UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
LEXON, INC.
(Name of Small Business Issuer in its Charter)
Oklahoma 541700 73-1533326
-------- ------ ----------
(State of incorporation) (Primary SIC Code) (IRS Employer ID Number)
8908 South Yale Avenue, Suite 409
Tulsa, OK 74137
(918) 492-4125
(Address and telephone number of principal executive
offices and principal place of business)
---------------------
Gifford M. Mabie, Chief Executive Officer
Lexon, Inc.
8908 South Yale Avenue, Suite 409
Tulsa, OK 74137
(918) 492-4125
(Name, address and telephone number of agent for service)
---------------------
Copies to:
Ronald C. Kaufman
Kaufman & Associates
One Main Plaza, Suite 210
610 South Main Street
Tulsa, OK 74119
(918) 584-4463
(918) 584-2207 Fax
---------------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this registration statement.
---------------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay this effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
SB-2 Sequential Page Number 1 of 77
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CALCULATION OF REGISTRATION FEE
Proposed Maximum Proposed Maximum
<S> <C> <C> <C> <C>
Title of Each Class Offering Price Per Aggregate Offering
of Securities to be Amount to be Unit Price Amount of
Registered Registered Registration Fee
----------------------- --------------------- -------------------- --------------------- --------------------
Common Stock (2) 1,150,000 $0.688(1) $793,500 $ 208.88
Common Stock (3) 500,000 $0.688(1) $812,500 $90.82
Common Stock (4) 250,000 $0.688(1) 250 $45.41
--------------------- --------------------- --------------------
Totals 1,900,000 $1,606,250 $345.11
--------------------- --------------------- --------------------
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(1) Based upon the average of the bid and asked prices of Lexon, Inc. common
stock as reported on the OTC Bulletin Board on September 29, 2000, pursuant
to Rules 457(c) and (g) of the Securities Act of 1933.
(2) Common stock (400,000) and issuable upon exercise of common stock purchase
options (600,000) issuable to Morgan-Phillips, Inc, common stock (50,000)
issuable to James Congleton and common stock issuable to Mark Lindsey
(100,000) pursuant to consulting contracts.
(3) Issuable upon the exercise of common stock purchase warrants by Goodbody
International, Inc. pursuant to a Consulting Agreement dated May 23, 2000.
(4) Common stock issued to Goodbody International, Inc. pursuant to a
Consulting Agreement dated May 23, 2000.
SB-2 Sequential Page Number 2 of 77
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The information in this prospectus is not complete and may be changed. We
may not sell these securities until the registration statement filed with the
Securities and Exchange Commission becomes effective. This prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the sale or offer is not permitted.
PROSPECTUS
LEXON, INC.
8908 South Yale Avenue, Suite 409
Tulsa, OK 74137
(918) 492-4125
THE OFFERING
This prospectus relates to the resale by various selling security holders
of up to 1,900,000 shares of common stock. The consultants and other parties may
sell the stock from time to time in the over-the-counter market at the
prevailing market price or in negotiated transactions.
We will receive proceeds from the sale of shares and the exercise of
options and warrants.
Our common stock is quoted on the over-the-counter Electronic Bulletin
Board under the symbol LXXN. On August 7, 2000, the average of the bid and asked
prices of the common stock on the OTC Bulletin Board was $0.84 per share.
THIS INVESTMENT involves a high degree of risk. You should invest in the
common stock only if you can afford to lose your entire investment. See "RISK
FACTORS" beginning on page 8 of this prospectus.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense. This prospectus is not an offer to sell these securities and
it is not soliciting an offer to buy these securities in any state where the
offer or sale is not permitted.
The date of this prospectus is October 2, 2000
Please read this prospectus carefully. It describes our company, finances,
products and services. Federal and state securities laws require that we include
in this prospectus all the important information that you will need to make an
investment decision.
You should rely only on the information contained or incorporated by
reference in this prospectus to make your investment decision. We have not
authorized anyone to provide you with different information. You should not
assume that the information in this prospectus is accurate as of any date other
than the date on the front page of this prospectus.
The following table of contents has been designed to help you find
important information contained in this prospectus. We encourage you to read the
entire prospectus.
SB-2 Sequential Page Number 3 of 77
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CROSS-REFERENCE SHEET PURSUANT TO ITEM 501(B) SHOWING LOCATION IN PROSPECTUS OF
INFORMATION REQUIRED BY ITEMS OF FORM SB-2
<S> <C> <C> <C>
Prospectus
Form SB-2 Item Location in Prospectus Page No.
------------------------------------------------ -------------------------------------------- -------------
Item 1. Front of Statement and Outside Cover Prospectus 3
of Prospectus
Item 2. Inside Front and Outside Back Cover Outside Back Cover of Prospectus 26
Pages of Prospectus
Item 3. Summary Information and Risk Factors Prospectus Summary 5
Item 4. Risk Factors Risk Factors 6
Item 5. Use of Proceeds Use of Proceeds 11
Item 6. Determination of Offering Price Determination of Offering Price 11
Item 7. Dilution Risk Factors "Dilution" 10
Item 8. Selling Security Holders Selling Securityholder 11
Item 9. Plan of Distribution Plan of Distribution 12
Item 10. Legal Proceedings None N/A
Item 11. Directors, Executive Officers, Directors, Executive Officers, Promoters
Promoters and Control Persons and Control Persons 12
Item 12. Security Ownership of Certain Security Ownership of Certain Beneficial
Beneficial Owners and Management Owners and Management 13
Item 13. Description of Securities Description of Securities 14
Item 14. Interest of Named Experts and Counsel Interest of Named Experts and Counsel 15
Item 15. Disclosure of Commission Position of
Indemnification for Securities Act Indemnification of Officers, Directors and
Liabilities Controlling Persons 15
Item 16. Organization Within Last Five Years Our History 15
Item 17. Description of Business Our Business 15
Item 18. Management's Discussion and Analysis
or Plan of Operation Our Plan of Operation 22
Item 19. Description of Property Description of Property 23
Item 20. Certain Relationships and Related Certain Relationships and Related 15
Transactions Transactions
Item 21. Market for Common Equity and Related Price Range of Our Common Stock 23
Stockholder Matters
Item 22. Executive Compensation Executive Compensation 24
Item 23. Financial Statements Index to Financial Statements 32
Item 24. Changes In and Disagreements With
Accountants on Accounting and
Financial Disclosure None N/A
</TABLE>
SB-2 Sequential Page Number 4 of 77
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<CAPTION>
Table of Contents
<S> <C> <C> <C>
Prospectus Summary...............................5 Our Business.....................................15
Risk Factors.....................................6 Our Plan of Operation............................22
Use of Proceeds..................................11 Description of Property..........................23
Price Range of Common Stock......................11 Certain Relationships and Related Transactions...23
Dividend Policy..................................11 Executive Compensation...........................24
Selling Securityholder...........................11 Financial Statements.............................32
Plan of Distribution.............................12 Legal Matters....................................N/A
Directors, Executive Officers, Promoters Interest of Named Experts and Counsel............24
And Control Persons..............................12 Indemnification of Officers, Directors
Security Ownership of Certain Beneficial and Controlling Persons..........................26
Owners and Management............................13 Reports to Securityholders.......................25
Description of Securities........................14 Incorporation of Certain Documents
Indemnification .................................24 By Reference.....................................25
Our History......................................15 Outside Back Cover of Prospectus.................26
</TABLE>
In this prospectus, we refer to Lexon, Inc. as we or Lexon. We refer to our
subsidiary Cancer Diagnostics, Inc. as CDI, North Shore Long Island Jewish
Medical Center as North Shore, University of Maryland, Baltimore as UMB and
Swartz Private Equity, LLC as Swartz.
PROSPECTUS SUMMARY
ABOUT OUR COMPANY
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 by scientists at North Shore for our
commercial use and requires approval by the FDA before it can be sold in the
United States. We also own, through CDI, the exclusive worldwide license to the
Telomerase Assay, a blood screening test for lung cancer. The Telomerase Assay
is presently being developed by scientists at UMB for our commercial use and
requires FDA approval before it can be sold in the United States.
ABOUT OUR INVESTMENT AGREEMENT
We have entered into an investment agreement with Swartz Private Equity,
LLC to raise up to $30 million through a series of sales of our common stock.
The dollar amount of each sale is limited by our common stock's trading volume,
and a minimum period of time must elapse between each sale. Each sale will be to
Swartz at a discount of the greater of 9% or $.15 off the trading average for
the 20 days immediately preceeding or following the put date, and Swartz will
receive warrants to purchase the Company's common stock equal to 10% of the
number fo shares put at 110% of market price. As additional consideration,
Swartz was issued 280,000 commitment warrants to purchase our common stock, for
five years at market price pursuant to the May 19th Investment Agreement. In
turn, Swartz will either sell our stock in the open market, place our stock
through negotiated transactions with other investors, or hold our stock in their
own portfolio. For complete details regarding the Swartz Agreement see the SB-2
Registration Statement filed July 8, 2000 and effective August 10, 2000, which
is incorporated herein by reference.
ADDITIONAL SHARES WE ARE REGISTERING
KEY FACTS
Shares being offered for resale to the public 2,200,000 Total shares outstanding
prior to the offering 7,502,735 Total shares registered by management and
consultants 1,700,000 Total shares registered for sale to Swartz 20,080,000
Total shares outstanding after the offering 31,962,735 Price per share to the
public Market price at time of resale Total proceeds raised by the offering
$2,804,750
SB-2 Sequential Page Number 5 of 77
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RISK FACTORS
The common shares being offered for sale are highly speculative in nature,
involve a high degree of risk and should be purchased only by persons who can
afford to lose their entire investment in the common shares. Before purchasing
any of the common shares, you should carefully consider each of the risks and
uncertainties described below and all the other information contained in this
prospectus. The trading price of our common stock could decline if any of the
following risks and uncertainties develop into actual events, and you may lose
all or part of the money you paid to buy our common stock.
This prospectus also contains forward-looking statements that involve risks
and uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including the risks faced by use described below and elsewhere in this
prospectus. We assume no obligation to update any forward-looking statements or
reason why actual results might differ.
WE HAVE A LIMITED OPERATING HISTORY
We have only been operating since December 1997. Accordingly, we have a
limited operating history upon which an evaluation of our performance and
prospects can be based. We face all of the risks common to companies in their
early stage of development, including:
-Under capitalization
-Cash Shortages
-An Unproven Business Model
-A Product in the Development Stage
-Lack of revenue, cashflow, and earnings to be self-sustaining
Our failure to successfully address any of the risks described above will
have a material adverse effect on our business, financial condition and on the
price of our common stock.
WE HAVE A HISTORY OF LOSSES AND EXPECT FUTURE LOSSES
We have had annual losses since our inception in December, 1997. We expect
to continue to incur losses until we finish the development of our products,
obtain FDA approval for our products, and sell enough products at prices high
enough to generate a profit. As of December 31, 1999, we had accumulated a
deficit of approximately $3.4 million. There is no assurance that we will be
able to develop a commercially viable product, to obtain FDA approval for our
products, or to generate net revenue from the sale of our products, or to
achieve or maintain profitable operations.
OUR PRODUCTS ARE STILL IN DEVELOPMENT
We have no products for sale at this time. The Ebaf Assay and the
Telomerase Assay are still in the research and development stage. Neither
product has yet been submitted to or received approval from the FDA. FDA
approval is required before we can sell the products in the U.S. There is no
assurance that the products will be commercially viable or that the FDA will
approve the products for sale in the U.S.
While we have been advised that there is a correlation between the ebaf
protein and colon cancer, and between telomerase and lung cancer, we have not
independently verified the accuracy of these statements. No assurance is given
that the presence of ebaf is an accurate predictor of cancer or that telomerase
is an accurate predictor of lung cancer.
IF WE CANNOT GENERATE ADEQUATE, PROFITABLE SALES OF OUR PRODUCT, WE WILL NOT BE
SUCCESSFUL
In order to succeed as a company, we must develop a commercially viable
product and sell adequate quantities at a high enough price to generate a
profit. We may not accomplish these objectives.
SB-2 Sequential Page Number 6 of 77
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Even if we succeed in developing a commercially viable product, a number of
factors may affect future sales of our product. These factors include:
-Whether we are successful in obtaining FDA approval;
-Whether physicians, patients and clinicians accept our product as a viable
screening method for colon cancer; and
-Whether reimbursement for the cost of our product is available
WE MUST RAISE ADDITIONAL FUNDS TO COMMENCE AND COMPLETE THE FDA APPROVAL PROCESS
We require substantial additional working capital to begin collecting data,
to commence and complete clinical trials, and to market our potential products.
There is no assurance that the 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.
UNTIL WE APPLY FOR AND RECEIVE FDA APPROVAL, WE CANNOT SELL OUR PRODUCT IN THE
UNITED STATES
We will not be able to market our potential products in the United States
until we apply for and receive FDA approval. We have not yet applied for FDA
approval related to our potential products, because they are still in the
research and development phase. Obtaining FDA approval generally takes years and
consumes substantial capital resources with no assurance of ultimate success. We
cannot apply for FDA approval until we have successfully collected sufficient
data from a pre-clinical trial. Several factors may prevent successful
completion of this pre-clinical trial, including an inability to enroll the
required number of patients and insufficient demonstration that our potential
products are safe and effective. Even if we are successful in collecting
sufficient data in the pre-clinical trial, we are not certain that we will be
able to obtain FDA approval.
STRINGENT, ONGOING GOVERNMENT REGULATION AND INSPECTION OF OUR POTENTIAL
PRODUCTS COULD LEAD TO DELAYS IN THEIR MANUFACTURE, MARKETING AND SALE
The FDA continues to review products even after they receive FDA approval.
If and when the FDA approves our potential product, its manufacture and
marketing will be subject to ongoing regulation, including compliance with
current Good Manufacturing Practices, adverse reporting requirements and the
FDA's general prohibitions against promoting products for unapproved or
"off-label" uses. We are also subject to inspection and market surveillance by
the FDA for compliance with these and other requirements. Any enforcement action
resulting from failure to comply with these requirements could affect the
manufacture and marketing of our potential products. In addition, the FDA could
withdraw a previously approved product from the market upon receipt of newly
discovered information.
WE MUST OBTAIN REGULATORY APPROVALS IN FOREIGN JURSIDICTIONS TO MARKET OUR
PRODUCTS ABROAD
We will be subject to a variety of regulations governing clinical trials
and sales of our products outside the United States. Whether or not FDA approval
has been obtained, we must secure approval of a product by the comparable
non-U.S. regulatory authorities prior to the commencement of marketing of the
product in a country. The process of obtaining these approvals will be time
consuming and costly. The approval process varies from country to country and
the time needed to secure additional approvals may be longer than that required
for FDA approval. These applications may require the completion of preclinical
and clinical studies and disclosure of information relating to manufacturing and
controls. Unanticipated changes in existing regulations or the adoption of new
regulations could affect the manufacture and marketing of our products.
WE MAY NOT BE ABLE TO MARKET AND DISTRIBUTE OUR PRODUCTS
Our success depends, in part, on our ability to market and distribute our
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
participant, enter into an alliance on favorable terms or enter into an alliance
that will be successful. Any participant to an alliance might, at its
discretion, limit the amount and timing of resources it devotes to marketing our
products. Any marketing participant 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.
SB-2 Sequential Page Number 7 of 77
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INTENSE COMPETITION COULD HARM OUR FINANCIAL PERFORMANCE
The biotechnology and pharmaceutical industries are highly competitive.
There are a number of companies, universities and research organizations
actively engaged in research and development of products that may be similar to
the Ebaf Assay or the Telomerase Assay. Our competitors may have substantially
greater assets, technical staffs, established market shares, and greater
financial and operating resources than we do. There is no assurance that we can
successfully compete.
WE DO NOT OWN THE PATENTS AND WILL NOT OWN ANY IMPROVEMENTS
The U.S. patent covering the Ebaf Assay was published on June 29, 1999 and
is owned by the University of South Florida ("USF"). Improvements to the patent
will be owned by USF and some will be owned by North Shore. A U.S. patent
application covering the Telomerase Assay was filed February 16, 1998 and is
owned by the University of Maryland, Baltimore ("UM"). There is no assurance
that a patent will be issued. If a patent is issued, all improvements will be
owned by UM.
THERE MAY BE COMPETING PRODUCTS IN THE FUTURE
There is no assurance that competing products will not be developed or that
improvements to the patents will be available to Lexon under its existing
licenses. The filing, prosecution and maintenance of all patent rights are
within the sole discretion of the patent owners. Lexon has the right to request
that the patent owners seek, obtain and maintain such patent and other
protection to the extent that they are lawfully entitled to do so, at Lexon's
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.
Further, there is no assurance that Lexon will have sufficient working capital
to fund the patent owners' efforts in those activities, if requested.
OUR LACK OF FOREIGN PATENT PROTECTION COULD ADVERSELY AFFECT OUR ABILITY TO
COMPETE
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 products.
NIH HAS CERTAIN STATUTORY RIGHTS TO OUR PRODUCTS
The initial research and development related to the ebaf screening process
was funded by a grant from the National Institutes of Health ("NIH"). The NIH
has also granted $1.1 million to the University of Maryland to study telomerase
in lung cancer patients. The NIH retains certain statutory rights to use any
invention that results from its funding without having to pay license fees and
royalties. In addition, the NIH is protected from lawsuits and infringement
claims. There is no assurance that the interests of the NIH will not materially
adversely affect Lexon or its business.
WE ARE DEPENDENT UPON THE SERVICES OF THE RESEARCHERS AND OUR EMPLOYEES
The Ebaf Assay is being developed at North Shore University Hospital in
Manhasset, New York under the direction of Dr. Tabibzedah, co-discoverer of the
ebaf screening process. The Telomerase Assay is being developed at the
University of Maryland, Baltimore under the direction of Dr. Edward Highsmith,
discoverer of the telomerase screening process. The loss of the services of Dr.
Tabibzedah or Dr. Highsmith and the inability to retain an acceptable substitute
could have a material adverse effect on Lexon.
SB-2 Sequential Page Number 8 of 77
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Lexon is also dependent upon the services of its sole officer and key
employees, who each provide services without cash compensation. The loss of the
services of these key personnel or the inability to retain such experienced
personnel could have a material adverse effect on Lexon.
CONCENTRATION OF STOCK OWNERSHIP
UTEK Corporation owns approximately 13% of the outstanding common stock.
Our sole officer and director and our key employees own approximately 25% of the
outstanding common stock. In addition, the sole officer and director and our key
employees have options to purchase up to 2,887,500 shares of common stock at
prices ranging from $0.84 to $1.5625 per share. Accordingly, UTEK and our sole
officer and director and our key employees exercise substantial influence over
our business and the election of members to the board of directors.
LIMITED EXPERIENCE OF MANAGEMENT AND POTENTIAL CONFLICTS OF INTEREST
The sole officer and key employees of Lexon have had limited experience in
the pharmaceutical industry. In addition, the sole officer and key employees are
associated with other firms involved in a range of business activities.
Consequently, there are potential conflicts of interest in their acting as
officers and directors of Lexon. Management estimates that not more than 50% of
their time will be devoted to Lexon's activities.
WE MAY NOT BE ABLE TO FIND AND RETAIN SUITABLE MANAGEMEN
As stated above, Lexon's current management has limited experience in the
pharmaceutical industry and the sole director and key employees are associated
with other firms in a range of business activities and will devote no more than
50% of their time to Lexon. Therefore, Lexon is planning to conduct a search for
a management team to include a new CEO. There is no guarantee that the Company
will find a suitable management team and/or CEO. The market for CEO's and
management is extremely competitive. If Lexon is unable to find and retain a
suitable CEO and/or management this could have an adverse effect on the Company.
HEALTH CARE REFORM AND CONTROLS ON HEALTH CARE SPENDING MAY LIMIT THE PRICE WE
CAN CHARGE FOR OUR POTENTIAL PRODUCT AND THE AMOUNT WE CAN SELL
The federal government and private insurers have considered ways to change,
and have changed, the manner in which health care services are provided in the
United States. Potential approaches and changes in recent years include controls
on health care spending and the creation of large purchasing groups. In the
future, it is possible that the government may institute price controls and
limits on Medicare and Medicaid spending. These controls and limits might affect
the payments we collect from sales of our product. Assuming we succeed in
bringing our product to market, uncertainties regarding future health care
reform and private practices could impact our ability to sell our product in
large quantities at profitable pricing.
UNCERTAINTY OF THIRD-PARTY REIMBURSEMENT COULD AFFECT OUR ABILITY TO SELL OUR
PRODUCTS AT A PROFIT
Sales of medical products largely depend on the reimbursement of patients'
medical expenses by governmental health care programs and private health
insurers. There is no guarantee that governmental health care programs or
private health insurers will cover the cost of our product or permit us to sell
our product at a high enough price to generate a profit.
OUR STOCK PRICE IS VOLATILE
Our common stock is traded on the OTC Bulletin Board under the symbol
"LXXN." The price at which our common stock is traded is volatile and may
continue to fluctuate substantially due to factors such as:
-Our anticipated operating results
-Variations between our actual results and the expectations of investors
-Announcements by us or others and developments affecting our business
-Investor perceptions of our company and comparable public companies
In particular, the stock market has from time to time experienced
significant price and volume fluctuations affecting the common stocks of
companies in the pharmaceutical industry, like us. These fluctuations may result
in a material decline in the price of our common stock.
A LARGE NUMBER OF SHARES MAY BE SOLD AT A DISCOUNT IN THE FUTURE
Pursuant to our Investment Agreement with Swartz we must put a minimum
amount of Common Stock at a discount equal to the greater of 9% or $.15
($1,000,000 every 6 months) or pay a non-usage fee in the amount of $100,000. In
addition, for every put exercised, Swartz receives, at no additional cost, an
amount of warrants equal to 10% of the # of shares they purchased for that put.
The exercise price of which is equal to 110% of the Market Price for the
applicable put. The term of these warrants is 5 years.
In accordance to the Investment Agreement with Swartz, the Company's
initial put was executed on August 24, 2000. Swartz purchased 260,160 shares at
an exercise price of $0.75 per share for a total of $195,120 delivered to the
Company on September 29, 2000.
SB-2 Sequential Page Number 9 of 77
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LIQUIDITY
The low volumes traded in our stock may make it difficult or impossible to
resell our securities.
OUR STOCK IS CONSIDERED TO BE A "PENNY STOCK"
The Penny Stock Act of 1990 requires specific disclosure to be made
available in connection with trades in the stock of companies defined as "penny
stocks". The SEC has adopted regulations that generally define a penny stock to
be any equity security that has a market price of less than $5.00 per share,
subject to certain exceptions. If an exception is unavailable, the regulations
require the delivery, prior to any transaction involving a penny stock, of a
disclosure schedule explaining the penny stock market and the risk associated
therewith as well as the written consent of the purchaser of such security prior
to engaging in a penny stock transaction. The regulations on penny stock may
limit the ability of the purchasers of our securities to sell their securities
in the secondary marketplace.
WE DO NOT EXPECT TO PAY DIVIDENDS
We have not declared or paid, and for the foreseeable future we do not
anticipate declaring or paying, dividends on our common stock.
DILUTION
To the extent outstanding warrants and options to purchase our common stock
are exercised or additional equity securities are issued at a price below the
price of a share in this offering, you may experience dilution. At June 30,
2000, the Company had 3,542,500 options outstanding, of which 3,167,500 were
exercisable at prices ranging from $1.20 to $1.5625 per share. On August 18,
2000 the Company filed a Registration Statement for 1,250,000 options granted to
employees of the Company which are exercisable at $0.84 per share.
The following table shows the number of Shares acquired from the Company,
the aggregate consideration paid by the existing shareholders and by Swartz,
assuming Swartz purchases all of the shares and warrants included in the
Registration Statement filed July 28, 2000 at an assumed purchase price of $1.34
per share however, Swartz on each put date receives a discount equal to the
greater of 9% or $.15 and stock purchase warrants equal to 10% of the number of
shares for that put at an exercise price equal to 110% of the Market Price for
that put. The Company is required to put a certain amount of shares or pay a
non-usage fee :Included in the table are 450,000 shares issued pursuant to
compensation and 1,250,000 options assumed to be exercised at $0.84 per share.
<TABLE>
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Aggregate Percentage of
Shares Percentage Consideration Consideration
Acquired from of Shares Paid for Paid by
Company Held by Group Shares Group
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Existing Shareholders .............. 7,502,735 66.0% $2,003,386 36.1%
Swartz ............................. 260,160 2.3% $195,120 3.5%
Employees and Consultants 1,700,000 15.0% $1,751,000 31.5%
Shareholders included in this Offering 1,900,000 16.7% $1,606,250 28.9%
----------------------------------------------------------------
Total ............................. 11,362,895 100.0% $5,555,756 100.0%
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</TABLE>
***Dilution in table above is as of October 2, 2000***
Under the terms of the Investment Agreement, Swartz must purchase a minimum
number of shares at the discount described above, based upon volume
restrictions. The company must sell a minimum number of shares or pay a usage
fee. Therefore, the dilution based upon the Swartz Agreement will vary based
upon volume and future prices. In addition, under the Investment Agreement,
Swartz will not be required to purchase any shares that would increase the
number of shares beneficially owned to more that 9.9% of common stock.
SB-2 Sequential Page Number 10 of 77
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USE OF PROCEEDS
We will receive no proceeds from the sale of the shares and will only
receive proceeds when and if the options are exercised. While we intend to use
the proceeds from the sale of the shares and the exercise of options for working
capital and general corporate purposes, including to complete the development of
the Ebaf and Telomerase Assays and to fund the gathering of data for FDA
approval, a portion of the proceeds is not allocated for a specific purpose. The
primary purpose of this offering is to meet contractual obligations.
DETERMINATION OF OFFERING PRICE
The options , warrants and stock for services to the Company were issued at
the market closing price on the date of the transaction. For those options
issued prior to a trading price being established, the price used was the fair
market value as determined by the Board of Directors.
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.
SELLING SECURITYHOLDERS
The following table provides certain information with respect to ownership
of our common stock as of June 30, 2000, and as adjusted to give effect to the
sale of all of the shares offered hereby. The Selling Shareholders are not
affiliates of Lexon.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Number of Shares Beneficially Owned After
Shares Offering (1)
Beneficially ---------------------------------
Owned Before Number of Number of
Name Offering Shares Offered Shares Percent
---------------------------------------- ---------------- ----------------- ---------------- -----------------
Morgan-Phillips (Beneficial Owner) 0 1,000,000 0 0%
James Congleton (Beneficial Owner) 0 50,000 0 0%
Mark Lindsey (Beneficial Owner) 0 100,000 0 0%
Goodbody International (Beneficial Owner) 0 750,000 0 0%
Total Selling Shareholders 0 1,900,000 0 0%
</TABLE>
(1) Assumes that the selling shareholders will exercise their options and
warrants and sell their shares.
SB-2 Sequential Page Number 11 of 77
<PAGE>
PLAN OF DISTRIBUTION
The selling shareholders are free to offer and sell their common shares at
such times, in such manner and at such prices as they may determine. The types
of transactions in which the common shares are sold may include transactions in
the over-the-counter market (including block transactions), negotiated
transactions, the settlement of short sales of common shares or a combination of
such methods of sale. The sales will be at market prices prevailing at the time
of sale or at negotiated prices. Such transactions may or may not involve
brokers or dealers. There are no known Underwriters or Underwriting obligations.
DIRECTORS, EXECUTIVE OFFICER, PROMOTERS AND CONTROL PERSONS
Gifford M. Mabie, age 59, 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:
--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.
SB-2 Sequential Page Number 12 of 77
<PAGE>
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.
(e) Changes In Control
The Swartz Investment Agreement, as described in the July 8th SB-2, may
result in a change of control as the Company must sell a minimum number of
shares or pay a usage fee. Subject to the volume restriction, a change in contol
may occur.
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 June 30, 2000 and ownership consists of sole voting and
investment power.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Percent of
Relationship to Common Shares Outstanding
Name and Address Company Owned (1) Shares
---------------------------------------------- ------------------- ------------------- ----------------
UTEK Corporation Beneficial Owner 1,000,000 13.33%
202 Wheeler Street
Plant City, FL 33566
Gifford M. Mabie Sole Officer and 750,000 (2) 10.00%
8908 S. Yale Ave. #409 Director
Tulsa, OK 74137
Thomas R. Coughlin Beneficial Owner 887,500 (3) 11.83%
8908 S. Yale Ave. #409
Tulsa, OK 74137
Sole Officer and Director 750,000 10.00%
Beneficial Owners, as a group
(2 persons) 1,887,500 25.16%
Sole Officer and Director and Beneficial
Owners, as a group
(3 person) 2,637,500 35.16%
</TABLE>
(1) Includes shares of common stock issuable upon the exercise of options that
are currently exercisable or will become exercisable within 60 days of June
30, 2000. For each beneficial owner, his or her percentage of shares owned
was based on 7,502,735 shares issued and outstanding as of June 30, 2000
plus the shares which each beneficial owner has the right to acquire within
60 days of June 30, 2000.
(2) Includes 250,000 shares of common stock issuable upon the exercise of
options
(3) Includes 587,500 shares of common stock issuable upon the exercise of
options
SB-2 Sequential Page Number 13 of 77
<PAGE>
DESCRIPTION OF SECURITIES
Common Stock
Lexon is authorized to issue 45,000,000 Shares of Common Stock, par value
$0.001 per share, of which 7,728,870 shares were outstanding as of July 8, 2000.
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.
Preferred Stock
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.
Warrants
There are outstanding warrants to purchase 280,000 shares of our common
stock at a price of $2.80 per share that were issued to Swartz on March 28, 2000
in consideration of its commitment to enter into the Investment Agreement. An
additional 204,809 warrants will be issued to Swartz pursuant to the Investment
Agreement which required a total warrant amount equal to 4% of the outstanding
stock on August 24th which was the first put date. The warrants expire on March
27, 2005. There are also outstanding warrants to purchase 500,000 shares of our
common stock at a price of $1.625 per share that were issued to Goodbody on May
23, 2000 pursuant to our Consulting Agreement with them. Goodbody has the right
to have the common stock issuable upon exercise of the its warrants included in
any registration statement we file, other than a registration statement covering
an employee stock plan or a registration statement filed in connection with a
business combination or reclassification of our securities. Therefore,
Goodbody's warrants are indlcued in this registration statement.
Swartz Agreement
The Company must sell Swartz a minimum amoung of shares at a discount (the
greater of 9% or $.15) or pay the non usage fee purusant to the Investment
Agreement signed on May 19, 2000 and included herein by reference to Form SB-2
filed on July 8, 2000.
SB-2 Sequential Page Number 14 of 77
<PAGE>
INTEREST OF NAMED EXPERTS AND COUNSEL
The balance sheet of Lexon as of December 31, 1999 and the statements of
operations, shareholders' equity and cash flows for the period from inception
(December 17, 1997) to December 31, 1999 and for the years ended December 31,
1999 and 1998, included in this prospectus, have been included herein in
reliance on the report, which includes an explanatory paragraph on our ability
to continue as a going concern, of Tullius Taylor Sartain & Sartain LLP,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
INDEMNIFICATION OF OFFICERS, DIRECTORS AND CONTROLLING PERSONS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors officers or persons controlling the
Registrant pursuant to the foregoing provisions, the registrant has been
informed that in the opinion of the SEC, such indemnification is against public
policy as expressed in the Act is therefore, unenforceable.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On August 4, 1999, we borrowed $100,000 from Morgan-Phillips, 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.
In January 2000, we entered into a purchase agreement with UTEK
Corporation, a beneficial owner of our common stock, under which we purchased
Cancer Diagnostics, Inc. As a result we were obligated to pay UTEK $200,000 in
in cash. by mutual agreement, UTEK extended the note obligation until December
31, 2000. Interest is accrued on the unpaid balance at a rate of 12% per annum.
As of October 2, 2000, the unpaid principal balance of that note was $30,000.
On July 1, 1998, we borrowed $50,000 from Fred Slicker, a former officer
and legal counsel, and $180,000 from the Mabie Children's Trust, 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 Mabie Children's Trust 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.
OUR HISTORY
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. At June 30, 2000, the due date for
this note had been extended by mutual agreement. 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.
OUR BUSINESS
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").
SB-2 Sequential Page Number 15 of 77
<PAGE>
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, embarrassing 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 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.
SB-2 Sequential Page Number 16 of 77
<PAGE>
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 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.
SB-2 Sequential Page Number 17 of 77
<PAGE>
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.
SB-2 Sequential Page Number 18 of 77
<PAGE>
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.
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 issue.
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. As of June 30, 2000, the Company owed $27,054 of
its original obligation to North Shore.
SB-2 Sequential Page Number 19 of 77
<PAGE>
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 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.
SB-2 Sequential Page Number 20 of 77
<PAGE>
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 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 Share, $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.
SB-2 Sequential Page Number 21 of 77
<PAGE>
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.
REPORTS TO SECURITYHOLDERS
We file annual, quarterly and periodic reports, proxy statements and other
information with the Securities and Exchange Commission using the Commission's
EDGAR system. The Commission maintains a web site, www.sec.gov, that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission. You may read and copy
any materials filed with the SEC at the SEC's Public Reference Room at 450 Fifth
Street, N.W., Washington, D.C. 20549. You may obtain information on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
We furnish our shareholders with annual reports containing audited
financial statements and with such other periodic reports as we, from time to
time, deem appropriate or as may be required by law. We use the calendar year as
our fiscal year.
You should rely only on the information contained in this Prospectus and
the information we have referred you to. We have not authorized any person to
provide you with any information that is different.
OUR 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 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 is expected to 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 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 are expected to
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.
SB-2 Sequential Page Number 22 of 77
<PAGE>
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.
MARKET FOR COMMON EQUITY
Our common stock is traded in the over-the-counter market and is quoted on
the OTC Bulletin Board under the trading symbol "LXXN". As of June 30 ,2000,
there were approximately 49 holders of record of our common stock.
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
------------- ---- ---
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
March 31, 2000 $3.25 $0.93
June 30, 2000 $2.56 $1.25
SB-2 Sequential Page Number 23 of 77
<PAGE>
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 Securities % of Total Options
Underlying Options Granted to Employees
Name Granted in Fiscal Year Exercise Price Expiration Date
----------------- ---------------------- ----------------------- ---------------- -----------------
Gifford Mabie 250,000 14.81% $1.5625 March 3, 2009
</TABLE>
<TABLE>
<CAPTION>
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Value
<S> <C> <C> <C> <C>
Number of Securities
Shares Acquired Underlying Unexercised Value of Unexercised
Name On Exercise Value Realized Options/SARs at December In-the-Money Options/SARs
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.
FINANCIAL STATEMENTS
See Index to Financial Statements on page 36.
LEGAL MATTERS
The legality of the securities offered hereby has been passed upon by
Kaufman & Associates, Tulsa, Oklahoma.
SB-2 Sequential Page Number 24 of 77
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The SEC allows us to "incorporate by reference" information that we file
with them, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
an important part of this prospectus, and information we file later with the SEC
will automatically update and supersede this information. We incorporate by
reference the documents listed below and any future filings we will make with
the SEC under Section 13(a), 13(c), 14 or 15 of the Securities Exchange Act of
1934
1. Our Form 10-SB/A, filed January 4, 2000.
2. Our Quarterly Report on Form 10-QSB/A for the quarter ended September
30, 1999, filed January 4, 2000.
3. Our Current Report on Form 8-K, regarding our purchase of Cancer
Diagnostics, Inc. on January 28, 2000, filed February 11, 2000.
4. Our Form 10-KSB for the year ended December 31, 1999, filed April 14,
2000.
5. Our Quarterly Report on Form 10-QSB for the quarter ended March 31,
2000, filed May 22, 2000.
6. Our Form SB-2 filed July 28, 2000 to register stock pursuant to an
Investment Agreement with Swartz Institutional Finance.
7. Our Quarterly Report on Form 10-QSB for the quarter ended June 30,
2000, filed on August 15,2000.
This prospectus is part of a registration statement we filed with the SEC.
You should rely only on the information incorporated by reference or provided in
this prospectus and the registration statement. We have authorized no one to
provide you with different information. You should not assume that the
information in this prospectus is accurate as of any date other than the date on
the front of the statement.
If we file any document with the Commission that contains information which
is different from the information contained in this prospectus, you may rely
only on the most recent information which we have filed with the Commission.
We will provide a copy of the documents referred to above without charge if
you request the information from us. You should contact Mr. Gifford Mabie,
President, Lexon, Inc., 8908 S. Yale Ave. #409, Tulsa, Oklahoma 74137, telephone
(918) 492-4125, if you wish to receive any of such material.
SB-2 Sequential Page Number 25 of 77
<PAGE>
OUTSIDE BACK COVER OF PROSPECTUS
PART II- INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Lexon's Certificate of Incorporation provides for indemnification to the
full extent permitted by Oklahoma law of all persons it has the power to
indemnify under Oklahoma law. In addition, Lexon's Bylaws provide for
indemnification to the full extent permitted by Oklahoma law of all persons it
has the power to indemnify under Oklahoma law. Such indemnification is not
deemed to exclusive of any other rights to which those indemnified may be
entitled, under any bylaw, agreement, vote of stockholders or otherwise. The
provisions of Lexon's Certificate of Incorporation and By Laws which provide
indemnification may reduce the likelihood of derivative litigation against
Lexon's directors and officers for breach of their fiduciary duties, even though
such action, if successful, might otherwise benefit Lexon and its stockholders.
In addition, Lexon has entered into indemnification agreements with its
sole officer and director, significant employees, consultants and others. These
agreements provide that Lexon will indemnify each person for acts committed in
their capacities and for virtually all other claims for which a contractual
indemnity might be enforceable.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors officers or persons controlling the
Registrant pursuant to the foregoing provisions, the registrant has been
informed that in the opinion of the SEC, such indemnification is against public
policy as expressed in the Act and is therefore, unenforceable.
Item 25. Other Expenses of Issuance and Distribution
The following is an itemized statement of the estimated amounts of all
expenses payable by the registrant in connection with the registration of the
common stock offered hereby:
SEC Filing Fee............................... $ 350
Legal Fees................................... $10,000
Accounting Fees and Expenses................. $ 5,000
Miscellaneous................................ $ 3,000
-----------
Total........................................ $18,350
-----------
Item 26. Recent Sales of Unregistered Securities
(a) Securities Sold
During the year ended December 31, 1998, the following common stock
transactions occurred:
o Under the terms of an offering dated April 1, 1998, we sold 5,000,000
shares of our common stock to our founders at par value for $5,000
cash.
o On July 8, 1998, we issued 1,000,000 shares of our common stock in
connection with the Gentest merger.
SB-2 Sequential Page Number 26 of 77
<PAGE>
o On May 18, 1998, we began a Rule 504 private offering at $2.00 per
share. This price was determined by our 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 our 15c211 application was filed with the NASD. Our common stock
began trading on November 4, 1998 at $2.50 per share. On November 6,
1998, we began a Rule 504 private offering at $3.00 per share, which
price was greater than the closing price of our 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. We incurred expenses of $48,287 in connection with
the offerings. On January 18, 1999, we ended the $3.00 offering and
began an offering at $1.50 per share, which was equal to the closing
price of our common stock on January 19, 1999. Although we had no
obligations to do so, our 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, we
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.
o During 1998, we issued 33,541 shares of our 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 We sold 385,700 shares of common stock to third party investors for
$557,550 in cash.
o We 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 our 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 about our Company. An additional 7,500 shares were
issued at $2.34 per share to a public relations specialist in
connection with our colon cancer awareness activities. The remaining
2,000 shares were issued at $4.875 per share for legal services.
o We issued 55,000 shares of common stock to an employee who exercised
stock options at $1.5625 per share. We received $85,938 in cash. The
exercise price was equal to the closing price of our common stock on
the date the options were granted.
During the six months ended June 30, 2000, the following common stock
transactions occurred:
o We issued 150,000 shares of common stock to employees who exercised
stock options at $1.5625 per share. We received $234,375 in cash. The
exercise price was equal to the closing price of our common stock on
the date the options were granted.
o We issued 293,222 shares of common stock for services rendered by
outside consultants. The shares were valued based on the closing price
of our common stock on the date the services were rendered or
agreements were signed. Of the shares issued, 190,000 were issued at
$.9375 per share to consultants for services rendered in connection
with accounting and legal services; 81,000 shares were issued at
$.9375 per share for general business consulting services; and 22,222
shares were issued at $1.125 per share to a consultant to develop and
maintain an Internet web site for the Company.
o We issued 250,000 shares of common stock and 500,000 purchase warrants
to Goodbody in connection with a Consulting Agreement dated May 23,
2000. We received $250 in cash.
o We issued 280,000 commitment warrants to Swartz in connection with our
Investment Agreement which was registered purusant to an SB-2 filed on
July 28, 2000.
SB-2 Sequential Page Number 27 of 77
<PAGE>
(b) Underwriters and Other Purchasers
There was no public offering of the shares. The shares were sold to
officers, directors and key consultants, to Gentest in connection with its
Merger into Lexon, and to purchasers in compliance with Regulation D, Rule 504
of the Securities Exchange Act of 1933, or in compliance with Rule 701, or in
reliance upon an effective S-8 Registration Statement.
(c) Consideration
We paid commissions of $100,360 to RichMark Capital Corporation, a
registered broker-dealer. Such commissions were for sales by the broker-dealer
to third-party investors and consisted of 10% of the gross proceeds received. In
addition to these commissions, we paid a due diligence fee of 6% and a 4% fee
for unallocated expense reimbursement.
We paid $13,000 and $2,500, respectively, to two non-affiliates as finder's
fees, which fees represented up to 10% of the gross proceeds received by us from
the purchase of Lexon common stock by persons first identified as prospective
investors by the finders. The finders did not act as broker-dealers. Lexon dealt
directly with such prospective investors and did not pay a brokerage commission
or other fees. We believe that these finders fees did not exceed customary fees
paid to finders in these circumstances.
Goodbody International, Inc. helped us to facilitate the transaction with
Swartz, upon consultation, regarding various other financing alternatives. On
May 23, 2000, we entered into a three year consulting agreement with Goodbody.
We agreed to pay them $500.00 per month to cover expenses during the term of the
consulting agreement. They purchased 250,000 restricted shares of our common
stock at par value, $0.001 per share, and were issued a 5-year warrant to
purchase 500,000 shares of our common stock exercisable at the closing bid price
on May 10, 2000, which was $1.625 per share. The warrant has a cashless exercise
provision and reset provisions. Their restricted shares and warrants are subject
to piggyback registration rights after ten (10) months and are not being
registered pursuant to this Registration Statement.
(d) Section under which exemption from registration was claimed
The issuance of the securities described above were deemed to be exempt
from registration under the Securities Act in reliance on Section 4( 2) and SEC
Regulation D, Rule 504, among other exemptions. Each recipient of securities in
each such transaction represented his or her intentions to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof and, where applicable, appropriate legends were
affixed to the share certificates issued in such transactions. All recipients
had access to information about Lexon.
Item 27. Exhibits
Exhibit
No. Description of Exhibit
---------- -----------------------------------------------------------------
2.1 Agreement and Plan of Merger between Registrant and Gentest, Inc.
dated May 11, 1998 and Certificate of Merger (incorporated herein
by reference to our Form 10-SB/A, filed January 4, 2000.)
2.2 Agreement and Plan of Merger between Registrant and Cancer
Diagnostics, Inc. dated August 5, 1999 (incorporated herein by
reference to our Form 10-QSB/A for the nine months ended
September 30, 1999, filed January 4, 2000)
2.3 Stock Purchase Agreement between Registrant and Cancer
Diagnostics, Inc. dated January 28, 2000 (incorporated herein by
reference to our Form 8-K dated January 28, 2000 and filed
February 14, 2000.)
3.1 Certificate of Incorporation of the Registrant (incorporated herein
by reference to our Form 10-SB/A, filed January 4, 2000.)
3.2 Bylaws of the Registrant (incorporated herein by reference to our
Form 10-SB/A, filed January 4, 2000.)
4.1 Specimen Stock Certificate *
4.2 Investment Agreement dated as of May 19, 2000 by and between
Registrant and Swartz Private Equity, LLC *
5.1 Legal opinion of Kaufman & Associates *
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 (incorporated herein by reference to our
Form 10-SB/A, filed January 4, 2000.)
10.2 Research and License Agreement between Gentest, Inc. and North
Shore University Hospital Research Corporation dated June 22,
1998 (incorporated herein by reference to our Form 10-SB/A, filed
January 4, 2000.)
SB-2 Sequential Page Number 28 of 77
<PAGE>
10.3 Agreement between Registrant and North Shore Office of Grants and
Contracts dated March 8, 1999 (incorporated herein by reference to
our Form 10-SB/A, filed January 4, 2000.)
10.4 Investor Relations Services Agreement and Option Agreement
between Registrant and Morgan-Phillips, Inc. dated November 1,
1998 (incorporated herein by reference to our Form 10-SB/A, filed
January 4, 2000.)
10.5 Consulting Agreement between Registrant and the Viking Group dated
November 1, 1998 (incorporated herein by reference to our Form
10-SB/A, filed January 4, 2000.)
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 (incorporated herein by reference
to our Form 10-SB/A, filed January 4, 2000.)
10.7 Consulting Agreement between Registrant and SSP Management
Corporation dated March 31, 1999 (incorporated herein by reference to
our Form 10-SB/A, filed January 4, 2000.)
10.8 Confidentiality Agreement between Registrant and Ortho-Clinical
Diagnostics Corporation, dated April 19, 1999 (incorporated herein by
reference to our Form 10-SB/A, filed January 4, 2000.)
10.9 Confidentiality Agreement between Registrant and Chiron Diagnostics
Corporation, dated April 21, 1999 (incorporated herein by reference
to our Form 10-SB/A, filed January 4, 2000.)
10.10 Confidentiality Agreement between Registrant and Abbott Laboratories,
dated June 29, 1999 (incorporated herein by reference to our Form
10-SB/A, filed January 4, 2000.)
10.11 Consulting Agreement between Registrant and Jonathan Dariyanani dated
March 1, 1999 (incorporated herein by reference to our Form 10-SB/A,
filed January 4, 2000.)
10.12 Consulting Agreement between Registrant and Dr. Tabibzadeh
(incorporated herein by reference to our Form 10-SB/A, filed
January 4, 2000.)
10.13 Form of Indemnification Agreement (incorporated herein by reference
to our Form 10-SB/A, filed January 4, 2000.)
10.14 Lexon, Inc. 1998 Stock Option Plan dated August 15, 1998 and Form
of Option Agreement (incorporated herein by reference to our Form
10-SB/A, filed January 4, 2000.)
10.15 Consulting Agreement between Registrant and UTEK Corporation
effective August 4, 1999 (incorporated herein by reference to our
Form 10-QSB/A for the nine months ended September 30, 1999, filed
January 4, 2000)
10.16 License Agreement between Cancer Diagnostics, Inc. and University of
Maryland, Baltimore dated August 27, 1999 and amended September 23,
1999 (incorporated herein by reference to our Form 8-K dated January
28, 2000, filed February 14, 2000.)
10.17 Sponsored Research Agreement between Cancer Diagnostics, Inc. and
University of Maryland, Baltimore dated August 27, 1999 and amended
September 23, 1999 (incorporated herein by reference to our Form 8-K
dated January 28, 2000, filed February 14, 2000.)
10.18 Secured Promissory Note dated January 28, 2000 (incorporated herein
by reference to our Form 8-K dated January 28, 2000, filed February
14, 2000.)
10.19 Pledge and Security Agreement dated January 28, 2000 (incorporated
herein by reference to our Form 8-K dated January 28, 2000, filed
February 14, 2000.)
10.20 Mutual Release and Settlement Agreement between Registrant and UTEK
Corporation dated January 28, 2000 (incorporated herein by reference
to our Form 10-KSB for the year ended December 31, 1999, filed April
14, 2000)
10.21 Consulting Agreement with Goodbody International(incorporated herein
by reference to our Form SB-2, filed August 18, 2000)
10.22 Investor Relations Services Agreement with Morgan-Phillips, Inc.*
10.23 Consulting Agreement with James Congleton*
10.24 Consulting Agreement with Mark Lindsey*
23.1 Consent of Kaufman & Associates *
23.2 Consent of Tullius Taylor Sartain & Sartain LLP *
24.1 Power of Attorney (included on Signature Page)
27.0 Financial Data Schedule at June 30, 2000 (for electronic
filers only) *
* Filed herewith
SB-2 Sequential Page Number 29 of 77
<PAGE>
Item 28. Undertakings
(a) The undersigned registrant hereby undertakes that it will:
(1) File, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered
(if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more than
a 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement;
(iii) To include any additional or changed material information
on the plan of distribution;
(2) For determining liability under the Securities Act of 1933, treat
each post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time to be
the initial bona fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(c) The undersigned registrant hereby undertakes that it will:
(1) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b) (1) or (4) or
497 (h) under the Securities Act as part of this registration statement as
of the time the Commission declared it effective.
(2) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration
statement, and that offering of the securities at that time as the initial
bona fide offering of those securities.
SB-2 Sequential Page Number 30 of 77
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned in the City of Tulsa,
Oklahoma on August 21, 2000.
LEXON, INC.
-------------------------------------
By: Gifford Mabie, Sole Officer and Director
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and as of the dates indicated.
Signature Title Date
------------- ------------------------- ---------------
Gifford Mabie Sole Officer and Director August 21, 2000
SB-2 Sequential Page Number 31 of 77
<PAGE>
<TABLE>
<CAPTION>
INDEX TO EXHIBITS FILED WITH THIS REGISTRATION STATEMENT
<S> <C> <C>
Exhibit Page Number
Number Description of Exhibit
------------ -------------------------------------------------------------------------------- ------------
F/S Audited financial statements for the years ended December 31, 1999 and 1998 36
and unaudited interim financial statements for the six months ended June 30,
2000
5.1 Legal opinion of Kaufman & Associates 64
10.22 Investor Relations Services Agreement with Morgan-Phillips, Inc.
10.23 Consulting Agreement with James Congleton
10.24 Consulting Agreement with Mark Lindsey
23.1 Consent of Kaufman & Associates (contained in Exhibit 5.1)
23.2 Consent of Tullius Taylor Sartain & Sartain LLP
24.1 Power of Attorney (included on Signature Page to this Registration Statement) N/A
27.0 Financial Data Schedule N/A
</TABLE>
SB-2 Sequential Page Number 32 of 77
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT F/S
INDEX TO FINANCIAL STATEMENTS AND RELATED NOTES
AUDITED FINANCIAL STATEMENTS
<S> <C>
Independent Auditors' Report..............................................................................F-1
Balance Sheet at December 31, 1999........................................................................F-2
Statement of Operations from Inception (December 16, 1997) through December 31, 1999
and for the Years Ended December 31, 1999 and 1998........................................................F-3
Statement of Cash Flows from Inception (December 16, 1997) through December 31,
1999 and for the Years Ended December 31, 1999 and 1998...................................................F-4
Statement of Shareholders' Equity from Inception (December 16, 1997) through
December 31, 1999 and for the Years Ended December 31, 1999 and 1998......................................F-5
Notes to Financial Statements from Inception (December 16, 1997) through
December 31, 1999 and for the Years Ended December 31, 1999 and 1998......................................F-6
INTERIM UNAUDITED FINANCIAL STATEMENTS
Balance Sheets at June 30, 2000 and December 31, 1999....................................................F-15
Statements of Operations from Inception (December 16, 1997) through June 30,
2000 and for the Six Months Ended June 30, 2000 and 1999 and for the Three
Months Ended June 30, 2000 and 1999......................................................................F-16
Statements of Cash Flows from Inception (December 16, 1997) through June 30,
2000 and for the Six Months Ended June 30, 2000 and 1999.................................................F-17
Notes to Financial Statements from Inception (December 16, 1997) through
June 30, 2000 and for the Six Months Ended June 30, 2000 and 1999........................................F-18
</TABLE>
SB-2 Sequential Page Number 33 of 77
<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 auditing standards generally accepted
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 generally accepted 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
SB-2 Sequential Page Number 34 of 77
<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
SB-2 Sequential Page Number 35 of 77
<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
SB-2 Sequential Page Number 36 of 77
<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
SB-2 Sequential Page Number 37 of 77
<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
SB-2 Sequential Page Number 38 of 77
<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
SB-2 Sequential Page Number 39 of 77
<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
SB-2 Sequential Page Number 40 of 77
<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
SB-2 Sequential Page Number 41 of 77
<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
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<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
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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
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<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
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<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
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<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 placed in escrow and will be released upon payment in full of
Lexon's obligation to UTEK.
UTEK, a Florida corporation, is a technology merchant that specializes
in the transfer of technology from universities and government research
facilities to the private sector. UTEK has relationships with major universities
and government research facilities in the U.S. and in Europe. UTEK owns
approximately 1,000,000 shares (or about 14.7% of the outstanding shares) of
Lexon Common Stock.
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
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<PAGE>
<TABLE>
<CAPTION>
F-15
Lexon, Inc.
(A Development Stage Company)
Balance Sheets
June 30, 2000 and December 31, 1999
(Unaudited)
<S> <C> <C>
June 30, 2000 December 31,
ASSETS (Unaudited) 1999
------------- ------------
Current assets
Cash $5,799 $10,041
Due from related parties 6,532 9,703
Prepaid consulting expenses (Note 10) 1,001,140 4,062
------------- ------------
Total current assets 1,013,471 23,806
------------- ------------
Other assets
Licensed technology, net (Note 3) 214,635 146,794
Sponsored research, net (Notes 4 & 6) 187,094 77,813
------------- ------------
Total other assets 401,729 224,607
------------- ------------
TOTAL ASSETS $1,415,200 $248,413
------------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities $ 29,532 $37,214
Interest payable 4,897 4,900
Payable to UTEK (Note 5) 100,000 -
Payable to North Shore University (Note 8) 27,054 54,108
Payable to University of Maryland (Note 6) 124,537 -
Related party payables (Note 7) 123,627 251,627
------------- ------------
Total current liabilities 409,647 347,849
------------- ------------
Shareholders' equity
Preferred stock, $0.001 par value, 5,000,000 shares authorized; no shares issued
and outstanding at June 30, 2000 and December 31, 1999, respectively - -
Common stock, $0.001 par value,
45,000,000 shares authorized;
7,502,735 shares and 6,809,513 shares
issued and outstanding at June 30, 2000 and
December 31, 1999, respectively 7,503 6,810
Paid in capital 5,997,553 3,249,558
Deficit accumulated during the development stage (4,999,503) (3,355,804)
------------- ------------
1,005,553 (99,436)
------------- ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,415,200 $248,413
------------- ------------
The accompanying notes are an integral part of the financial statements
</TABLE>
1
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<PAGE>
<TABLE>
<CAPTION>
F-16
Lexon, Inc.
(A Development Stage Company)
Statements of Operations
For the Six Months Ended June 30, 2000 and 1999 and
For the Three Months Ended June 30, 2000 and 1999 and For the
Period from Inception (December 16, 1997) to June 30, 2000
(Unaudited)
<S> <C> <C> <C> <C> <C>
From inception
(December 16, Six Months Ended Three Months Ended
1997) through _______________________________ _______________________________
June 30, 2000 June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
-------------- ------------- ------------- ------------- -------------
Revenue $ - $ - $ - $ - $ -
Expenses
Research and development 962,390 154,735 498,065 78,230 84,291
General and administrative 3,780,037 1,613,290 1,186,814 1,251,425 754,734
-------------- ------------- ------------- ------------- -------------
Total operating expenses 4,742,427 1,768,025 1,684,879 1,329,655 839,025
-------------- ------------- ------------- ------------- -------------
Operating loss (4,742,427) (1,768,025) (1,684,879) (1,329,655) (839,025)
Interest expense 389,076 7,674 3,418 4,820 -
-------------- ------------- ------------- ------------- -------------
Net loss $ (5,131,503) $ (1,775,699) $ (1,688,297) $ (1,334,475) $ (839,025)
Weighted average shares outstanding 5,794,774 6,988,134 6,580,914 7,333,291 6,789,680
-------------- ------------- ------------- ------------- -------------
Loss per share (Note 12) $ (0.89) $ (0.25) $ (0.26) $ (0.18) $ (0.12)
-------------- ------------- ------------- ------------- -------------
The accompanying notes are an integral part of the financial statements
</TABLE>
2
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<PAGE>
<TABLE>
<CAPTION>
F-17
Lexon, Inc.
(A Development Stage Company)
Statements of Cash Flows
From Inception (December 16, 1997) through June 30, 2000 and For the
Six Months Ended June 30, 2000 and 1999
(Unaudited)
<S> <C> <C> <C>
From inception
(December 16, Six Months Six Months
1997) through Ended Ended
June 30, 2000 June 30, 2000 June 30, 1999
-------------- ------------- -------------
Operating activities
Net loss $ (5,131,503) $ (1,775,699) $ (1,688,297)
Plus non-cash charges to earnings:
Amortization of license and sponsored research agreements 395,060 147,415 123,822
Value of common stock options granted to non-employees for services 1,768,829 469,610 600,700
Amortization of Stock Options Issued to Non-employee Lenders 356,346 - -
Value of services contributed by employees 711,479 210,000 140,000
Value of stock issued for services 1,054,988 833,313 293,750
Future Obligation for research and consulting expenses 213,162 - -
Change in working capital accounts:
(Increase) in prepaid expenses - 4,063 288,830
(Increase) in other receivables (6,532) 3,171 (10,684)
Increase in accounts payable and accrued liabilities 29,531 ( 7,683) 11,978
Increase (decrease) in interest payable 4,897 (3) (16,739)
Decrease in obligation to North Shore (54,108) (27,054) -
-------------- ------------- -------------
Total operating activities ( 657,851) (142,867) (256,640)
-------------- ------------- -------------
Financing activities
Loans from related parties 453,627 104,000 -
Repayment of loans from related parties (330,000) (100,000) (230,000)
Sale of common stock for cash:
To founders 5,000 -
To third-party investors 1,160,708 234,500 559,488
Less: issue costs (140,498) - (72,211)
To employees upon exercise of employee stock options 86,063 125 -
-------------- ------------- -------------
Total financing activities 1,234,900 238,625 257,277
-------------- ------------- -------------
Investing activities
Purchase of Cancer Diagnostics Inc. (100,000) (100,000) -
Purchase of exclusive licenses (160,000) - -
Payment of sponsored research contract (311,250) - -
-------------- ------------- -------------
Total investing activities (571,250) (100,000) -
-------------- ------------- -------------
Change in cash 5,799 (4,242) 637
Cash at beginning of period - 10,041 31,164
-------------- ------------- -------------
Cash at end of period $ 5,799 $ 5,799 $ 31,801
-------------- ------------- -------------
Supplemental disclosure of cash flow information:
Cash paid for interest and taxes during the period - 1,233 3,418
-------------- ------------- -------------
Non-cash financing and investing activities:
Common stock issued in Gentest Merger 1,000 - -
-------------- ------------- -------------
The accompanying notes are an integral part of the financial statements
</TABLE>
3
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<PAGE>
F-18
Lexon, Inc.
(A Development Stage Company)
Notes to Financial Statements
From Inception (December 16, 1997) through June 30, 2000 and For the
Six Months Ended June 30, 2000 and 1999
(Unaudited)
Note 1-- Organization and Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial statements
and do not include all information and footnotes required by generally accepted
accounting principles for complete financial statements. However, the
information furnished reflects all adjustments, consisting only of normal
recurring adjustments which are, in the opinion of management, necessary in
order to make the financial statements not misleading.
Organization and Nature of Operations
Lexon, Inc. ("Lexon" or "the Company") is a development stage corporation that
acquires, develops, and markets emerging medical technologies. Lexon owns the
exclusive worldwide license to develop, manufacture, obtain FDA approval for,
and market a cancer screening test kit for detecting the Ebaf protein, which
allows for early, non-invasive screening for colon cancer and certain types of
ovarian and testicular cancers. The Company also owns, through CDI, the
exclusive worldwide license to the Telomerase Assay, a blood screening test for
lung cancer.
Development Stage Operations
The Company was incorporated on December 16, 1997 under the laws of the state of
Oklahoma. Since inception, the Company's primary focus has been raising capital
and developing the Ebaf blood screening process.
Income Taxes
The Company uses the liability method of accounting for income taxes as set
forth in Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes". Under the liability method, deferred taxes are determined based
on the differences between the financial statements and tax basis of assets and
liabilities at enacted tax rates in effect in the years in which the differences
are expected to reverse.
Compensation of Officers and Employees
The Company's sole officer and director and its other employees serve without
pay or other non-equity compensation. The fair value of these services is
estimated by management and is recognized as a capital contribution. For the six
months ended June 30, 2000 and 1999 and for the period from inception (December
16, 1997) to June 30, 2000 the Company recorded $210,000, $140,000, and
$701,479, respectively, as a capital contribution by its sole officer and
director and its other employees.
Fair Market Value of Stock Options and Stock Issued for Services
The fair market value of stock options granted or stock issued as payment for
services is equal to the closing price of the Company's common stock on the date
options are granted or on the date agreements for services are signed. On
November 4, 1998, the Company's common stock began trading on the OTC Bulletin
Board under the symbol "LXXN". Prior to trading, the Board of Directors
determined the fair market value of stock options granted or stock issued as
payment for services.
4
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<PAGE>
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.
Research and Development ("R&D") Costs
The Company is amortizing the $311,250 paid pursuant to the Sponsored Research
Agreement for the Ebaf assay over two years, which is the life of the service
agreement. The $249,458 to be paid pursuant to the Sponsored Research Agreement
for the Telomerase assay acquired through the purchase of Cancer Diagnostics,
Inc. is being amortized over two years, which is the life of the service
agreement (See Note 5). Any other costs relating to the development of the Ebaf
and Telomerase Assays are expensed as incurred. Compensation cost associated
with stock options granted to Dr. Tabibzadeh, the inventor of the Ebaf Assay, is
recorded by the Company as R&D expense.
New Accounting Standards
The Company adopted SFAS No. 130, "Reporting Comprehensive Income" and SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information"
during 1998. The Company has no comprehensive income items during 2000 or 1999.
Therefore, net loss equals comprehensive income. The Company operates in only
one business segment. The Company will adopt SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" during 2001. Currently, the
Company does not engage in hedging activities or transactions involving
derivatives.
Note 2-- Gentest Merger
On May 11, 1998, the Company entered into an Agreement and Plan of Merger with
Gentest, Inc., a Florida corporation, whereby the Company agreed to issue
1,000,000 shares of its common stock for all the issued and outstanding common
stock of Gentest, Inc. Gentest was formed in March 1998 for the purpose of
securing the License Agreement and Sponsored Research Agreement related to the
Ebaf Assay. Under the terms of the Agreement and Plan of Merger, the Company
issued to UTEK Corporation ("UTEK"), the sole shareholder of Gentest, 1,000,000
shares of common stock of Lexon. Gentest ceased to exist by reason of the
merger, and the assets and liabilities of Gentest, including those rights and
obligations associated with the exclusive License Agreement and the Sponsored
Research Agreement, became assets and liabilities of Lexon. The obligations of
Gentest were to pay $105,000 for the exclusive license, $311,250 to develop the
test kit and $55,000 for services rendered in connection with securing the
agreements. Lexon paid the obligations in full on July 8, 1998. The Gentest
merger was accounted for as a purchase. The purchase price of $1,000 was based
on the number of shares issued at par value of $0.001 per share.
Par value per share was used to value the purchase because all previous share
issuances, consisting solely of issuances to founders, were based on par value,
and there was no public market for the Company's stock. Gentest had only
recently been formed for the purpose of entering into the License and Sponsored
Research Agreements. The value assigned to the License and Sponsored Research
Agreements and the related obligations, were therefore based on Gentest's cost.
Since Gentest had no prior operations, no pro forma financial information is
presented.
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The Gentest assets acquired and liabilities assumed are summarized as follows:
License Agreements $161,000
Sponsored Research Agreement 311,250
----------------
Total Cost of Assets Acquired $472,250
Obligations Assumed $(471,250)
----------------
Purchase Cost $1,000
================
Note 3-- Exclusive License--Ebaf Assay
On July 8, 1998, the Company paid $100,000 to the University of South Florida
Research Foundation ("USFRF") and $5,000 to North Shore University Hospital
Research Foundation ("North Shore") for the exclusive worldwide license to
develop and market the cancer screening test kits. In addition, the Company paid
$55,000 to UTEK for services rendered in connection with securing the license
agreements. The exclusive license is being amortized over 17 years using the
straight-line method. At June 30, 2000, the amount of accumulated amortization
related to the Exclusive License was $18,941.
Note 4-- Sponsored Research Contract--Ebaf Assay
On July 8, 1998, the Company paid $311,250 to North Shore under the terms of a
Sponsored Research Agreement to develop the cancer screening test kits. The
contract specifies a 24-month development period with costs not to exceed
$311,250. The Sponsored Research Agreement is amortized over 2 years using the
straight-line method, with amortization costs recorded as R&D expenses. At June
30, 2000, the amount of accumulated amortization related to the Sponsored
Research Agreement was $311,250.
Note 5-- Purchase of Cancer Diagnostics, Inc.
On January 29, 2000, Lexon purchased 100% of the common stock of Cancer
Diagnostic, Inc. ("CDI"), a Florida corporation, according to the terms of a
Stock Purchase Agreement. By reason of the stock purchase, CDI became a
wholly-owned subsidiary of Lexon. CDI owns the exclusive worldwide license to
the Telomerase Assay, a patent-pending blood test for lung cancer being
developed at the University of Maryland, Baltimore ("UMB"). The exclusive
Telomerase Assay license is being amortized over 15 years using the
straight-line method. At June 30, 2000, the amount of accumulated amortization
related to the exclusive license was $2,503.
Lexon purchased all of the outstanding common stock of CDI from CDI's sole
shareholder, 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 Company has paid $50,000 to
UTEK to date. The interest rate will increase to 12% per year on any unpaid
principal balance after June 30, 2000. To secure the promissory note, Lexon
pledged all of the shares of common stock of CDI pursuant to a Pledge and
Security Agreement. The shares were placed in escrow and will be released upon
payment in full of Lexon's obligation to UTEK. On July 14, 2000, UTEK
Corporation agreed to extend the due date for the secured promissory note to
August 15, 2000. The rate of interest on the $100,000 balance is 12%.
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.
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Note 6-- Sponsored Research Contract--Telomerase Assay
On August 27, 1999, CDI agreed to pay UMB $249,458 to fund the development of
the Telomerase Assay for the ELISA format over a two year period beginning
January 4, 2000 and ending January 3, 2002. CDI paid $124,921 upon signing the
sponsored research agreement. The balance of $124,537 is due on or before
January 1, 2001. The Sponsored Research Agreement is being amortized over 2
years using the straight-line method, with amortization costs recorded as R&D
expenses. At June 30, 2000, the amount of accumulated amortization related to
the Sponsored Research Agreement was $62,365.
Note 7-- Notes Payable
During 1998, the Company borrowed $50,000 from an officer and $180,000 from a
shareholder. The Company executed notes payable which were due December 31, 1998
at an interest rate of 12% per year, which increased to 14% per year after the
due date. The notes payable and accrued interest were paid in full during 1999.
On October 15, 1998, in connection with these notes, the Board granted 50,000
options to the officer and 180,000 options to the shareholder, each at an
exercise price of $1.20 per share. 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%.
During 1999, the Company borrowed $118,250 from non-affiliated shareholders. The
Company executed notes payable, which are due December 31, 2000 at an interest
rate of 10% per year. As of June 30, 2000, the balance on these loans was
$18,250.
During 2000, the Company borrowed $104,000 from its shareholders. The Company
executed notes payable, which are due December 31, 2000 at an interest rate of
10% per year. As of June 30, 2000, the remaining balance on these notes was
$104,000
Note 8-- Commitments and Contingencies
Future Royalty Obligations Under Exclusive License Agreement--Ebaf Assay
In connection with the exclusive license agreement, the Company agreed to pay to
USFRF a royalty equal to the greater of (a) five percent (5%) of revenue from
the sale of products based on the concept for the diagnosis of selected
adenocarcinomas and any additions, extensions and improvements thereto or as a
minimum (b) zero (0) dollars for the first twenty four (24) months; $75,000 at
the end of year three (3); $100,000 at the end of year four (4); $125,000 at the
end of year five (5); $150,000 at the end of year six (6) and for each
successive year thereafter during the term of the exclusive license agreement.
The royalty obligation will expire after the longer of twenty (20) years or the
expiration of the last to expire patent that covers the licensed intellectual
property. The Company also agreed to pay to North Shore a royalty equal to
one-half percent (0.5%) of revenue from the sale of such products and ten
percent (10%) of any consideration received by the Company
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<PAGE>
from granting sublicenses. No minimum royalty payments are required under the
License Agreement with North Shore.
Future Royalty Obligations Under Exclusive License Agreement--Telomerase Assay
In exchange for the exclusive license agreement, CDI agreed to pay UMB a royalty
of 4% of Net Sales of products sold using the Telomerase Assay technology. The
license agreement provides for minimum annual royalties for the life of the
license agreement, which coincides with the life of the last to expire patent
covering the licensed technology. The minimum annual royalties range from $2,500
per year beginning in 2002 to a maximum of $4,000 per year beginning in 2006 and
continuing each year thereafter for the life of the license agreement. In
addition, the license agreement provides for royalties of 2% of Net Sales of
products sold by sublicensees of CDI and 50% of all consideration received by
CDI for up-front, milestone or other payments from sublicensees.
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. At June 30, 2000, the balance on the Company's obligation was $27,054.
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
Swartz Investment Agreement
The Company entered into an investment agreement on May 19, 2000 with Swartz
Private Equity, LLC to raise up to $30 million through a series of sales of
Lexon's common stock. The dollar amount of each sale is limited by Lexon's
common stock's trading volume, and a minimum period of time must elapse between
each sale. Each sale will be to Swartz. In turn, Swartz will either sell Lexon's
stock in the open market, place Lexon's stock through negotiated transactions
with other investors, or hold Lexon's stock in their own portfolio.
Lexon may terminate its right to initiate puts or terminate the Investment
Agreement at any time by providing Swartz with notice of such intention to
terminate; however, any such termination will not affect any other rights or
obligations Lexon has concerning the Investment Agreement or any related
agreement.
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Should Lexon terminate the Investment Agreement prior to initiating puts in the
amount of $2,000,000 during the 36 month period of the Investment Agreement, the
Company may be required to pay a Non-Usage fee of a maximum of $200,000.
Note 9-- 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.
o During 1998, the Company issued 33,541 shares of its Common Stock at $2.00
per share for services rendered in connection with the Offering. The $2.00
per share value was determined by the Board of Directors based on the most
recent offering price of $2.00 per share.
During the year ended December 31, 1999, the following common stock transactions
occurred:
o The Company sold 385,700 shares of Common Stock to third party investors
for $557,550 in cash.
o The Company issued a total of 89,500 shares of common stock for services
rendered by outside consultants. The shares were valued based on the
closing price of the Company's Common Stock on the date the services were
rendered or agreements were signed. Of the shares issued, 80,000 were
issued at $2.50 per share to a consultant to develop and market an Internet
web site and to prepare and distribute via e-mail a detailed profile report
on the Company. An additional 7,500 shares were issued at $2.34 per share
to a public relations specialist in connection with the Company's colon
cancer awareness activities. The remaining 2,000 shares were issued at
$4.875 per share for legal services.
o The Company issued 55,000 shares of Common Stock to an employee who
exercised stock options at $1.5625 per share. The Company received $85,938
in cash. The exercise price was equal to the closing price of the Company's
common stock on the date the options were granted.
During the six months ended June 30, 2000, the following common stock
transactions occurred:
o The Company issued 150,000 shares of Common Stock pursuant to the exercise
of employee stock options, for which the Company received $234,375 in cash.
The employees exercised their options at $1.5625 per share. The exercise
price was equal to the closing price of the Company's Common Stock on the
date the options were granted.
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o The Company issued a total of 293,222 shares of Common Stock for services
rendered by outside consultants. The shares were valued based on the
closing price of the Company's Common Stock on the date the services were
rendered or agreements were signed. Of the shares issued, 190,000 were
issued at $.9375 per share to consultants for services rendered in
connection with accounting and legal services; 65,000 shares were issued at
$.9375 per share for general business consulting services; and 22,222
shares were issued at $1.125 per share to a consultant to develop and
maintain an Internet web site for the Company. In connection with the
issuance of stock for services, the Company recorded $484,727, $284,727 and
$67,500, respectively, as G&A expense for the period from inception
(December 16, 1997) through June 30, 2000, and for the six months ended
June 30, 2000 and 1999.
o The Company sold 250,000 restricted shares of stock to a third-party
investor in conjuction with a consulting agreement signed on May 23, 2000.
The purchase price for the shares was $.001 and the stock is restricted for
a period of 10 months. The $554,250 difference between the purchase price
of the stock and the fair market value of the stock on the date of purchase
was recorded as a general and administrative expense on the income
statement.
Lexon is authorized to issue 45,000,000 Shares of Common Stock, par value $0.001
per share, of which 7,502,735 shares were outstanding as of June 30, 2000. Lexon
is also authorized to issue 5,000,000 Shares of Preferred Stock, par value
$0.001 per share, of which there are no shares presently outstanding. There is
no present intent to issue any Preferred Stock.
Voting Rights
Holders of shares of Common Stock are entitled to one vote per share on all
matters submitted to a vote of the shareholders. Shares of Common Stock do not
have cumulative voting rights, which means that the holders of a majority of the
shareholder votes eligible to vote and voting for the election of the Board of
Directors can elect all members of the Board of Directors. Holders of a majority
of the issued and outstanding shares of Common Stock may take action by written
consent without a meeting.
Dividend Rights
Holders of record of shares of Common Stock are entitled to receive dividends
when and if declared by the Board of Directors. To date, Lexon has not paid cash
dividends on its Common Stock. Holders of Common Stock are entitled to receive
such dividends as may be declared and paid from time to time by the Board of
Directors out of funds legally available therefor. Lexon intends to retain any
earnings for the operation and expansion of its business and does not anticipate
paying cash dividends in the foreseeable future. Any future determination as to
the payment of cash dividends will depend upon future earnings, results of
operations, capital requirements, Lexon's financial condition and such other
factors as the Board of Directors may consider.
Liquidation Rights
Upon any liquidation, dissolution or winding up of Lexon, holders of shares of
Common Stock are entitled to receive pro rata all of the assets of Lexon
available for distribution to shareholders after liabilities are paid and
distributions are made to the holders of Lexon's Preferred Stock.
Preemptive Rights
Holders of Common Stock do not have any preemptive rights to subscribe for or to
purchase any stock, obligations or other securities of Lexon.
Note 10-- Stock Options
Employee Stock Options
On August 15, 1998, the Board of Directors and shareholders approved the
adoption of the Lexon Option Plan, pursuant to which 3,000,000 shares of Common
Stock were reserved. Stock options granted under the Plan expire ten years from
the date of grant.
On October 15, 1998, the Board granted 50,000 options to an officer at an
exercise price of $1.20 per share in connection with a loan made by the officer
to the Company. The Company recorded no compensation cost for the options
granted to the officer.
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On March 4, 1999, the Board granted 1,692,500 options to purchase common stock
at an exercise price of $1.5625 per share to employees of the Company. The
exercise price was equal to the closing price of the Company's common stock on
the date of grant. No compensation cost was recorded.
SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") provides an
alternative method of determining compensation cost for employee stock options,
which alternative method may be adopted at the option of the Company. Had
compensation cost for the 1,692,500 options granted to employees on March 4,
1999 been determined consistent with SFAS 123, the Company's net loss for the
quarter ended June 30, 2000 would have been increased and EPS would have been
reduced to the following pro forma amounts:
Net loss:
As reported $(5,131,503)
Pro forma (6,695,035)
Basic and diluted EPS:
As reported $ (0.89)
Pro forma (1.16)
Non-Employee Options
On October 15, 1998, the Board granted 300,000 options to a consultant at an
exercise price of $1.20 per share. In exchange for the options, the consultant
provided the Company financial and investment consulting services for a one-year
period. Compensation cost was based on an estimated fair value of $1.98 per
share, which was calculated using the Black-Scholes option pricing model with
the following assumptions: exercise price of $1.20 per share; stock price of
$2.00 per share; risk-free interest rate of 6.0%; expected dividend yield of
0.0; expected life of ten years; and estimated volatility of 151%. During 1998
the Company recorded $593,910 as a prepaid consulting expense and an increase to
paid in capital. The Company amortized the prepaid expense over a 12-month
period, which was the life of the agreement. Amortization expense included in
general and administrative expense was $494,925 in 1999 and $98,985 in 1998.
On October 15, 1998, the Board granted 50,000 options at an exercise price of
$1.20 per share to the inventor of the ebaf screening process. Compensation cost
was based on an estimated fair value of $1.98 per share, which was calculated
using the Black-Scholes option pricing model with the following assumptions:
exercise price of $1.20 per share; stock price of $2.00 per share; risk-free
interest rate of 6.0%; expected dividend yield of 0.0; expected life of ten
years; and estimated volatility of 151%. The Company recorded the compensation
cost of $98,985 as R&D expense on the date the options were granted.
On October 15, 1998, the Board granted 180,000 options a shareholder at an
exercise price of $1.20 per share in connection with a loan made by the
shareholder to the Company. Compensation cost was based on an estimated fair
value of $1.98 per share, which was calculated using the Black-Scholes option
pricing model with the following assumptions: exercise price of $1.20 per share,
stock price of $2.00 per share, risk-free interest rate of 6.0%, expected
dividend yield of 0.0; expected life of ten years; and estimated volatility of
151%. The Company recorded compensation cost of $356,346 as interest expense on
the date the options were granted.
On November 1, 1998, the Company entered into an agreement with an investor
relations firm whereby the Board granted the firm options to purchase up to
1,000,000 shares of common stock over a two-year period. Amounts and exercise
prices are as follows:
Number of Exercise Price
Vesting Period Options Per Share
------------------------------------------ ---------------- ----------------
January 1, 1999 to March 31, 1999 45,000 $1.20
April 1, 1999 to June 30, 1999 70,000 $1.50
July 1, 1999 to September 30, 1999 95,000 $1.75
October 1, 1999 to December 31, 1999 120,000 $2.00
January 1, 2000 to March 31, 2000 135,000 $2.25
April 1, 2000 to June 30, 2000 160,000 $2.50
July 1, 2000 to September 30, 2000 175,000 $2.75
October 1, 2000 to December 31, 2000 200,000 $3.00
----------------
Total 1,000,000
----------------
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The options are eligible to vest on a quarterly basis, subject to the
achievement of certain market conditions surrounding the Company's stock. If the
vesting conditions are not met, the options eligible for vesting are forfeited.
Compensation cost will be recorded for the options when and if they become
vested. Only vested options are exercisable. All vested options are exercisable
until October 27, 2008. On June 30, 1999, 70,000 options exercisable at $1.50
per share became vested. To determine compensation cost, the 70,000 vested
options were valued at $3.26 per share based on the Black-Scholes option pricing
model and the Company recorded $228,200 as G&A expense. The following
assumptions for the Black-Scholes option pricing model were used: exercise price
of $1.50 per share, market price on vesting date of $3.375, risk- free interest
rate of 5.87%, expected dividend yield of 0.0; expected life of ten years; and
estimated volatility of 117%. During the year ended December 31, 1999, 260,000
options at exercise prices ranging from $1.20 to $2.00 per share were forfeited
and during the three months ended March 31, 2000, 135,000 options at an exercise
price of $2.25 per share were forfeited.
On March 4, 1999, the Board granted 250,000 options to purchase common stock at
an exercise price of $1.5625 per share to Dr. Tabibzadeh, inventor of the Ebaf
Assay screening process. The exercise price was equal to the closing price of
the common stock on the date of grant. The options were valued at $1.49 per
share based on the Black-Scholes option-pricing model and the Company recorded
$372,500 as R&D expense. The following assumptions for the Black-Scholes option
pricing model were used: exercise price of $1.5625, market price of $1.5265,
risk- free interest rate of 5.87%, expected dividend yield of 0.0; expected life
of ten years; and estimated volatility of 117%.
On March 28, 2000, the Board granted 280,000 warrants to purchase common stock
at an exercise price of $2.062 per share to Swartz Institutional Finance
pursuant to the Equity Line Letter of Agreement signed on that day. The exercise
price was equal to the lowest closing price for 5 trading days prior to the
execution of all Closing Documents on May 19, 2000. The warrants were valued at
$1.575 per share based on the Black-Scholes option pricing model and the Company
recorded $441,000 as consulting expense. The following assumptions for the
Black-Scholes option pricing model were used: exercise price of $2.062, market
price of $2.625, risk-free interest rate of 8.00%, expected dividend yield of
0.0, expected life of five years, and estimate volatility of 142%.
On May 23, 2000, the Board granted 500,000 warrants to purchase common stock at
an exercise price of $1.625 per share to Goodbody International, Inc. for
consulting services and guidance on any matters relating to investor relations,
financial relations, stock enhancement and public relations and to CEO
responsibilities, including any financing mergers, acquisitions, contract
negotiations and the possible sale of the Company. The term of the agreement is
3 years and is being amortized using the straight-line method. The exercise
price was equal to the closing price of the common stock on May 10, 2000. The
warrants were valued at $2.0595 per share based on the Black-Scholes option
pricing model and the Company recorded $28,610 as consulting expense and
$1,001,140 as prepaid consulting expense. The following assumptions for the
Black-Scholes option pricing model were used: exercise price of $1.625, market
price of $2.218, risk-free interest rate of 8.00%, expected dividend yield of
0.0, expected life of five years, and estimated volatility of 146%.
A summary of the status of the Company's stock options at June 30, 2000, and
changes during the six months then ended is presented below:
June 30, 2000
--------------------------
Weighted
Average
Shares Exercise Price
---------- --------------
Employees
Outstanding, beginning of period 1,687,500 $1.56
Granted --- ---
Exercised (150,000) $1.56
Forfeited --- ---
---------- --------------
Outstanding, June 30, 2000 1,537,500 $1.56
Exercisable, June 30, 2000 1,537,500 $1.56
---------- --------------
Weighted average fair value of options granted $1.49
----------
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June 30, 2000
--------------------------
Weighted
Average
Shares Exercise Price
---------- --------------
Non-employees
Outstanding, beginning of period 1,360,000 $1.89
Granted or Vested 780,000 1.78
Exercised -- --
Forfeited (135,000) $1.93
---------- --------------
Outstanding, June 30, 2000 2,005,000 $1.56
Exercisable, June 30, 2000 1,630,000 $1.13
---------- --------------
Weighted average fair value of options granted $1.89
----------
The following table summarizes information about fixed stock options outstanding
at June 30, 2000:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------ -------------------------
<S> <C> <C> <C> <C> <C>
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of exercise Outstanding Contractual Exercise Exercisable Exercise
prices at 06/30/00 Life Price at 06/30/00 Price
---------------------- -------------- -------------- ------------ -------------- -----------
Employees
$1.20-$1.5625 1,537,500 9.64 years $1.5518 1,487,500 $1.5518
Non-employees
$1.20-$1.625 2,005,000 5.46 years $1.3552 1,630,000 $1.1308
</TABLE>
Note 11-- Income Taxes
The components of deferred income tax are as follows:
Inception
(December 16, Six Months Six Months
1997) to Ended June 30, Ended June 30,
June 30, 2000 2000 1999
---------------- --------------- --------------
Net operating loss $ 773,065 $ 66,432 $ 238,079
Stock-based compensation 562,892 374,425 188,467
Valuation allowance (1,335,957) ( 440,856) (426,546)
---------------- --------------- --------------
Net deferred tax asset $ --- $ --- $ ---
---------------- --------------- --------------
From inception to June 30, 2000 the Company had a net operating tax loss of
approximately $5,000,000, which expires 2019 and 2020, and temporary differences
related to stock-based compensation of $1,655,565. A valuation allowance fully
offsets the benefit of the net operating loss, since the Company does not meet
the "more probable than not" criteria of FASB 109.
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Note 12-- Earnings per Share
Basic and Diluted EPS Computation: June 30, 2000 June 30, 1999
------------- -------------
Net loss applicable to common stockholders $(1,775,699) $(1,688,297)
------------- -------------
Weighted average shares outstanding 6,988,134 6,580,914
------------- -------------
Basic and Diluted EPS $ (0.25) $ (0.26)
------------- -------------
For the six months ended June 30, 2000 and 1999, all options were excluded from
the EPS calculation, as their effect was anti-dilutive.
Note 13-- 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
$5,131,503 for the six months ended June 30, 2000. Management intends to obtain
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.
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