<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-QSB
/ X / Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period ended JUNE 30, 1998
/_ / Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission file number : 000-27866
VYREX CORPORATION
(Name of small business issuer as specified in its charter)
NEVADA 88-0271109
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
2159 AVENIDA DE LA PLAYA, LA JOLLA, CALIFORNIA, 92037
(Address of principal executive offices)
(619) 454-4446
(Issuer's telephone number including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
--- ---
Applicable Only to Issuers Involved in Bankruptcy
Proceedings During the Preceding Five Years
Check whether the registrant filed all documents and reports required to be
filed by Sections 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan by a court.
Yes No
--- ---
Applicable Only to Corporate Issuers
State the number of shares outstanding of each of the issuers classes of common
equity, as of latest practicable date:
As of June 30, 1998, there are 7,423,455 shares of common stock outstanding and
warrants to purchase 1,256,701 shares of common stock outstanding.
Transitional Small Business Disclosure Format
Yes No X
--- ---
<PAGE>
VYREX CORPORATION
INDEX TO FORM 10-QSB
PART I FINANCIAL INFORMATION PAGE NUMBER
Item 1 - Financial Statements
Balance Sheets 3
Statements of Operations 4
Statements of Cash Flows 5
Notes to Financial Statements 6
Item 2 - Management's Discussion and 7
Analysis of Financial Condition
And Results of Operations
PART II OTHER INFORMATION 10
Item 1 - Legal Proceedings 10
Item 2 - Changes in Securities 10
Item 3 - Defaults upon Senior Securities 10
Item 4 - Submission of Matters to a Vote of
Security Holders 10
Item 5 - Other Information 10
Item 6 - Exhibits and Reports on Form 8-K 10
Signatures 10
2
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VYREX CORPORATION
(a development stage enterprise)
Balance Sheets
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------------- -------------
(Unaudited) Note
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,046,646 $ 2,041,339
Short-term investments - 999,227
Accounts Receivable - 100,000
Interest Receivable 4,200 14,348
Prepaid assets 49,602 17,341
------------ -----------
Total current assets 1,100,448 3,172,255
Property, plant and equipment, net of accumulated
depreciation of $95,585 in 1998 and $71,495 in 1997 114,011 105,810
Notes receivable from related party 44,982 49,506
Debt issuance cost - 119,147
Patents, trademarks and copyrights, net of accumulated
amortization of $28,573 in 1998 and $24,449 in 1997 111,646 115,770
------------ -----------
Total assets $ 1,371,087 $ 3,562,488
------------ -----------
------------ -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 429,589 $ 627,583
Deferred revenue - 100,000
------------ -----------
Total current liabilities 429,589 727,583
Convertible debentures, net, including accrued interest - 950,278
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value; 10,000,000 shares authorized;
none issued - -
Common stock, $.001 par value; 50,000,000 shares authorized;
7,423,455 issued and outstanding in 1998, and
7,121,409 issued and outstanding at December 31, 1997 7,423 7,121
Additional paid-in capital 11,645,898 10,402,159
Deficit accumulated during the development stage (10,711,823) (8,524,653)
------------ -----------
Total stockholders' equity 941,498 1,884,627
------------ -----------
Total liabilities and stockholders' equity $ 1,371,087 $ 3,562,488
------------ -----------
------------ -----------
</TABLE>
Note: The balance sheet at December 31, 1997 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
SEE ACCOMPANYING NOTES.
3
<PAGE>
VYREX CORPORATION
(a development stage enterprise)
Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
FROM
THREE MONTHS ENDED SIX MONTHS ENDED INCEPTION
JUNE 30, JUNE 30, (01/02/1991)
1998 1997 1998 1997 TO DATE
--------------- -------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Revenue and licensing
agreement $ - $ - $ - $ - $ 310,000
Operating expenses:
Research and development 804,122 335,842 1,263,882 739,973 5,604,592
Marketing and selling 72,526 - 158,642 - 380,213
General and administrative 340,252 413,360 803,967 754,259 4,105,390
--------------- -------------- --------------- ------------- -------------
Total operating expenses 1,216,900 749,202 2,226,491 1,494,232 10,090,195
--------------- -------------- --------------- ------------- -------------
Loss from operations (1,216,900) (749,202) (2,226,491) (1,494,232) (9,780,195)
Other income (expense):
Interest income 27,466 55,751 55,652 116,692 454,110
Interest expense - - (16,330) - (35,837)
Charge from issuance of
stock options for arranging
bridge financing costs - - - - (1,349,900)
--------------- -------------- --------------- ------------- -------------
Total other income (expense) 27,466 55,751 39,322 116,692 (931,627)
--------------- -------------- --------------- ------------- -------------
Net loss (1,189,434) (693,451) (2,187,169) (1,377,540) (10,711,822)
--------------- -------------- --------------- ------------- -------------
--------------- -------------- --------------- ------------- -------------
Net loss per common share -
basic $ (0.16) $ (0.10) $ (0.30) $ (0.19) $ (1.71)
--------------- -------------- --------------- ------------- -------------
--------------- -------------- --------------- ------------- -------------
Net loss per common share -
diluted $ (0.16) $ (0.10) $ (0.30) $ (0.19) $ (1.71)
--------------- -------------- --------------- ------------- -------------
--------------- -------------- --------------- ------------- -------------
Shares used in per share
computations 7,402,877 7,121,290 7,289,869 7,121,246 6,245,586
--------------- -------------- --------------- ------------- -------------
--------------- -------------- --------------- ------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
VYREX CORPORATION
(a development stage enterprise)
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, CUMULATIVE
1998 1997 FROM INCEPTION
------------ ----------- --------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Loss $(2,187,169) $(1,377,540) $(10,711,822)
Adjustments to reconcile net loss to net
cash used in operating activities: - - -
Depreciation and amortization 28,214 13,197 123,870
Amortization of debt discount and debt
issuance cost - - 10,466
Accounts Receivable and Interest Receivable 110,148 (17,852) 104,841
Issuance of compensatory notes, stock and
stock options as compensation 386,401 - 1,947,453
Prepaid and other current assets (32,262) (42,812) (49,603)
Accounts payable and accrued liabilities (297,995) (165,759) 329,592
----------- ----------- ------------
Net cash used in operating activities (1,992,663) (1,590,766) (8,245,203)
----------- ----------- ------------
INVESTING ACTIVITIES
Purchases of short-term investments - (2,439,787) (8,440,442)
Sale of short-term investments 1,025,737 946,410 8,467,932
Purchases of property and equipment (32,291) (13,275) (209,596)
Patent and trademark costs - - (133,519)
Other assets, including Notes Receivable related parties 4,524 261,500 (45,678)
----------- ----------- ------------
Net cash provided by (used in) investing activities 997,970 (1,245,152) (361,303)
----------- ----------- ------------
FINANCING ACTIVITIES
Proceeds (repayment) on Notes and
Debentures, net - - 1,273,844
Net proceeds from sale and exercise of
stock options - - 950,100
Net proceeds from issuance of common stock - 1,600 7,429,208
----------- ----------- ------------
Net cash provided by financing activities - 1,600 9,653,152
----------- ----------- ------------
Net increase (decrease) in cash (994,693) (2,834,318) 1,046,646
Cash and equivalents, beginning of period 2,041,339 3,187,906 -
----------- ----------- ------------
Cash and equivalents, end of period $ 1,046,646 $ 353,588 $ 1,046,646
----------- ----------- ------------
----------- ----------- ------------
</TABLE>
SEE ACCOMPANYING NOTES
5
<PAGE>
VYREX CORPORATION
(A Development Stage Enterprise)
Notes To Financial Statements
June 30, 1998
(unaudited)
NOTE 1. BASIS OF PRESENTATION
The accompanying financial statements have been prepared by the Company in
accordance with generally accepted accounting principles for interim
financial information. Certain information and disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. In the
opinion of the Company's management, the unaudited financial statements
contain all adjustments necessary (consisting of normal recurring accruals)
for a fair presentation of the financial position as of June 30, 1998, and
the results of operations for the three month and six month periods ended
June 30, 1998. The results of operations for the periods ended June 30,
1998, are not necessarily indicative of the results to be expected for the
full year. For further information, refer to the financial statements and
footnotes thereto included in Vyrex's Form 10-K SB for the year ended
December 31, 1997.
NOTE 2. DEBENTURES
On November 6, 1997, the Company entered into two securities purchase
agreements (the "Debenture Agreements") with two investors (the "Debenture
Holders") and pursuant thereto, the Company issued each Debenture Holder a
debenture in the amount of $500,000 (the "Debentures"). Each Debenture is
a 6% interest accruing and deferred convertible debenture due November 15,
2000. All outstanding debentures were converted into 227,222 shares of
stock during the first quarter of 1998.
Pursuant to the securities purchase agreements, the purchasers of the
Debentures have agreed to each purchase an additional $1,500,000 of
Debentures ("Additional Debentures") in multiple tranches during the 21
months following the effective date of the registration statement, which
was January 26, 1998, subject to certain conditions, including minimum
trading volume, the existence of an effective registration statement, a
current NASDAQ listing and other conditions. The Company has been notified
that it no longer meets the requirements of continued NASDAQ listing and an
appeal hearing has been scheduled for August 21, 1998. The Company cannot
access funds from issuance of the debentures in the event of a decision to
delist the Company's securities.
Each tranche can be between $100,000 and $225,000 per investor. Each
tranche may be completed at the election of the Company subject to the
existence of certain conditions. Each Additional Debenture shall be
substantially similar to the Debentures but shall have a term of 18 months
and be convertible into common stock at 86% of the Market Price on the date
of conversion.
In connection with each Additional Debenture, the Company shall issue the
purchaser a warrant to purchase shares of common stock at a rate of 17,000
shares of common stock for each one million dollars of Additional
Debentures purchased.
NOTE 3. DEVELOPMENT STAGE ENTERPRISE AND LIQUIDITY
From inception (January 2, 1991) through June 30, 1998, the Company has not
generated operating revenues, is classified as a development stage
enterprise and has incurred losses aggregating $10,712,000.
6
<PAGE>
As of June 30, 1998, the Company had working capital of $670,000, which
will enable the Company to fund its planned operations into the third
quarter of calendar 1998. As disclosed in Note 2 above, the Company can no
longer access funds from the issuance of debentures pending the outcome of
the NASDAQ appeal hearing. Accordingly, additional capital will be
required to continue operations beyond the third quarter. Management is
actively pursuing various financing alternatives and expects to raise the
financing necessary to adequately fund operations through 1999. Over the
longer term, successful completion of the Company's development program and
its transition, ultimately, to attaining profitable operations, is
dependent upon obtaining additional financing adequate to fulfill its
research and development activities, and achieving a level of revenues
adequate to support the Company's cost structure.
NOTE 4. NET LOSS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, EARNINGS PER SHARE. Statement 128
replaced the previously reported primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary earnings
per share, basic earnings per share excludes any dilutive effects of
options, warrants and convertible securities. Diluted earnings per share
is very similar to the previously reported fully diluted earnings per
share. All net loss per share amounts for all periods have been presented,
and where necessary, restated to conform to the Statement 128 requirements.
NOTE 5. NEW ACCOUNTING STANDARDS
Effective January 1, 1998, the Company adopted the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 130,
REPORTING COMPREHENSIVE INCOME ("SFAS 130") and Statement of Financial
Accounting Standards No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE
AND RELATED INFORMATION ("SFAS 131"). SFAS 130 requires that all
components of comprehensive income, including net income, be reported in
the financial statements in the period in which they are recognized.
Comprehensive income is defined as the change in equity during a period
from transactions and other events and circumstances from non-owner
sources. Net income and other comprehensive income, including foreign
currency translation adjustments, minimum pension accrual, and unrealized
gains and losses on investments, shall be reported, net of their related
tax effect, to arrive at comprehensive income. The adoption of SFAS 130
did not affect results of operations or financial position because the
Company's only component of comprehensive income is unrealized gains and
losses on investments, which is not significant. SFAS 131 establishes
standards for the way that public business enterprises report information
about operating segments in annual financial statements and requires that
those enterprises report selected information about operating segments in
interim financial reports. SFAS 131 also establishes standards for related
disclosures about products and services, geographic areas and major
customers. The adoption of SFAS 131 did not affect results of operations
or financial position and did not affect the disclosure of segment
information because SFAS 131 is not required to be applied to interim
financial statements in the initial year of adoption.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH
THE FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS
REPORT AND "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" PRESENTED IN THE COMPANY'S 1997 ANNUAL REPORT ON
FORM 10-KSB.
7
<PAGE>
INTRODUCTORY NOTE
This Quarterly Report on Form 10-QSB contains certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933
and Section 21E of the Securities Exchange Act of 1934 and the Company
intends that such forward-looking statements be subject to the safe harbors
created thereby. These forward-looking statements relate to, but are not
limited to, (i) future research plans, expenditures and results, (ii)
potential collaborative arrangements, (iii) the potential utility of the
Company's proposed products and (iv) the need for, and availability of,
additional financing.
The forward-looking statements included herein are based on current
expectations, which involve a number of risks, uncertainties and
assumptions regarding the Company's business and technology. These
assumptions involve judgments with respect to, among other things, future
scientific, economic and competitive conditions, and future business
decisions, all of which are difficult or impossible to predict accurately
and many of which are beyond the control of the Company. Although the
Company believes that the assumptions underlying the forward-looking
statements are reasonable, any of the assumptions could prove inaccurate
and, therefore, there can be no assurance that the results contemplated in
forward-looking statements will be realized and actual results may differ
materially. In light of the significant uncertainties inherent in the
forward-looking information included herein, the inclusion of such
information should not be regarded as a representation by the Company or
any other person that the objectives or plans of the Company will be
achieved.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 AND JUNE 30, 1997
Research and development expenses increased $468,000, to $804,000, in the
three months ended June 30, 1998, compared to $336,000 for the same period
during 1997. $394,000 of the increase is due to compensation expense
related to the cashless exercise of stock options. The balance of the
increase is due to nutrition product animal studies. General and
administrative expenses decreased $73,000, to $340,000, in the current
period, compared to $413,000 for the same period in 1997. The increase is
primarily due to lower salary and consulting expenses of approximately
$70,000. The Company incurred $73,000 of marketing expenses in the three
months ended June 30, 1998, compared to zero during the previous period.
Marketing expense is primarily related to salaries and services related to
the launch of the Company's nutraceutical products.
Net loss increased $496,000, to $1,189,000 in the current period, compared
to $693,000 for the same period during 1997. $394,000 of the increased
loss is related to compensation expense related to the cashless exercise of
stock options. The balance of the increase is due to higher marketing and
research and development expenses for nutrition products. Net loss per
common share increased $0.06 to $0.16, compared to $0.10 for the same
period during 1997. The higher loss per share is primarily related to the
stock option compensation expense noted above.
SIX MONTHS ENDED JUNE 30, 1998 AND JUNE 30, 1997
Research and development expenses increased $524,000, to $1,264,000, in the
six months ended June 30, 1998, compared to $740,000 for the same period
during 1997. $394,000 of the increase is due to compensation expense
related to the cashless exercise of stock options. Nutrition-related
expense increased $180,000, but was partially offset by lower salaries for
CD-Tagging-TM-. General and administrative expenses increased $50,000, to
$804,000, in the current period, compared to $754,000 for the same period
in 1997. The increase is due to $100,000 in higher legal spending,
partially offset by lower salary and consulting expense. The Company
incurred $159,000 of marketing expenses in the six months ended June 30,
1998, compared to zero during the previous period. Marketing expense is
primarily related to salaries and services related to the launch of the
Company's nutraceutical products, as well as $19,000 for new business
development efforts for the Company's gene discovery and antioxidant
compound product lines.
8
<PAGE>
Net loss increased $809,000, to $2,187,000 in the current period, compared
to $1,378,000 for the same period during 1997 as the Company built up its
research, marketing and administrative efforts. $394,000 of the increased
loss is due to compensation expense related to the cashless exercise of
stock options. Net loss per common share increased $0.11 to $0.30, compared
to $0.19 for the same period during 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception solely through the
sales of debt and equity securities. As of June 30, 1998, the Company had
working capital of $670,000 which includes $1,047,000 of cash and cash
equivalents. Net cash used in operating activities during the six months
ended June 30, 1998 was $1,993,000, compared to $1,591,000 for the same
period during 1997. The increase in cash used was primarily related to the
net loss from operations as the Company accelerated its research and
marketing activities. The Company generated $998,000 of cash in investing
activities during the current period, which was primarily related to the
sale of maturing short-term investments. This compares to a use of cash of
$1,245,000 during the previous period when excess cash was invested in
short-term investments.
On November 6, 1997 the Company entered into agreement with two parties
which allows the Company the ability to borrow up to $4.0 million through
the issuance of convertible debentures, subject to certain conditions. On
November 6, 1997, the Company issued $1.0 million of its debentures which
resulted in net proceeds of $947,500 before expenses were deducted. The
Company can borrow the remaining $3 million by the issuance of additional
debentures only if certain conditions are met, including minimum daily
trading volume of its common stock, the existence of an effective
registration statement covering the common stock underlying the debentures,
current listing on the NASDAQ stock market and other conditions. During
the first quarter of 1998, all outstanding debentures were converted in
227,222 shares of stock. The Company cannot access the additional facility
if it does not maintain listing on the NASDAQ Small Cap Market.
The Company does not anticipate having significant revenues in the
foreseeable future and will be required to raise additional funds to
continue operations. There can be no assurance that additional funds will
be available.
On July 14, 1998, Martin Malk was hired to replace Steven Kemper as Chief
Financial Officer. Mr. Malk was previously Chief Financial Officer and
Chief Administrative Officer of the Hotel Del Coronado and led diligence
efforts for the sale of that enterprise, one of the largest of its kind.
Mr. Kemper resigned on July 24, 1998, to pursue an opportunity in
telecommunications.
On Monday, August 10, 1998, the Company entered into a letter of intent
to acquire the assets of Nutriguard Research, Inc., a nutritional mail-
order distribution company located in Encinitas, California. Nutriguard
Research, Inc. has been in business for 18 years. The parties have agreed
that the purchase price shall be $360,000 payable in a combination of stock
and/or a promissory note, the final terms of which shall be negotiated
prior to closing, anticipated to be within thirty to forty-five days. The
Company intends to expand Nutriguard's existing marketing programs,
customer base and revenues.
Mark F. McCarty, the president of Nutriguard Research, Inc., has joined
Vyrex. Mr. McCarty is considered a leading theoreticians in the area of
nutraceuticals and functional foods, having published over 70 authoritative
papers and been awarded four patents. Mr. McCarty will continue his
involvement with expansion of the Nutriguard business in addition to
playing an important role with Dr. Hendler in developing Vyrex's
proprietary nutraceutical product lines.
9
<PAGE>
On June 16, 1998, the Company received notification from the NASDAQ Stock
Market, Inc. that it did not meet the requirements for current listing on
the NASDAQ SmallCap Market. The Company submitted documents to NASDAQ on
June 30, 1998, including a plan to meet and continue to meet SmallCap
listing requirements. On July, 7, 1998, the Company received notice from
NASDAQ that the Company would be subject to delisting on July 14, 1998. On
July 10, 1998, the Company requested a hearing before the NASDAQ Listing
Qualifications Panel. On July 20, 1998, NASDAQ stayed its decision
regarding the Company's ability to meet listing requirements and scheduled
a review hearing on August 21, 1998. On August 5, 1998, the Company
notified NASDAQ that it would appear on August 21, 1998, and present
additional documentation intended to demonstrate its continuing compliance
with NASDAQ SmallCap Market listing requirements.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the three months
ended June 30, 1998.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
has duly caused this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
VYREX CORPORATION
Registrant
By: /s/ MARTIN MALK
------------------------------
Martin Malk,
Chief Financial Officer
(Principal Financial Officer)
10
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,046,646
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,100,448
<PP&E> 209,596
<DEPRECIATION> 95,585
<TOTAL-ASSETS> 1,371,087
<CURRENT-LIABILITIES> 429,589
<BONDS> 0
0
0
<COMMON> 7,423
<OTHER-SE> 934,075
<TOTAL-LIABILITY-AND-EQUITY> 1,371,087
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,216,900
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (27,466)
<INCOME-PRETAX> 1,189,434
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,189,434
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,189,434
<EPS-PRIMARY> (0.16)
<EPS-DILUTED> (0.16)
</TABLE>
