regulation of Class III.
Depending on the class of the device, FDA approval can be obtained
through one of two ways. If the device is "substantially equivalent" to a
legally marketed Class I or Class II device or to a Class III device for which
the FDA has not called for a PMA, the manufacturer may seek clearance from the
FDA by filing a 510(k) premarket notification. A 510(k) filing includes a
description of the device, its intended use, draft labeling, and an explanation
of why the device should be deemed substantially equivalent to a legally
marketed device. The 510(k) needs to be supported by appropriate preclinical and
clinical data establishing the claim of substantial equivalence to the
satisfaction of the FDA. The general review time after filing a traditional
510(k) is 90-150 days, but it could be longer.
If substantial equivalence cannot be established, then we must seek
pre-market approval through submission of a PMA application, which is the most
vigorous form of FDA regulatory review. The PMA application must be supported by
valid scientific evidence, including pre-clinical and clinical trial data, as
well as extensive literature to demonstrate a reasonable assurance of safety and
effectiveness of the device. The PMA
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review and approval process generally requires one year or more to complete from
the date the FDA accepts the filing for review.
The use for which a product is intended dictates the FDA's determination of
its classification. If we intend to use the product to monitor patients for
disease progression, response to therapy, or detection of recurrent or residual
illness, the product will likely fall into Class II and be subject to 510(k)
clearance. If we plan to use the product in screening for the early detection or
diagnosis of cancer, the product will likely fall into Class III and be subject
to the rigorous PMA approval process. We may initially seek FDA approval through
a 510(k) to market the Ebaf Assay as a monitoring device. At the same time, and
using much of the same data collected for the 510(k), we may seek FDA approval
through a PMA to market the Ebaf Assay as a screening test.
The FDA requires a separate approval for each proposed indication for the
use of our products. We expect that our first indication for both the Ebaf Assay
and the Telomerase Assay will only involve their use as monitoring devices for
cancer patients. Subsequently, we expect to expand the each product's indication
for use as a screening method. In order to do so, we will have to design
additional clinical trials, submit the trial designs to the FDA for review, and
complete those trials successfully. We cannot guarantee that the FDA will
approve our products for any indication. We can only promote our products for
indications which have been approved by the FDA. Moreover, it is possible that
the FDA may require a label cautioning against the use of our products for any
or all other indications.
There may be regulatory requirements, other than those FDA requirements,
applicable to our products prior to their sale in other countries. If we choose
to market our products in countries outside of the US, it will have to comply
with any applicable requirements before such sales can be made.
9. Effect of Existing or Probable Governmental Regulation
It is quite possible that new regulations which may become effective and be
applicable to blood screening tests for cancer could be proposed and adopted
which could restrict marketing of our products. We are not aware of any such
pending or proposed regulations, however, there is no assurance that they will
not be imposed.
10. Estimate of the amount spent on research and development
From July 1998 to December 31, 1999, we paid $358,554 to North Shore for
development of the Ebaf Assay. Of this amount, $321,500 was paid during 1998
pursuant to our sponsored research agreement with North Shore, $27,054 was paid
during 1999 as part of our commitment to fund an additional $81,162 to
accelerate the development of the Ebaf Assay, and $10,000 was paid during 1999
to cover miscellaneous laboratory expenses for Dr. Tabibzadeh. No customer has
or is expected to bear any direct research and development expense.
11. Costs and effects of environmental compliance
We have not incurred any environmental compliance costs to date and we do
not expect to incur any environmental compliance costs in the future.
12. Number of total employees and number of full time employees
We have no full time employees. Our sole officer and director and our
significant employees did not receive cash compensation for their services
during 1999 and have received no such cash compensation to date. There is no
assurance that these individuals will continue to serve without cash
compensation. There are no written employment agreements. During 1999, we
prepaid $8,125 for one part-time person to perform accounting duties until June
30, 2000.
Item 2. Description of Property
Our executive offices are leased from Oklahoma National Bank. We share the
executive offices with other companies owned or controlled by our sole officer
and director. Our portion of the $4,000 monthly lease payment is approximately
$800 per month.
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Item 3. Legal Proceedings
None
Item 4. Submission of Matters to a Vote of Security Holders
None
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
(a) Market information.
Our common stock is traded in the over-the-counter market and is quoted on
the OTC Bulletin Board under the trading symbol "LXXN".
The following table sets forth the high and low sales prices for our common
stock for each quarter in the last two fiscal years as reported by the OTC
Bulletin Board, beginning November 4, 1998, when our common stock was first
traded. The quotations shown represent inter-dealer prices without adjustments
for retail markups, markdowns or commissions, and may not necessarily reflect
actual transactions.
QUARTER ENDED HIGH LOW
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December 31, 1998 (beginning 11/4/98) $3.25 $2.00
March 31, 1999 $2.28 $1.12
June 30, 1999 $5.50 $2.43
September 30, 1999 $4.00 $2.00
December 31, 1999 $2.81 $0.93
(b) Holders
As of December 31, 1999, there were approximately 50 holders of record of
our common stock.
(c) Dividend Policy
We have not declared or paid, and for the foreseeable future we do not
anticipate declaring or paying, dividends on our common stock.
Item 6. Plan of Operation
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.
(i) 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
9
<PAGE>
additional capital required will be available to Lexon on acceptable terms when
needed, if at all. Any additional capital may involve substantial dilution to
the interests of Lexon's then existing shareholders.
(ii) 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)
(iii) Expected Purchase or Sale of Plant and Significant Equipment
None.
(iv) Expected Significant changes in number of employees.
None.
Item 7. Financial Statements
See Part F/S
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act
(a) Identify Directors and Executive Officers
GIFFORD M. MABIE, age 58, is our sole officer and director. He has been an
executive officer and director of the Company since December 1997 (inception).
From 1982 to 1994, Mr. Mabie was Senior Vice President of CIS Technologies, Inc.
(NASD: CISI), a leading healthcare information company that was purchased by
National Data Corporation (NYSE: NDC) in 1996. Mr. Mabie was instrumental in
raising over $40 million in capital that funded acquisitions and new product
development. As a result, that company's revenues grew from $105,000 in 1987 to
over $40 million in 1995. Prior to CIS, Mr. Mabie was with Honeywell Information
Systems, Inc., where he ranked as one of its top five salesmen worldwide. Prior
to joining Honeywell, he was corporate controller with W.B. Dunavant & Company,
one of the world's largest cotton brokers. He holds degrees in accounting and
economics from Memphis State University and served for eight years in the United
States Navy.
Mr. Mabie is the sole officer and director of Maxxon, Inc. (OTC Bulletin
Board: MXON). Mr. Mabie is also an officer and director of the following
privately-held emerging technology companies:
10
<PAGE>
Image Analysis, Inc., a color magnetic resonance imaging technology
company; Centrex, Inc., an e.coli detection and measurement company; and
Nubar Enterprises, Inc., a laminated carbon fiber reinforcing bar company.
(b) Significant Employees
The following individuals are not executive officers but are expected by
the Company to make a significant contribution to our business:
Thomas R. Coughlin, M.D., age 50, is Medical Director for Lexon. Prior to
joining Lexon, Dr. Coughlin was a cardiovascular surgeon. From 1992 to 1995, he
was Medical Director of Cardiovascular Surgical Services at Alexandria Hospital
in Alexandria Virginia and from 1991 to 1995, was Assistant Clinical Professor,
Thoracic and Cardiovascular Surgery at George Washington University Medical
Center in Washington, D.C. He has received numerous professional honors and has
published 25 research papers. He is a graduate of the University of Rochester
School of Medicine and Dentistry, Rochester, New York (M.D.) and of Seton Hall
University (B.S.).
Rhonda R. Vincent, age 36, is Financial Reporting Manager for Lexon. From
incorporation until July 16, 1999, when she resigned as an officer and director
of Lexon, Ms. Vincent was Vice President, Secretary and Treasurer of Lexon. From
1994 to 1997, Ms. Vincent was Vice President, Secretary, Treasurer and Director
of Corporate Vision, Inc. (OTCBB: CVIA), then a multimedia software development
company. For five years prior thereto, Ms. Vincent held various accounting,
finance and investor relations positions with CIS Technologies, Inc., a leading
healthcare information processing company that was purchased by National Data
Corporation in 1996. She began her career as an audit associate with the public
accounting firm of Coopers & Lybrand. Ms. Vincent is a Certified Public
Accountant and holds a Bachelor of Science degree in accounting from Oral
Roberts University.
Vicki L. Pippin, age 40, is Administrative Manager for Lexon. She has
had more than 20 years in senior executive administration for various public
companies in the aerospace and healthcare software industries, including
McDonnell Douglas, Burtek Industries and CIS Technologies.
(c) Family Relationships
None.
(d) Involvement in Legal Proceedings of Officers, Directors and Control Persons
None.
Item 10. Executive Compensation
Mr. Mabie, our sole officer and director, has received no salary or bonus
since inception. The following tables provide details about the common stock
options that were granted to Mr. Mabie during 1999:
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<S> <C> <C> <C> <C>
Number of % of Total Options
Securities Granted to
Underlying Options Employees in Fiscal
Name Granted Year Exercise Price Expiration Date
- ------------- ------------------ ------------------- -------------- ---------------
Gifford Mabie 250,000 14.81% $1.5625 March 3, 2009
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
<S> <C> <C> <C> <C>
Number of Securities
Shares Underlying Unexercised Value of Unexercised In-
Aquired Value Options/SARs at the-Money Options/SARs
Name On Exercise Realized December 31, 1999 at December 31, 1999
- ------------- ----------- -------- ---------------------- ------------------------
Gifford Mabie N/A N/A 250,000 (1) N/A (2)
</TABLE>
(1) All options granted to Mr. Mabie during 1999 were exercisable at December
31, 1999.
(2) The closing price of our common stock on December 31, 1999 was $1.125.
Because Mr. Mabie's 250,000 options are exercisable at $1.5625 per share,
none were "in-the-money" at December 31, 1999.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following shareholders are known to us to own more than 5% of the
outstanding common stock of the Company. Except as otherwise indicated, all
information is as of March 31, 2000 and ownership consists of sole voting and
investment power.
Percent of
Relationship to Common Shares Outstanding
Name and Address Company Owned (1) Shares
- ---------------- --------------- ------------- -----------
UTEK Corporation Beneficial Owner 1,000,000 13.60%
202 Wheeler Street
Plant City, FL 33566
Gifford M. Mabie Sole Officer and 750,000 (2) 9.86%
8908 S. Yale Ave. #409 Director
Tulsa, OK 74137
Rhonda R. Vincent Beneficial Owner 490,300 (3) 6.53%
8908 S. Yale Ave. #409
Tulsa, OK 74137
Frederick K. Slicker Beneficial Owner 400,000 (4) 5.23%
4444 E. 66TH, Suite 201
Tulsa, OK 74136
Thomas R. Coughlin Beneficial Owner 737,500 (5) 9.35%
8908 S. Yale Ave. #409
Tulsa, OK 74137
Vicki L. Pippin Beneficial Owner 377,500 (5) 5.03%
8908 S. Yale Ave. #409
Tulsa, OK 74137
Sole Officer and Director 750,000 9.86%
Beneficial Owners, as a group
(5 persons) 3,005,300 5.40%
Sole Officer and Director and
Beneficial Owners, as a group
(5 person) 3,755,300 42.97%
12
<PAGE>
(1) Includes shares of common stock issuable upon the exercise of options that
are currently exercisable or will become exercisable within 60 days of
March 31, 2000. For each beneficial owner, his or her percentage of shares
owned was based on 7,352,735 shares issued and outstanding as of March 31,
2000 plus the shares which each beneficial owner has the right to acquire
within 60 days of March 31, 2000.
(2) Includes 250,000 shares of common stock issuable upon the exercise of
options
(3) Includes 200,000 shares of common stock issuable upon the exercise of
options
(4) Includes 300,000 shares of common stock issuable upon the exercise of
options and 100,000 shares owned of record by Mr. Slicker.
(5) Includes 537,500 shares of common stock issuable upon the exercise of
options
(6) Includes 150,000 shares of common stock issuable upon the exercise of
options
COMMON STOCK OPTIONS.
At December 31, 1999, we had outstanding a total of 3,207,500 options to
purchase our common stock at prices ranging from $1.20 per share to $3.00 per
share, of which 2,537,500 options were exercisable. Of the options exercisable
at December 31, 1999, 1,687,500 were exercisable by employees at prices ranging
from $1.20 per share to $1.5625 per share; and 850,000 were exercisable by
non-employees at prices ranging from $1.20 per share to $1.5625 per share.
Details about the options outstanding and exercisable at December 31, 1999 can
be found in the notes to our financial statements.
Item 12. Certain Relationships and Related Transactions
On August 4, 1999, we borrowed $100,000 from a non-affiliated shareholder
at a 10% interest rate due December 31, 2000. Subsequent to year end, we repaid
the shareholder the $100,000 plus accrued interest.
On August 4, 1999, we entered into a consulting agreement with UTEK
Corporation, a beneficial owner of our common stock, under which we were
obligated to pay UTEK $132,000 in consulting fees in cash or common stock during
the year 2000. Subsequent to year end, the consulting agreement was cancelled by
mutual consent.
On July 1, 1998, we borrowed $230,000 from an officer and a non-affiliated
shareholder. The Notes accrued interest at 12% per year through December 31,
1998 and at 14% per annum thereafter. The Notes, including accrued interest,
were paid in full in February, 1999. In connection with these loans, the Board
granted the officer options to purchase 50,000 shares of common stock and
granted the non-affiliated shareholder options to purchase 180,000 shares of
common stock, each at an exercise price of $1.20 per share. The exercise price
was deemed by the Board to be the fair market value of the stock on the date of
grant. The options expire ten years from the date of grant.
Item 13. Exhibits and Reports on Form 8-K
None
13
<PAGE>
PART III
INDEX TO AND DESCRIPTION OF EXHIBITS
Exhibit
Number Description of Exhibit
- --------------------------------------------------------------------------------
2.1 Agreement and Plan of Merger between Registrant and Gentest, Inc. dated May
11, 1998 and Certificate of Merger (1)
2.2 Agreement and Plan of Merger between Registrant and Cancer Diagnostics,
Inc. dated August 5, 1999 (2)
2.3 Stock Purchase Agreement between Registrant and Cancer Diagnostics, Inc.
dated January 28, 2000 (3)
3.1 Certificate of Incorporation of the Registrant (1)
3.2 Bylaws of the Registrant (1)
10.1 License Agreement between Gentest, Inc., the University of South Florida
and the University of South Florida Research Foundation, Inc. dated April
9, 1998 (1)
10.2 Research and License Agreement between Gentest, Inc. and North Shore
University Hospital Research Corporation dated June 22, 1998 (1)
10.3 Agreement between Registrant and North Shore Office of Grants and Contracts
dated March 8, 1999 (1)
10.4 Investor Relations Services Agreement and Option Agreement between
Registrant and Morgan-Phillips, Inc. dated November 1, 1998 (1)
10.5 Consulting Agreement between Registrant and the Viking Group dated November
1, 1998 (1)
10.6 Sponsorship Commitment Agreement between Registrant and Celebrity Images,
representatives for Eric Davis and the Score Against Colon Cancer Event,
dated March 15, 1999 (1)
10.7 Consulting Agreement between Registrant and SSP Management Corporation
dated March 31, 1999 (1)
10.8 Confidentiality Agreement between Registrant
and Ortho-Clinical Diagnostics Corporation, dated April 19, 1999 (1)
10.9 Confidentiality Agreement between Registrant and Chiron Diagnostics
Corporation, dated April 21, 1999 (1)
10.10Confidentiality Agreement between Registrant and Abbott Laboratories, dated
June 29, 1999 (1)
10.11Consulting Agreement between Registrant and Jonathan Dariyanani dated
March 1, 1999 (1)
10.12Consulting Agreement between Registrant and Dr. Tabibzadeh (1)
10.13Form of Indemnification Agreement (1)
10.14Lexon, Inc. 1998 Stock Option Plan dated August 15, 1998 and Form of
Option Agreement (1)
10.15Consulting Agreement between Registrant and UTEK Corporation effective
August 4, 1999 (2)
10.16License Agreement between Cancer Diagnositics, Inc. and University of
Maryland, Baltimore dated August 27, 1999 and amended September 23, 1999
(3)
10.17Sponsored Research Agreement between Cancer Diagnostics, Inc. and
University of Maryland, Baltimore dated August 27, 1999 and amended
September 23, 1999 (3)
10.18Secured Promissory Note dated January 28, 2000 (3)
10.19Pledge and Security Agreement dated January 28, 2000 (3)
10.20Mutual Release and Settlement Agreement between Registrant and UTEK
Corporation dated January 28, 2000 (4)
23.0 Consent of Tullius Taylor Sartain & Sartain LLP (4)
27.0 Financial Data Schedule at December 31, 1999 (for electronic filers only)
(4)
(1) Incorporated herein by reference to our Form 10-SB, as amended.
(2) Incorporated herein by reference to our Form 10-QSB for the nine
months ended September 30, 1999, as amended
(3) Incorporated herein by reference to our Form 8-K dated January 28,
2000 and filed February 14, 2000.
(4) Filed herewith
14
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
LEXON, INC.
-------------------------------------
By: Gifford Mabie, Sole Officer and Director
Date: April 14, 2000
15
<PAGE>
Part F/S
INDEX TO FINANCIAL STATEMENTS AND RELATED NOTES
AUDITED FINANCIAL STATEMENTS
Independent Auditors' Report............................................... F-1
Balance Sheet at December 31, 1999......................................... F-2
Statement of Operations from inception (December 16, 1997)................. F-3
through December 31, 1999
Statement of Cash Flows from inception (December 16, 1997)................. F-4
through December 31, 1999
Statement of Stockholders' Equity from inception (December 16, 1997)
through December 31, 1999.................................................. F-5
Notes to Financial Statements from inception (December 16, 1997)
through December 31, 1999.................................................. F-6
<PAGE>
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of Lexon, Inc.
We have audited the acompanying balance sheet of Lexon, Inc., a Development
Stage Company, as of December 31, 1999, and the related statements of
operations, cash flows and stockholders' equity for the period from inception
(December 16, 1997) to December 31, 1999, and for the years ended December 31,
1999 and 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatements. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Lexon, Inc. as of December 31,
1999, and the results of its operations and its cash flows for each of the two
years in the period then ended, and the period from inception, December 16,
1997, to December 31, 1999, in conformity with generally accepted accounting
principles in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 12 to the
financial statements, the Company is a development stage company with
insufficient revenues to fund development and operating expenses. This condition
raises substantial doubt about its ability to continue as a going concern.
Management's plan concerning this matter is also described in Note 12. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ Tullius Taylor Sartain & Sartain LLP
Tulsa, Oklahoma
February 21, 2000
<PAGE>
F-2
Lexon, Inc.
(A Development Stage Company)
Balance Sheet
December 31, 1999
ASSETS
Current assets
Cash $10,041
Due from related parties 9,703
Prepaid consulting expenses 4,062
------------------
Total current assets 23,806
------------------
Other assets
Licensed technology, net 146,794
Sponsored research, net 77,813
------------------
Total other assets 224,607
------------------
TOTAL ASSETS $248,413
------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities $37,214
Interest payable 4,900
Payable to North Shore University 54,108
Related party payables 251,627
------------------
Total current liabilities 347,849
------------------
Shareholders' deficiency
Preferred stock, $0.001 par value,
5,000,000 shares authorized; no shares
issued and outstanding at December 31, 1999 and
December 31, 1998, respectively -
Common stock, $0.001 par value,
45,000,000 shares authorized;
6,809,513 shares and 6,279,313 shares
issued and outstanding at December 31, 1999 and
December 31, 1998, respectively 6,810
Paid in capital 3,249,558
Deficit accumulated during the development stage (3,355,804)
------------------
(99,436)
------------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIENCY $248,413
------------------
The accompanying notes are an integral part of the financial statements
Page 1 of 13
<PAGE>
F-3
Lexon, Inc.
(A Development Stage Company)
Statements of Operations
From Inception (December 16, 1997) through December 31, 1999 and
For the Years Ended December 31, 1999 and 1998
From inception
(December 16,
1997) through Year ended Year ended
December 31, December 31, December 31,
1999 1999 1998
-------------- ------------ ------------
Revenue $ - $ - $ -
Expenses
Research and development 807,655 626,122 181,533
General and administrative 2,166,747 1,768,198 396,830
-------------- ------------ ------------
Total operating expenses 2,974,402 2,394,320 578,363
Operating loss (2,974,402) (2,394,320) (578,363)
Interest expense 381,402 8,318 373,084
-------------- ------------ ------------
Net loss $ (3,355,804) $ (2,402,638) $ (951,447)
Weighted average shares outstanding 5,448,007 6,698,089 4,253,702
-------------- ------------ ------------
Loss per share $ (0.62) $ (0.36) $ (0.22)
-------------- ------------ ------------
The accompanying notes are an integral part of the financial statements
Page 2 of 13
<PAGE>
<TABLE>
<CAPTION>
F-4
Lexon, Inc.
(A Development Stage Company)
Statements of Cash Flows
From Inception (December 16, 1997) through December 31, 1999 and
For the Years Ended December 31, 1999 and 1998
<S> <C> <C> <C>
From inception
(December 16,
1997) through Year ended Year ended
December 31, December 31, December 31,
1999 1999 1998
-------------- ------------ ------------
Operating activities
Net loss $ (3,355,804) $ (2,402,638) $ (951,447)
Plus non-cash charges:
Amortization of license and sponsored research agreements 247,645 165,096 82,549
Value of common stock options granted to non-employees for services 1,299,219 1,101,249 197,970
Amortization of Stock Options Issued to Non-employee Lenders 356,346 356,346
Value of services contributed by employees 501,479 280,000 220,000
Value of stock issued for services 221,675 221,675 -
Change in working capital accounts:
Increase in prepaid expenses (4,063) (4,063) -
Increase in other receivables (9,703) (9,703) -
Increase in accounts payable and accrued liabilities 37,214 12,087 24,887
Increase (decrease) in interest payable 4,900 (11,839) 16,739
Future Obligation for research and consulting expenses 186,108 186,108 -
-------------- ----------- -----------
Total operating activities (514,984) (462,028) (52,956)
-------------- ----------- -----------
Financing activities
Loans from officer and shareholder 349,627 119,627 230,000
Payment of loans from officer and shareholder (230,000) (230,000) -
Sale of common stock for cash
To founders 5,000 - 5,000
To third-party investors 926,208 557,550 368,658
Less: issue costs (140,498) (92,210) (48,288)
To employees upon exercise of employee stock options 85,938 85,938 -
-------------- ----------- -----------
Total financing activities 996,275 440,905 555,370
-------------- ----------- -----------
Investing activities
Purchase of exclusive licenses (160,000) - (160,000)
Payment of sponsored research contract (311,250) - (311,250)
-------------- ----------- -----------
Total investing activities (471,250) - (471,250)
-------------- ----------- -----------
Change in cash 10,041 (21,123) 31,164
Cash at beginning of period - 31,164 -
-------------- ----------- -----------
Cash at end of period $ 10,041 $ 10,041 $ 31,164
-------------- ----------- -----------
Supplemental disclosure of cash flow information:
Cash paid for interest and taxes during the period - - -
-------------- ----------- -----------
Non-cash financing and investing activities:
Common stock issued in Gentest Merger 1,000 - 1,000
-------------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of the financial statements
Page 3 of 13
<PAGE>
<TABLE>
<CAPTION>
F-5
Lexon, Inc.
(A Development Stage Company)
Statements of Shareholders' Equity
From Inception (December 16, 1997) through December 31, 1999 and
For the Years Ended December 31, 1999 and 1998
<S> <C> <C> <C> <C> <C>
Shares of Common Paid In Net Income
Stock Stock Capital (Loss) Total
--------- ------ --------- ---------- ---------
Balance at December 16, 1997 (Inception) - $ - $ - $ - $ -
Services contributed by officer 1,479 1,479
Net Loss through December 31, 1997 (1,719) (1,719)
--------- ------ --------- ---------- ---------
Balance at December 31, 1997 - - 1,479 (1,719) (240)
Common stock issued for cash
To Founders 5,000,000 5,000 - - 5,000
To Third-Party Investors 164,621 165 368,494 - 368,659
Issuance of additional shares to
Third party Investors 81,151 81 (81) - -
Less issue costs - - (48,288) - (48,288)
Common stock issued for services 33,541 33 (33) - -
Common stock issued in Gentest Merger 1,000,000 1,000 - - 1,000
Value of stock options to non-employees - - 1,049,241 - 1,049,241
Services contributed by officer and employees - - 220,000 - 220,000
Net Loss through December 31, 1998 - - - (951,447) (951,447)
--------- ------ --------- ---------- ---------
Balance at December 31, 1998 6,279,313 6,279 1,590,812 (953,166) 643,925
Common stock issued for cash:
To third-party investors 385,700 386 557,164 - 557,550
Less issue costs - - (92,210) - (92,210)
To employees upon exercise of stock options 55,000 55 85,883 - 85,938
Common stock issued for services 89,500 90 221,585 - 221,675
Value of stock options granted to non-employees - - 606,324 - 606,324
Contribution of services by officer and employees - - 280,000 - 280,000
Net Loss through December 31, 1999 - - - (2,402,638) (2,402,638)
--------- ------ --------- ---------- ---------
Balance at December 31, 1999 6,809,513 $6,810 $3,249,558 $(3,355,804) $ (99,436)
--------- ------ --------- ---------- ---------
</TABLE>
The accompanying notes are an integral part of the financial statements
Page 4 of 13
<PAGE>
F-6
LEXON, INC.
(A Development Stage Company)
NOTES TO FINANCIAL STATEMENTS
FROM INCEPTION (DECEMBER 16, 1997) THROUGH DECEMBER 31, 1999 AND
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
NOTE 1-- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
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 officers and 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 years ended December 31, 1999 and
1998 and for the period from inception (December 16, 1997) to December 31, 1999
the Company recorded $280,000, 220,000, and $501,479, respectively, as a capital
contribution by the officers and other employees.
FAIR MARKET VALUE OF STOCK OPTIONS AND STOCK ISSUED FOR SERVICES
The fair market value of stock options granted or stock issued as payment for
services is equal to the closing price of the Company's common stock on the date
options are granted or on the date agreements for services are signed. On
November 4, 1998, the Company's common stock began trading on the OTC Bulletin
Board under the symbol "LXXN". Prior to trading, the Board of Directors
determined the fair market value of stock options granted, or stock issued as
payment for services.
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.
Page 5 of 13
<PAGE>
FISCAL YEAR END
The Company's fiscal year ends on December 31.
RESEARCH AND DEVELOPMENT ("R&D") COSTS
The Company is amortizing the $311,250 paid pursuant to the Sponsored Research
Agreement over two years, which is the life of the service agreement. Any other
costs related to developing the Ebaf Assay are expensed as incurred.
Compensation cost associated with stock options granted to Dr. Tabibzadeh, the
inventor of the Ebaf Assay, is recorded by the Company as R&D expense.
NEW ACCOUNTING STANDARDS
The Company adopted SFAS No. 130, "Reporting Comprehensive Income" and SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information"
during 1998. The Company has no comprehensive income items during 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.
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
================
Page 6 of 13
<PAGE>
NOTE 3-- EXCLUSIVE LICENSE
On July 8, 1998, the Company paid $100,000 to the University of South Florida
Research Foundation ("USFRF") and $5,000 to North Shore University Hospital
Research Foundation ("North Shore") for the exclusive worldwide license to
develop and market the cancer screening test kits. In addition, the Company paid
$55,000 to UTEK for services rendered in connection with securing the license
agreements. The exclusive license is being amortized over 17 years using the
straight-line method. At December 31, 1999, the amount of accumulated
amortization related to the Exclusive License was $14,206.
NOTE 4-- SPONSORED RESEARCH CONTRACT
On July 8, 1998, the Company paid $311,250 to North Shore under the terms of a
Sponsored Research Agreement to develop the cancer screening test kits. The
contract specifies a 24-month development period with costs not to exceed
$311,250. The Sponsored Research Agreement is amortized over 2 years using the
straight-line method, with amortization costs recorded as R&D expenses. At
December 31, 1999, the amount of accumulated amortization related to the
Sponsored Research Agreement was $233,438.
NOTE 5-- NOTES PAYABLE
On July 1, 1998, the Company borrowed $50,000 from an officer and $180,000 from
a shareholder. The Company executed notes payable which were due December 31,
1998 at an interest rate of 12% per year, which increased to 14% per year after
the due date. As of December 31, 1999, the notes payable and accrued interest
were paid in full.
In connection with the loans, the Board granted 50,000 options to the officer
and 180,000 options to the shareholder, each at an exercise price of $1.20 per
share. Because no trading market for the common stock was yet established, the
option exercise price of $1.20 per share was determined by the Board based on
the most recent offering price of $2.00 per share less a 40% discount. The
discount was determined to be appropriate as stock issued when these options are
exercised may be restricted.
The Company recorded no compensation cost for the options granted to the
officer. For the year ended December 31, 1998, the Company recorded $356,346 as
interest expense for the options granted to the shareholder based on an
estimated fair value of $1.98 per share. The fair value of $1.98 per share was
estimated on the date of grant using the Black-Scholes option pricing model with
the following assumptions: exercise price of $1.20 per share, stock price of
$2.00 per share, risk-free interest rate of 6.0%, expected dividend yield of
0.0; expected life of ten years; and estimated volatility of 151%.
NOTE 6-- COMMITMENTS AND CONTINGENCIES
FUTURE ROYALTY OBLIGATIONS UNDER EXCLUSIVE LICENSE AGREEMENT
In connection with the exclusive license agreement, the Company agreed to pay to
USFRF a royalty equal to the greater of (a) five percent (5%) of revenue from
the sale of products based on the concept for the diagnosis of selected
adenocarcinomas and any additions, extensions and improvements thereto or as a
minimum (b) zero (0) dollars for the first twenty four (24) months; $75,000 at
the end of year three (3); $100,000 at the end of year four (4); $125,000 at the
end of year five (5); $150,000 at the end of year six (6) and for each
successive year thereafter during the term of the exclusive license agreement.
The royalty obligation will expire after the longer of twenty (20) years or the
expiration of the last to expire patent that covers the licensed intellectual
property. The Company also agreed to pay to North Shore a royalty equal to
one-half percent (0.5%) of revenue from the sale of such products and ten
percent (10%) of any consideration received by the Company from granting
sublicenses. No minimum royalty payments are required under the License
Agreement with North Shore.
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.
Page 7 of 13
<PAGE>
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 7-- 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.
Page 8 of 13
<PAGE>
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. The Company recorded $200,000, $17,550
and $4,125, respectively, as G&A expense.
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.
Lexon is authorized to issue 45,000,000 Shares of Common Stock, par value $0.001
per share, of which 6,809,513 shares were outstanding as of December 31, 1999.
Lexon is also authorized to issue 5,000,000 Shares of Preferred Stock, par value
$0.001 per share, of which there are no shares presently outstanding. There is
no present intent to issue any Preferred Stock.
VOTING RIGHTS
Holders of shares of Common Stock are entitled to one vote per share on all
matters submitted to a vote of the shareholders. Shares of Common Stock do not
have cumulative voting rights, which means that the holders of a majority of the
shareholder votes eligible to vote and voting for the election of the Board of
Directors can elect all members of the Board of Directors. Holders of a majority
of the issued and outstanding shares of Common Stock may take action by written
consent without a meeting.
DIVIDEND RIGHTS
Holders of record of shares of Common Stock are entitled to receive dividends
when and if declared by the Board of Directors. To date, Lexon has not paid cash
dividends on its Common Stock. Holders of Common Stock are entitled to receive
such dividends as may be declared and paid from time to time by the Board of
Directors out of funds legally available therefor. Lexon intends to retain any
earnings for the operation and expansion of its business and does not anticipate
paying cash dividends in the foreseeable future. Any future determination as to
the payment of cash dividends will depend upon future earnings, results of
operations, capital requirements, Lexon's financial condition and such other
factors as the Board of Directors may consider.
LIQUIDATION RIGHTS
Upon any liquidation, dissolution or winding up of Lexon, holders of shares of
Common Stock are entitled to receive pro rata all of the assets of Lexon
available for distribution to shareholders after liabilities are paid and
distributions are made to the holders of Lexon's Preferred Stock.
PREEMPTIVE RIGHTS
Holders of Common Stock do not have any preemptive rights to subscribe for or to
purchase any stock, obligations or other securities of Lexon.
Page 9 of 13
<PAGE>
NOTE 8-- STOCK OPTIONS
On August 15, 1998, the Board of Directors and shareholders approved the
adoption of the Lexon Option Plan, pursuant to which 3,000,000 shares of Common
Stock were reserved. Stock options granted under the Plan expire ten years from
the date of grant.
On October 15, 1998, the Board granted 300,000 options to a consultant at an
exercise price of $1.20 per share. In exchange for the options, the consultant
will provide the Company financial and investment consulting services for a
one-year period beginning October 29, 1998. 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 is
amortizing the prepaid expense over a 12-month period, which is the life of the
agreement. Amortization expense included in general and administrative expense
was $494,925 in 1999 and $98,985 in 1998.
During 1998, the Company entered into an agreement with an investor relations
firm whereby the Board granted 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
----------------
Options are eligible to vest on a quarterly basis, subject to the achievement of
certain market conditions surrounding the Company's stock. If the vesting
conditions are not met, the options eligible for vesting are forfeited.
Compensation cost will be recorded for the options when and if they become
vested. Only vested options are exercisable. All vested options are exercisable
until October 27, 2008. During the year ended December 31, 1999, 260,000 options
at exercise prices ranging from $1.20 to $2.00 per share were forfeited. 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%.
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%.
Page 10 of 13
<PAGE>
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 certain officers, directors and
employees of the Company. The exercise price was equal to the closing price of
the Company's common stock on the date of grant. No compensation cost was
recorded. 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
and EPS would have been reduced to the following pro forma amounts:
Net loss:
As reported $(2,402,638)
Pro forma (3,966,169)
Basic and diluted EPS:
As reported $ (0.36)
Pro forma (0.59)
A summary of the status of the Company's stock options at December 31, 1999, and
changes during the period then ended is presented below:
December 31, 1999
-----------------------------------
Weighted Average
Shares Exercise Price
------------- ------------------
EMPLOYEES
Outstanding, beginning of period 50,000 $1.20
Granted 1,692,500 $1.5625
Exercised (55,000) $1.5625
Forfeited --- ---
------------- ------------------
Outstanding, December 31, 1999 1,687,500 $1.5518
------------- ------------------
Exercisable, December 31, 1999 1,687,500 $1.5518
------------- ------------------
Weighted average fair value
of options granted $1.49
-------------
December 31, 1999
-----------------------------------
Shares Weighted Average
Exercise Price
------------- ------------------
NON-EMPLOYEES
Outstanding, beginning of period 1,530,000 $1.95
Granted or Vested 250,000 $1.5625
Exercised --- ---
Forfeited (260,000) $1.77
------------- ------------------
Outstanding, December 31, 1999 1,520,000 $1.9152
Exercisable, December 31, 1999 850,000 $1.3313
------------- ------------------
Weighted average fair value
of options granted $1.49
-------------
Page 11 of 13
<PAGE>
The following table summarizes information about fixed stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------ ------------------------------
Weighted
<S> <C> <C> <C> <C> <C>
Average Weighted
Number Remaining Average Number Weighted
Range of exercise Outstanding Contractual Exercise Exercisable Average
prices at 12/31/99 Life Price at 12/31/99 Exercise Price
---------------------- -------------- -------------- ------------ -------------- ---------------
EMPLOYEES
$1.20-$1.5625 1,687,500 9.67 years $1.5518 1,687,500 $1.5518
NON-EMPLOYEES
$1.20-$1.5625 1,520,000 9.37 years $1.9152 850,000 $1.3313
</TABLE>
NOTE 9-- INCOME TAXES
The components of deferred income tax are as follows:
Inception (December Year ended Year ended
16, 1997) to December 31, December 31,
December 31, 1999 1999 1998
------------------- ------------ -------------
Net operating loss $ 332,209 $ 271,902 $ 60,225
Stock-based compensation 562,892 374,425 188,467
Valuation allowance (895,101) (646,327) (248,692)
------------------- ------------ -------------
Net deferred tax asset $ 0 $ 0 $ 0
From inception to December 31, 1999 the Company had a net operating tax loss of
approximately $3,355,841, which expires 2019 and 2020, and temporary differences
related to stock-based compensation of $1,452,000. A valuation allowance fully
offsets the benefit of the net operating loss, since the Company does not meet
the "more probable than not" criteria of FASB 109.
NOTE 10-- EARNINGS PER SHARE
December 31, December 31,
1999 1998
BASIC AND DILUTED EPS COMPUTATION: ------------ ------------
Net loss applicable to common stockholders $(2,402,638) $ (951,447)
------------ ------------
Weighted average shares outstanding 6,698,089 4,253,702
------------ ------------
Basic and Diluted EPS $ (0.36) $ (0.22)
------------ ------------
For the years ended December 31, 1999 and 1998, all options were excluded from
the EPS calculation, as their effect was anti-dilutive.
NOTE 11-- SUBSEQUENT EVENTS
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. 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.
Page 12 of 13
<PAGE>
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.
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 place 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.
By reason of the stock purchase, CDI became a wholly-owned subsidiary
of Lexon. CDI still owns the exclusive worldwide license to the Telomerase
Assay. Under the terms of the sponsored research agreement, CDI must pay
$124,537 to UMB on or before January 1, 2001. CDI is also obligated under the
terms of the license agreement to pay a royalty of 4% of Net Sales of products
sold by Lexon. The license agreement provides for minimum annual royalties for
the life of the agreement, which coincides with the life of the last to expire
patent covering the licensed technology. 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 Agreement. In
addition, the Agreement provides for royalties of 2% of Net Sales of products
sold by sublicensees and 50% of all consideration received by CDI for up-front,
milestone or other payments from sublicensees.
The Agreement and Plan of Merger dated August 5, 1999 between Lexon and
CDI was cancelled by agreement of the parties. The consulting agreement dated
August 4, 1999 between Lexon and UTEK in which Lexon agreed to pay UTEK $132,000
was also cancelled by agreement of the parties.
NOTE 12-- 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
$2,402,638 in 1999. 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 13-- RELATED PARTY TRANSACTIONS
On August 4, 1999, the Company executed a consulting agreement with
UTEK Corporation, a Florida corporation and the sole shareholder of CDI, which
was purchased by Lexon subsequent to the year end (see Note 11). Lexon is
required to pay UTEK $132,000, either in cash or in stock in consideration for
technology merchant consulting services including identification, evaluation and
recommendation of potential technology acquisitions that are synergistic with
the Company's existing cancer diagnostic testing technologies. The first payment
of $44,000 is due on or before April 1, 2000 with remaining payments of $44,000
each being due on or before September 1 and December 1, 2000. Subsequent to year
end this agreement was canceled by mutual consent of the parties.
On August 4, 1999, the Company borrowed $100,000 from a related party.
The agreement requires that payment be received by December 31, 2000 and bears
an interest rate of 10%. Subsequent to year end the note and all accrued
interest related to it were paid in full.
Page 13 of 13
MUTUAL RELEASE AND
SETTLEMENT AGREEMENT
THIS MUTUAL RELEASE AND SETTLEMENT AGREEMENT ("AGREEMENT") IS ENTERED
INTO EFFECTIVE THIS 28TH day of January, 2000, by and between Lexon, Inc.
("Lexon") and UTEK Corporation ("UTEK").
WHEREAS, the parties entered into that certain Consulting Agreement
dated August 4, 1999 ("Consulting Agreement"), that Agreement and Plan of Merger
dated August 5, 1999 ("Merger Agreement") and any other consulting or other
agreements whether oral or written of every kind, character, and description,
between the parties relating to the merger of Cancer Diagnostics, Inc. into
Lexon; and
WHEREAS, the Consulting Agreement, the Merger Agreement and all other
consulting agreements of every kind, character and description between the
parties, whether oral or in writing, are hereinafter referred to as the
"Principal CDI Documents"; and
WHEREAS, disputes have arisen between the parties with respect to the
Principal CDI Documents, and the parties have reached a full and final
settlement of all claims and disputes existing prior to the date of this
Agreement to their mutual satisfaction as set forth in this Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt,
adequacy and sufficiency of which are hereby acknowledged, the parties agree as
follows:
1. The parties agree not to initiate any form of legal action against the
other with respect to any matter covered by this Agreement, except to
enforce this Agreement.
2. UTEK agrees that this Mutual Release constitutes a full and complete
general release, settlement, discharge, accord and satisfaction by
UTEK of Lexon and each past and present officer, director, employee,
agent, attorney, accountant and other representatives of Lexon from
and against any and all claims, actions, causes of action, rights,
obligations, debts, duties, demands, damages and liabilities of every
kind, character and description arising out of or in connection with
the Principal CDI Documents, from the beginning of time through the
date hereof.
3. Lexon agrees that this Mutual Release constitutes a full and complete
general release, settlement, discharge, accord and satisfaction by
Lexon of UTEK and each past and present officer, director, employee,
agent, attorney, accountant and other representatives of UTEK from and
against all claims, actions, causes of action, rights, obligations,
debts, duties, demands, damages and liabilities of every kind,
character and description arising out of or in connection with the
Principal CDI Documents, from the beginning of time through the date
hereof.
4. This Agreement constitutes a full and final general release, accord,
satisfaction, acquittal, compromise, adjustment, adjudication and
settlement of all claims referred herein connection with the Principal
CDI Documents. This Agreement was entered into with full knowledge of
<PAGE>
the legal purposes, intents and effects of the parties; and this
Mutual Release was entered into voluntarily and without any promise,
inducement, threat, coercion, or intimidation of any kind except as
specifically set forth herein and does not constitute an admission of
wrongdoing of any kind, character and description.
IN WITNESS WHEREOF, the parties have executed this Agreement intending
to be legally bound for all purposes.
Lexon, Inc. UTEK CORPORATION
By / signed / By / signed /
---------------------------- --------------------------------
Gifford Mabie, Pres Clifford Gross, Chairman and CEO
2
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation of our report dated February 21, 2000, on
the financial statements of Lexon, Inc. (the "Company") at December 31, 1999,
for the period from inception (December 16, 1997) to December 31, 1999 and for
the years ended December 31, 1999 and 1998, included in the Company's
Registration Statement on Form 10-KSB for the year ended December 31, 1999, into
the Company's Registration Statements on Form S-8 (File numbers 333-30828 and
333-31386).
TULLIUS TAYLOR SARTAIN & SARTAIN LLP
Tulsa, Oklahoma
April 13, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<NAME> Lexon, Inc.
<CIK> 0001062679
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 10,041
<SECURITIES> 0
<RECEIVABLES> 9,703
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 23,806
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 248,413
<CURRENT-LIABILITIES> 347,849
<BONDS> 0
0
0
<COMMON> 6,810
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 248,413
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,394,320
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,318
<INCOME-PRETAX> (3,355,804)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,355,804)
<EPS-BASIC> (0.36)
<EPS-DILUTED> (0.36)
</TABLE>
