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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-K SB
/ X / Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Fiscal Year ended DECEMBER 31, 1998
/_ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ________ to ________.
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
corporation or organization) Identification No.)
2159 Avenida de la Playa, La Jolla, California 92037
(Address of principal executive offices)
(619) 454-4446
(Issuer's telephone number including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, Par
Value $.001
Warrants
(Title of Class)
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
----- -----
Check there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K SB or any
amendment to this Form 10-K SB.
[X]
State issuer's revenues for its most recent year: $0.00.
State the aggregate market value of the voting and non-voting common equity held
by non affiliates of the registrant computed by reference to the price at which
the stock was sold, or the average bid and ask prices of such stock equity, as
of a date within the past 60 days: $3,148,669 as of March 30, 1999
State the number of shares outstanding of each of the issuer's classes of common
equity, as of latest practicable date:
Common Stock - 7,423,455 as of March 30, 1999 Warrants to purchase common
stock - 1,156,701 as of March 30, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
The issuer's definitive Proxy Statement for its Annual Meeting of Shareholders
to be submitted to the commission on or before April 30, 1998 **
Transitional Small Business Disclosure Format
Yes No X
----- -----
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PART I
ITEM 1. BUSINESS
GENERAL
Certain statements in this Form 10-K SB regarding future expectations
and financial performance may be regarded as "forward-looking statements"
within the meaning of the U.S. Securities Litigation Reform Act. They are
subject to various risks and uncertainties, such as those described in the
Risk Factors section, and elsewhere, in this Form 10-K SB, and in the
Company's Securities and Exchange Commission filings. Actual results may vary
materially.
THE COMPANY
Vyrex Corporation is a research and development stage company seeking to
discover and develop pharmaceuticals and nutraceuticals for the treatment and
prevention of respiratory, cardiovascular and neurodegenerative diseases and
conditions associated with aging. The Company's current research is focused
on targeted antioxidant therapeutics for respiratory, neurological and
cardiovascular diseases and the development of nutraceuticals for the dietary
support of certain age-related conditions. The Company is also developing a
proprietary CD-Tagging-TM- gene and protein discovery technology in an effort
to help accelerate its pharmaceutical and nutraceutical research programs.
ANTIOXIDANT DRUG PROGRAM. In the Company's opinion, Vantox-Registered
Trademark- is currently its lead drug candidate. The Company's research with
Vantox-Registered Trademark- indicates it may have usefulness in the
treatment of asthma, ARDS, cystic fibrosis, oxygen toxicity, smoke inhalation
and other respiratory diseases and conditions. Vantox-Registered Trademark-
is an inhaled antioxidant intended to be used in vapor form. The Company
believes certain mechanisms in the inflammatory cascade which lead to tissue
damage may be mediated by free radicals. Free radicals are a by-product of
oxidation, which can be damaging at high levels. Vantox-Registered Trademark-
has been shown in laboratory tests to be a free radical scavenger, or
"antioxidant". The Company has demonstrated Vantox-Registered Trademark-'s
effects in preventing and treating oxidative lung damage in three different
animal models. The models evaluated protection from lung damage induced by
oxygen, paraquat and ozone. Vantox-Registered Trademark- showed protective
effects in all three models. Based on this data and growing evidence that
oxidative stress and inflammation may be central to the pathogenesis of
asthma and other respiratory conditions, the Company believes
Vantox-Registered Trademark- is an appropriate drug candidate to take forward
into clinical trials. Before initiating Phase I clinical trials, the Company
must complete toxicology and pharmacokinetic studies and submit an
Investigational New Drug (IND) application with the U.S. Food and Drug
Administration. Due to the expense of completing pre-clinical trials and
conducting clinical trials, the Company is currently seeking a joint venture
with a pharmaceutical company to assist in funding clinical development. In
May of 1998 the Company commenced its marketing effort with a number of
pharmaceutical companies. Preliminary pre-clinical data was provided to
several of these companies, pursuant to confidentiality and non-disclosure
agreements. The company is awaiting final review of its data by these
potential collaborators. There can be no assurance the Company will be
successful in funding the further development of Vantox-Registered
Trademark-, or that pre-clinical trials will be completed, or that clinical
trials will be initiated, or if they are initiated that the trials will be
completed and the Company's claims confirmed. Even if confirmed there is no
assurance that it will result in the production or marketing a drug. The
Company holds two patents in connection with Vantox-Registered Trademark-.
The Company believes oxidative damage is implicated in a variety of
diseases including cardiovascular, neurological and viral disorders. Based on
its research in oxidative stress and antioxidants, the Company has designed
several analogs and pro-drugs of Vantox-Registered Trademark- and
Panavir-Registered Trademark- another drug candidate being developed by the
Company. These derivatives are designed to provide improved bioavailability,
oral delivery and disease targeting. In laboratory tests, some of these
compounds have been shown to protect mitochondria from oxidative damage and
have been shown to be potentially potent antioxidants. On the basis of these
preliminary results, and the Company's view of a body of knowledge
surrounding certain disorders, the Company believes these derivatives may be
useful in treating Alzheimer's Disease, Parkinson's Disease, atherosclerosis,
spinal cord trauma and other disorders. The Company is continuing
pre-clinical development of these compounds and has filed patent disclosures
concerning their uses.
Panavir-Registered Trademark- is an antioxidant drug candidate the Company
believes may inhibit HIV proliferation and may target the events leading to the
slow progressive deterioration of the immune system. The Company believes
Panavir-Registered Trademark- directly inhibits HIV-1 in
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part by interfering with the attachment of the virus to cells and also by
inhibiting the syncytia-inducing strains of HIV-1. Many scientists today
believe the most pathogenic strains of HIV-1 are those that lead to the
formation of multinucleated giant cells called syncytia. Panavir-Registered
Trademark- may also prevent activation of HIV-1 in latently and chronically
infected cells, which is an activity not shown by the approved reverse
transcriptase inhibitors or protease inhibitors. The Company believes the
inhibition of viral activation in latently infected cells may be one of the
most desirable attributes of an anti-HIV/AIDS drug.
The Company believes the activation of HIV infection from the latent
state is associated with increased intracellular levels of oxygen free
radicals. In laboratory tests the antioxidant and free radical scavenging
activity of Panavir-Registered Trademark- inhibited activation of HIV-1 in
latently infected cells. Chronic and inappropriate activation of immune cells
in HIV infection has been linked to abnormal secretion of certain
immunological hormone-like substances called cytokines. Certain cytokines
appear to be associated with increased production of oxygen free radicals.
Based on the results of preliminary tests completed to date,
Panavir-Registered Trademark- appears to inhibit the activity of certain of
these cytokines, including interleukin-1 and tumor necrosis factor alpha. The
Company hopes Panavir-Registered Trademark- may allow HIV positive
individuals to remain healthy by preventing latently infected cells from
reactivating, as well as interfering with viral replication and transmission
to other cells when infected cells are activated by certain processes.
In May of 1992, the Company received an Investigational New Drug
allowance from the FDA for a Phase I/II human clinical trial using
Panavir-Registered Trademark- to treat patients infected with the HIV virus.
This phase of the Panavir-Registered Trademark- study began in July of 1992
and was completed in October of 1995. This trial examined safety,
bioavailability and pharmacokinetics in a small group of patients. Results
indicated that Panavir-Registered Trademark- was well tolerated and achieved
targeted serum levels. CD4 counts, which normally decline in untreated AIDS
patients, were stabilized, but did not show a significant increase. During
1996 and 1997, the Company synthesized new Panavir-Registered Trademark-
analogs and prodrugs in an effort to improve bioavailability and the
Company's proprietary position. These compounds have undergone initial
pharmacologic testing and have exhibited antioxidant activity, but will
require additional testing. During 1998, the Company focused on seeking a
collaborative partner or partners to continue its development and clinical
program involving Panavir-Registered Trademark-
Ultimately, further trials will be required involving the treatment of
at least several hundred patients with Panavir-Registered Trademark- alone,
or in combination with approved drugs. There can be no assurance that funding
will be secured or such tests will be undertaken or completed, or that any
form of Panavir-Registered Trademark- will be developed as a marketable
product.
The Company entered into an agreement with the Immune Response
Corporation in 1997, to search for treatments for spinal cord and other
central nervous system trauma. In June 1998 the companies agreed to amend
their collaboration to include research and development of certain
proprietary Vyrex compounds as potential treatments for spinal cord and
central nervous system trauma. During the remainder of 1998 the companies
initiated a development program to explore potential therapeutic indications
of the compounds. Based on the results achieved thus far, the companies are
seeking a pharmaceutical partner and / or outside financing for further
development and commercialization of the compounds.
NUTRACEUTICALS. The nutraceutical market includes nutritional
supplements and foods, which may deliver health benefits beyond basic
nutrition. Consumer research seems to indicate consumers may seek out
nutritional supplements provided they are backed by reliable science, and
that many consumers prefer to receive their health benefits through foods
rather than through pills. There are a large number of companies competing in
the market to provide nutraceuticals to consumers. The Company's research
programs are currently being directed at developing proprietary formulas of
nutritional supplements targeted at consumer health concerns and the
development of proprietary supplements (Pronutrients-TM-) which may be
marketed as single line supplements, in multi-formulations and in foods. The
Company currently has a pipeline of proprietary nutraceutical compounds in
varying stages of development.
During 1997 the Company entered into an agreement with Retired Persons
Services, Inc. (RPS), which administers the AARP Pharmacy Service, to design
and market four nutritional supplement products. The proposed products are
intended to provide for the dietary support of the heart, the prostate,
bones, joints and immunity/vitality. The Company has completed pilot
production of these potential products contract manufacturers and has also
initiated stability and safety studies. The Company has agreed to license
these initial four formulas to RPS and allow RPS to manufacture and market
the products. Pursuant to its agreement with RPS the Company is to receive a
royalty from RPS based upon a percentage of RPS' sales of the products. The
Company has granted RPS exclusive rights to market these potential products
in the U.S. All products were launched for national distribution by RPS in
January 1999 and were featured in the AARP Pharmacy Service catalogue,
which was mailed to all catalogue subscribers in late January. In addition
the products are being marketed through inclusion on the AARP Pharmacy
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Service internet web site. Pursuant to the agreement between Vyrex and RPS,
the Company is to be provided reports for purposes of royalty accounting on a
quarterly basis. The Company is entitled to a royalty in the amount of 15%
of gross product sales. There can be no assurance that a market will develop
for the products or that any products will be sold and produce revenue for
the Company
In early 1998 the Company entered into an agreement with Uncle Ben's,
Inc. to jointly develop "Wellness Foods". Wellness foods are proposed foods
designed to offer health benefits beyond basic nutrition. Pursuant to an
Agreement with Uncle Ben's several steps were completed in 1998, including
investigation of regulatory issues, prosecution of the Company's patent
position and certain animal studies. There can be no assurance the
development efforts will be successful, that the parties will proceed to a
definitive agreement, or if they are, that any products will be produced or
achieve acceptance or generate revenues.
GENE DISCOVERY. A major goal of recent pharmaceutical research is to
decipher the human genome. With the gene databases rapidly filling, the
Company and others believe the next step is not only to discover the genes
but also to discover the genes' functions. The Company acquired an exclusive
worldwide license to a gene research method, called CD-Tagging-TM-.
CD-Tagging-TM- is a proprietary functional genomics and proteomics technology
that incorporates hereditary tags into genes, transcripts and proteins via
recombinational events at the DNA level. CD-Tagging-TM- can be used to
analyze known genes and gene products (proteins) and to identify and
characterize new genes and gene products. The Company believes CD-Tagging-TM-
may provide advantages over current methods by which genes and proteins are
discovered and characterized. These advantages may include identification and
analysis of genes and proteins in their natural cellular and/or organismal
environments, direct purification of tagged proteins from tagged cells by
immunoaffinity methods, direct amplification of tagged proteins from tagged
cells, and assessment of gene function via modulation of gene expression in
vivo. Due to capital constraints the Company reduced its research and
development for CD Tagging activities in the second half of 1998. The
Company is currently reviewing several options regarding its genomics
program, including seeking a collaborative partnership to undertake
continuing research and development. The Company may be unable to continue
its genomics program without a collaborative partnership or additional
funding, for which there is no assurance.
RESEARCH COLLABORATIONS AND LICENSING AGREEMENTS
As part of its strategy for developing and commercializing certain
potential products the Company has entered into research collaborations and
licensing agreements. There can be no assurance the Company will enter into
additional collaborative, license or similar agreements, or that its existing
agreements will result in development or successful commercialization of any
potential product. Some of the agreements that the Company has entered into
are summarized below:
JONATHAN W. JARVIK, PH.D. In January, 1996, the Company entered into
license agreements with Jonathan W. Jarvik, Ph.D. ( Jarvik Agreement )
pursuant to which Dr. Jarvik granted the Company a 99 year exclusive
world-wide license to develop and market certain technology, processes and
potential products relating to gene research methods discovered by Dr. Jarvik
called CD-Tagging -TM- and epitope tagging. Dr. Jarvik presently has had a
patent issued on the CD-Tagging-TM- technology and universal epitope
technology. The Company is responsible for all costs and expenses in
connection with obtaining patent protection and with the future development
of the licensed technology. Pursuant to the agreement, Dr. Jarvik will
receive royalties in the amount of 4% of the gross proceeds received from the
sale by Vyrex of certain defined products developed by CD-Tagging-TM- and
universal epitope technology not including sales by sublicensees. Dr. Jarvik
shall also receive royalties in an amount equal to the lesser of: 7% of the
gross proceeds received by each sublicensee from products developed with the
sublicensed technology; or 50% of any royalty received by Vyrex from each
sublicensee. In addition, Dr. Jarvik shall receive 20% of any sublicense fees
received by Vyrex. Dr. Jarvik also is entitled to an annual maintenance fee
in the amount of $35,000 less all other compensation paid to Dr. Jarvik as
salary or similar compensation. The License Agreement may be terminated by
Dr. Jarvik or converted to a non-exclusive license in the event Vyrex fails
to comply with certain obligations under the Agreement. Dr. Jarvik's
employment status was converted to a consultant relationship in January of
1998, which consultancy terminated later in the year.
DUSAN MILJKOVIC, PH.D. In October 1997, the Company entered into a
License Agreement with Dusan Miljkovic, Ph.D. ("Miljkovic Agreement")
pursuant to which Dr. Miljkovic granted the Company an exclusive worldwide
license to develop, manufacture and sell certain proprietary nutraceutical
compositions. Dr. Miljkovic originally filed a provisional patent application
covering the compounds, and subsequently filed a United States patent
application. Pursuant to the agreement, the Company is responsible for all
costs and expenses in connection with obtaining patent protection. In the
case of licensed products sold as bulk compounds or stand-alone supplements,
Dr. Miljkovic will receive royalties in the amount of 2.5% of gross proceeds
up to $1 million; 1.75% of gross proceeds of between $1.0 million and $5.0
million and 1% of gross
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proceeds in excess of $5 million. In the case of licensed products sold as a
component of a supplement formulation, Dr. Miljkovic will receive royalties
according to the preceding schedule based on 34% of gross revenues. The
License Agreement may be terminated by Dr. Miljkovic or the Company under
certain circumstances. During 1998 the Company continued development of the
compounds licensed from Dr. Miljkovic. The Company was recently notified
that the claims set forth in Dr. Miljovic's United States and PCT patent
applications will be allowed.
THE IMMUNE RESPONSE CORPORATION. During 1997 the Company entered into an
agreement with The Immune Response Corporation to search for treatments for
spinal cord and other central nervous system trauma. The Immune Response
Corporation is a Carlsbad, California-based biopharmaceutical company
involved with research in T-cell therapy, molecular biology and gene therapy.
The collaboration is focusing on an effort to discover proteins and small
molecules, which may lead to the development of drugs for the treatment of
central and peripheral nervous system injury. The companies have agreed to
share equally the ownership of potential proprietary discoveries within the
scope of the collaboration. In 1998 the companies agreed to amend their
collaboration to include research and development of certain proprietary
Vyrex compounds. The companies are seeking a pharmaceutical partner and /
outside financing for development and commercialization of technology arising
from the collaboration.
UNCLE BEN'S, INCORPORATED. On January 22, 1998, the Company entered into
an exclusive development agreement with Uncle Ben's, Incorporated to develop
wellness foods for human and animal consumption. In early 1998 the Company
entered into an agreement with Uncle Ben's, Inc. to jointly develop "Wellness
Foods". Wellness foods are proposed foods designed to offer health benefits
beyond basic nutrition. Pursuant to an Agreement with Uncle Ben's several
steps were completed in 1998, including investigation of regulatory issues,
prosecution of the Company's patent position and certain animal studies.
There can be no assurance the development efforts will be successful, that
the parties will proceed to a definitive agreement, or if they are, that any
products will be produced or achieve acceptance or generate revenues.
PATENTS AND PROPRIETARY TECHNOLOGY
A United States Patent was issued in 1991 for methods of inhibiting
viral and retroviral infections via the use of various antioxidants
corresponding to the formulae set forth in the subject patent. The patent has
been assigned to the Company and describes the primary proprietary technology
underlying the Company's proposed Panavir-Registered Trademark- products.
A United States Patent was issued in 1992 for methods of inhibiting
viral and retroviral replication and for treating viral and retroviral
infections via the administration of compositions containing tocopherol, or a
tocopherol derivative, or a pharmaceutically effective product thereof. The
Company is one of two assignees of this patent, with Biodor U.S. Holding.
A United States Patent was issued in 1994 directed to certain
preparations and methods for dilipidation of skin or hair through the use of
cyclodextrin and cyclodextrin derivative preparations such as hydroxypropyl
cyclodextrin. This patent also is directed to cerumen removal methods
involving introduction of cyclodextrin preparations to the ear canal,
resulting in the removal of ear wax and related substances. This patent has
been assigned to the Company. This patent describes the proprietary
technology of the Company underlying its proposed Cerex-Registered Trademark-
products.
A United States Patent was issued in 1994 involving airborne protectants
against oxidative tissue damage. This patent is directed to certain methods
for preventing free radical-induced oxidative damage and inflammatory
response in biological tissue through the use of vapor-phase, phenolic
antioxidants such as vaporized 2,6-diisopropylphenol. This patent has been
assigned to the Company and describes the technology underlying the Company's
proposed Vantox-Registered Trademark- products.
A United States Patent was issued in 1995 directed to certain methods
for delipidation of skin or hair through the use of cyclodextrin and
cyclodextrin derivative preparations such as hydroxypropyl cyclodextrin. This
patent is also directed to cerumen removal methods involving introduction of
cyclodextrins to the ear canal resulting in the removal of ear wax and
related substances. This patent has been assigned to the Company. This patent
describes the proprietary technology of the Company underlying its proposed
Cerex-Registered Trademark-products.
A United States Patent was issued in 1995 directed to certain methods
for the prevention and treatment of poison ivy and poison oak dermatitis
through the use of cyclodextrins in applications to complex urushiols. This
patent is also directed to methods of desensitizing against urushiol -
induced dermatitis through cyclodextrin - urushiol complexes. This patent has
been assigned to the Company and describes the technology underlying the
Company's proposed Vyderm-TM- products.
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A United States Patent was issued in 1995 involving airborne protectants
against oxidative tissue damage. This patent is also directed to methods for
preventing free radical-induced oxidative damage and inflammatory response in
biological tissue through vapor-phase, phenolic antioxidants, such as
vaporized 2,6-diisopropylphenol.
A United States Patent was issued in 1996 directed to a certain delivery
formulation for Probucol, related to the Company's Panavir-Registered
Trademark-product.
A United States Patent was issued in 1997 directed to a certain method
for producing tagged genes, transcripts and proteins related to the Company's
CD-Tagging-TM- technology.
A United States Patent was issued in 1998 directed to the use of
cyclodextrins to complex urushiols to protect against and to treat irritation
arising from exposure to urushiols. This patent has been assigned to the
Company and relates to the proposed Vyderm-TM- products.
A United States Patent was issued in 1999 relating to compounds,
compositions, uses and methods for inhibiting viral and retroviral
replication and for treating viral and retroviral infections via the
administration of various compounds, including antioxidants. This patent has
been assigned to the Company and relates to the proposed Panavir-Registered
Trademark- products.
The Company has patent applications pending in the United States and
there have been foreign counterparts filed for certain of the Company's-TM-
patent applications. One of the U.S. patent applications and certain foreign
patent filings are jointly owned by the Company and Biodor U.S. Holding.
Pursuant to the Jarvik Agreement the Company is also responsible for
processing the patent application pending in the name of Dr. Jarvik regarding
a CD Tagging-TM- method. The Company has filed U.S. and foreign patent
applications in the name of Dr. Jarvik covering the universal epitope
technology. Pursuant to the Jarvik License Agreement, the Company is
responsible for fees and costs associated with the patent applications
covering the universal epitope technology.
The protection of proprietary rights relating to the Company's proposed
products, processes and know-how is critical for the Company's business. The
Company intends to file patent applications to protect technology, inventions
and improvements that are considered important to the development of its
business. The Company also intends to rely on unpatented trade secrets for a
part of its intellectual property and property rights, and there can be no
assurance others will not independently develop substantially equivalent
proprietary information and techniques, or otherwise gain access to the
Company's trade secrets or disclose such technology, or that the Company can
meaningfully protect its rights to any patented or unpatented technology.
Although the Company intends to seek patent protection for its
proprietary technology and potential products in the United States and in
foreign countries, the patent positions of biotechnology and pharmaceutical
firms, including the Company, are generally uncertain and involve complex
legal and factual questions. Consequently, the Company does not know whether
any of the patent applications pending, or the unfiled patent applications
which it is considering will result in the issuance of any patents, whether
the patents which it owns will provide significant proprietary protection, or
whether they will be circumvented or invalidated. Since patent applications
in the United States are maintained in secrecy until patents issue, and
publication of discoveries in the scientific or patent literature tend to lag
behind actual discoveries by several months, at the time of filing a patent
application or during the research phase prior to application the Company can
not be certain it will be deemed the first creator of inventions covered by
any future patent applications or that it will be deemed the first to file
patent applications for such inventions. There can be no assurance all United
States or foreign patents that may pose a risk of infringement can or will be
identified. If the Company is unable to obtain a license(s) where it may have
infringed on other patents, it could encounter delays in product market
introductions while it attempts to design around such intellectual property
rights, or could find that the development, manufacture or sale of potential
products requiring such licenses could be prevented. In addition, the Company
could incur substantial costs in defending against suits brought against it
in connection with such intellectual property rights or prosecuting suits
which the Company may bring against other parties to protect its intellectual
property rights. Competitors or potential competitors may have filed
applications for, or have received patents and may obtain additional patents
and proprietay rights relating to, compounds or processes competitive with
those of the Company. See "Business ) Competition."
The Company will generally require all or certain of its employees,
consultants and advisors to execute a confidentiality agreement either upon
the commencement of an employment or consulting relationship with the Company
or at a later time. There can be no assurance these agreements will provide
meaningful protection for the Company's trade secrets in the event of
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unauthorized use or disclosure of such information.
The protection of intellectual properties owned by technology firms,
including the Company is subject to uncertainty and involves complex legal and
factual questions. The degree of future protection for the Company's proprietary
technology rights is therefore uncertain. There can be no assurance the
Company's efforts to protect its intellectual property will prove to be
adequate. See "Risk Factors -- Patents and Proprietary Rights."
TRADEMARKS
The Company owns trademarks registered with the United States Patent and
Trademark Office (USPTO) for the names Panavir-Registered Trademark- ,
Vantox-Registered Trademark-, and its logo in connection with the name Vyrex.
Additionally the company is prosecuting a number of trademarks in connection
with its nutraceutical and genomics programs. Federally registered
trademarks have a perpetual life, as long as they are renewed on a timely
basis, subject to the rights of third parties to seek cancellation of the
marks. The Company has filed other trademark applications, may claim common
law trade name rights as to other potential products, and anticipates filing
additional trademark applications in the future.
EMPLOYEES
On December 31, 1998, the Company employed ten individuals, three in
executive positions, three in scientific positions and four in
administration. In an effort to reduce operating expenses as well as changing
its strategy to outlicense its CD-Tagging-TM- and epitope tagging technology
the company either eliminated or did not replace certain positions in the
Company. None of its employees are currently represented by a union or any
other form of collective bargaining unit. The Company may hire an
undetermined number of new employees over the next 12 to 24 months, should
the Company expand its activties. The Company's success will depend in large
part upon its ability to retain its current employees and secure additional
employees to continue its research and development activities.
GOVERNMENT REGULATION
The research and development, manufacture and marketing of the Company's
potential products may be subject to extensive regulation by the FDA and by
other federal, state, local and foreign entities, which regulate, among other
things, research and development activities and the testing, manufacture,
labeling, storage, record keeping, safety, advertising and promotion of
pharmaceutical products. Governmental review of new drugs, devices or
biologicals is an uncertain, costly and lengthy process.
The Federal Food, Drug and Cosmetic Act, the Public Health Services Act,
the Controlled Substances Act and other federal statutes and regulations
govern or influence all aspects of the Company's business. Noncompliance with
applicable requirements can result in fines and other judicially imposed
sanctions, including product seizures, injunction actions and criminal
prosecutions. In addition, administrative remedies can involve voluntary
recall of products, and the total or partial suspension of products as well
as the refusal of the government to approve pending applications or
supplements to approved applications. The FDA also has the authority to
withdraw approval of drugs in accordance with statutory due process
procedures.
Ongoing compliance with these requirements can require the expenditure
of substantial resources. Any failure by the Company, or possible licensees
to obtain, or any delay in obtaining required regulatory approvals would
adversely affect the planned marketing of the Company's proposed products and
the Company's ability to derive product or royalty revenue.
The FDA's regulatory system requires an initial determination of whether
a subsequent filing by the Company for that product will be classified by the
FDA as a drug, device or biological. The FDA has different approval
procedures for drugs, devices and biologicals. The Company believes most, if
not all, of its currently proposed products will be classified as drugs,
although the Company may develop proposed new potential products or potential
therapeutic agents in the future which are considered devices or biologicals.
If the Company is required to submit any application to the FDA as a
biological, or device, the application process may be significantly longer,
more expensive and certain different compliance procedures would apply than
those for a drug as described below.
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The steps required by the FDA before a new drug may be marketed in the
United States include: (a) preclinical studies; (b) submission to the FDA of
a request for authorization to conduct human clinical trials in an
Investigational New Drug (IND) application, which includes the test data of
the preclinical studies and the proposed protocols (study designs) for
clinical trials (an IND allows evaluation of the new drug in controlled
clinical studies); (c) adequate and well controlled human clinical trials
to establish the safety and effectiveness of the drug for its
intended use; (d) submission to the FDA of a New Drug Application ("NDA");
and (e) review and approval of the NDA by the FDA before the drug may be
shipped or sold commercially.
In addition to obtaining the FDA's approval of an NDA for each of a
Company's proposed products, each manufacturing establishment for new drugs
must receive some form of approval by the FDA. Among the conditions for such
approval is the requirement that the prospective manufacturer's quality
control and manufacturing procedures conform to the FDA's Good Manufacturing
Practices regulations, which must be followed at all times. In complying with
standards set forth in these regulations, manufacturers must continue to
expend time, monies and effort in the area of production and quality control
to ensure full technical compliance. Manufacturing establishments, both
foreign and domestic, also are subject to inspections by or under the
authority of the FDA and by other federal, state or local agencies.
In general, the clinical testing for new compounds required by the FDA
is an extremely costly, ongoing, multi-year project. The FDA itself estimates
clinical drug development time requirements average five years, but range
from two to ten years. Finally, the Company or the FDA may suspend clinical
trials at any time if it is felt that the subjects or patients are being
exposed to an unacceptable health risk. Other competitors of the Company have
had their proposed pharmaceutical clinical trials halted due to safety
concerns.
The process of completing clinical testing and obtaining FDA approval of
a NDA is likely to take a number of years and require the expenditure of
substantial resources. If an application is submitted, there can be no
assurance the FDA will review and approve the NDA in a timely manner if at
all. Even after initial FDA approval of the NDA has been obtained, further
studies, including post-market studies, may be required to provide additional
data on safety or effectiveness and will be required to gain approval for the
use of a potential product as a treatment for clinical indications other than
those for which the potential product was initially tested. Also, the FDA
will require post-market reporting and may require surveillance programs to
monitor the side effects of the drug. Results of post-marketing programs may
limit or expand the further marketing of the potential products. Further, if
there are any modifications to the drug, including changes in indication,
manufacturing process, labeling, or a change in manufacturing facility, an
NDA supplement may be required to be submitted to the FDA.
Whether or not FDA approval has been obtained, approval of a potential
product by regulatory authorities in foreign countries must be obtained prior
to the commencement of marketing of the product in such countries. The
requirements governing the conduct of clinical trials and product approvals
vary widely from country to country, and the time required for approval may
be longer or shorter than that required for FDA approval. Although there are
some procedures for unified filings for certain European countries, in
general, each country at this time has its own procedures and requirements.
Establishments handling controlled substances must be licensed by the
United States Drug Enforcement Administration. In addition to the regulatory
framework for potential product approvals, the Company is and may be subject
to regulation under state and federal law, including requirements regarding
occupational safety, laboratory practices, environmental protection and
hazardous substance control, and may be subject to other present and possible
future local, state, federal and foreign regulation.
SOURCES OF SUPPLY
The principal raw materials used in the Company's proposed products,
have been obtained from several large chemical suppliers. If and when the
Company begins production on a commercial scale, its use of raw materials
will significantly increase. The Company could experience raw material
shortages which, in turn, could affect its ability to produce products. The
Company may, from time to time, rely on a single supplier for one or more of
the raw materials and may represent a significant portion of any such
supplier's total output. Although the Company believes there are and will
continue to be alternative sources for each of its anticipated raw materials,
there can be no assurance this will be the case or that the qualification of
additional vendors will not delay the Company's ability to manufacture
product. The Company does not have any contracts with any suppliers of the
raw materials used in the development of its proposed products.
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COMPETITION
The biotechnology and pharmaceutical industries are intensely
competitive. There are many pharmaceutical companies, biotechnology
companies, public and private universities and research organizations
actively engaged in research and development of pharmaceutical products. Most
of the Company's existing or potential competitors have substantially greater
financial, human and other resources than the Company and may be better
equipped to develop, manufacture and market products. In addition, many of
these companies have extensive experience in preclinical testing and human
clinical trials. These companies may develop and introduce products and
processes competitive with or superior to those of the Company, and many of
these companies may be further along in the product development and approval
process for their potential products.
The Company's competition will be determined in part by the potential
indications for which the Company's proposed products are developed and
ultimately approved, if at all, by regulatory authorities. For most, if not
all, of the Company's potential products, an important factor in competition
will be the timing of market introduction of competitive products.
Accordingly, the relative speed with which the Company can develop potential
products, complete the clinical trials and approval processes and supply
commercial quantities of the products to the market are expected to be
important competitive factors. The Company expects competition among products
approved for sale will be based, among other things, on product
effectiveness, safety, reliability, availability, price and the strength of
the patents on which such products are based.
The Company's competitive position also depends upon its ability to attract
and retain qualified personnel, obtain patent protection or otherwise develop
proprietary products or processes and secure sufficient capital resources for
the very substantial period between technological conception and any commercial
sales, which may develop. There can be no assurance the Company will be able to
compete successfully.
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RISK FACTORS
THIS REPORT CONTAINS, IN ADDITION TO HISTORICAL INFORMATION,
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE
COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE RESULTS DISCUSSED
IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO
SUCH DIFFERENCES INCLUDE THOSE DISCUSSED BELOW AS WELL AS THOSE DISCUSSED
ELSEWHERE IN THIS REPORT.
EARLY STAGE OF DEVELOPMENT; ABSENCE OF PRODUCTS
The Company is in the development stage. It has not completed the
development of any product and, accordingly, has not begun to generate
revenues from operations. Most of the Company's proposed pharmaceutical
products will require significant additional research and development,
including in the majority of cases extensive preclinical and clinical
testing, before the Company will be able to apply for FDA approval. There can
be no assurance the Company's research and development efforts will be
successful, that any of the Company's potential pharmaceutical products under
development will prove to be safe and effective in clinical trials, that the
Company will be able to obtain FDA approval for any of its proposed
pharmaceutical products, that any such proposed pharmaceutical products can
be manufactured at acceptable cost and with appropriate quality, or that any
such proposed products, if they do receive regulatory approval, can be
successfully marketed. The Company cannot predict when, if ever, it will
begin to market any proposed pharmaceutical products which may not occur for
a number of years. The Company is also developing nutraceutical products
which the Company believes may be sold before any of its proposed
pharmaceutical products will be sold. However, as December 31 1998 no
nutraceutical products have completed testing or been sold, with the
exception that in January 1999 RPS commenced commercial sale of the products
under license from Vyrex. There can be no assurance such products will
complete testing, achieve consumer acceptance or generate any revenue. There
can be no assurance that the Company can successfully complete the product
development required to initiate its strategies with regard to nutraceutical
products or to successfully market any nutraceutical product.
NO OPERATING REVENUES; ACCUMULATED DEFICIT; EXPECTATION OF FUTURE LOSSES
The Company has experienced significant operating losses since its
inception in 1991. As of December 31, 1998 the Company had a deficit
accumulated in the development stage of $11,913,000. The Company expects to
incur substantial additional operating losses over the next several years and
expects cumulative losses to increase assuming the Company's research and
development efforts and clinical trials expand. The Company did not earn
significant revenues from operations. The development of the Company's
proposed pharmaceutical products will require the commitment of substantial
resources to prepare and submit applications to the FDA, and to conduct
research, preclinical and clinical trials, and for both its proposed
pharmaceutical and nutraceutical products the Company must either establish
commercial scale manufacturing processes and facilities or contract for such
manufacturing facilities, and to establish additional quality control,
regulatory, marketing, sales and administrative capabilities. There can be no
assurance the Company will be successful in these endeavors, especially in
light of the high failure rate of development stage pharmaceutical and
nutrition companies with limited resources. There can be no assurance the
Company will not incur substantial and continuing net losses beyond the next
several years or that the Company will ever reach profitability. Furthermore,
there can be no assurance the Company will apply for or obtain regulatory
approvals, enter into arrangements with third parties for product development
and commercialization, or successfully market or license any products. To
achieve profitable operations, the Company, alone or with others, must
successfully identify, develop, manufacture and market its proprietary
products or technologies. There can be no assurance the Company will be able
to accomplish these tasks. Significant delays in any of these matters could
materially adversely impact the Company.
FUTURE CAPITAL REQUIREMENTS; UNCERTAINTY OF ADDITIONAL FUNDING
Substantial expenditures will be required to enable the Company to
conduct existing and planned product research and development, continue the
FDA application process, including conducting preclinical studies and
clinical trials, and to manufacture and market its proposed products
including its proposed nutraceutical products. The Company will need to raise
substantial additional funds to support its long-term proposed product
development and commercialization programs including its nutraceutical
product development programs. The Company has no established bank financing
arrangements and it is not anticipated the Company will secure any bank
financing in the foreseeable future. Therefore, it is likely the Company will
need to seek additional financing through subsequent future public or private
sales of its securities, including equity and debt securities. The Company
may also seek funding for the development and marketing of its proposed
products through strategic alliances and other arrangements with corporate
partners. There can be no assurance such collaborative arrangements or
additional funds will
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be available when needed, or on terms acceptable to the Company, if at all.
Any such additional financing may result in significant dilution to existing
stockholders. If adequate funds are not available, the Company may be
required to delay, scale back or eliminate one or more of its potential
product development and drug and nutraceutical discovery programs, halt
operations, or obtain funds through arrangements with collaborative partners
or others that may require the Company to relinquish rights to certain of its
technologies, potential product candidates or potential products that the
Company would not otherwise relinquish. The Company has made a strategic
decision to commercialize its existing technologies, and has placed new
technology research and development on hold until such time as revenues, if
any, from its existing technology generate sufficient cash to warrant
additional new research. The Company's future cash position will be affected
by results of research and development, pre-clinical studies and clinical
trials, nutraceutical product development and marketing costs, relationships
with corporate partners, changes in the focus and direction of the Company's
research and development programs, competitive and technological advances,
the regulatory approval process and other factors.
INTENSE COMPETITION AND RAPID TECHNOLOGICAL CHANGE
The Company is engaged in rapidly evolving and highly competitive fields
and competition is expected to increase. There are many companies, including
large pharmaceutical, chemical, and vitamin and nutrition supplement
companies, engaged in developing, manufacturing and marketing products
similar to those proposed to be developed by the Company, many of which have
established a significant presence in the markets which the Company's
proposed products are designed to address. Virtually all of these companies
have substantially greater capital resources, research and development
staffs, facilities and experience in obtaining regulatory approvals, as well
as in the manufacturing, marketing and distribution of products, than the
Company. There can be no assurance the Company's competitors will not succeed
in developing technologies and products that are more effective and less
costly than any potential products under research and development by the
Company or which could render the Company's proposed products or technology
obsolete.
DEPENDENCE UPON KEY PERSONNEL
The Company's success in developing marketable products and achieving a
competitive position will depend, in large part, on its ability to attract
and retain qualified scientific and management personnel and in particular,
to retain Dr. Sheldon S. Hendler. The proprietary technology which has been
transferred to the Company was primarily developed by Dr. Hendler. The
Company does not currently maintain life insurance on Dr. Hendler, who is the
largest stockholder in the Company. The loss of Dr. Hendler or other
scientists and management personnel would likely have a material adverse
impact on the business and operations of the Company. The shortage of
operating cash, together with the short term strategy to commercialize
existing technology resulted in a reduction of the workforce during the
second half of 1998. In addition, salaries to management and science staff
were deferred until such time as the Company has the funds to fund the
payroll. As of December 31, 1998 deferred payroll amounted to approximately
$113,000.
RELIANCE ON COLLABORATIVE PARTNERS
The Company has relied in the past on certain established companies
interested in its technology to fund a portion of its research and
development expenses. In March of 1997 the Company entered into a
collaboration with The Immune Response Corporation to utilize the Company's
CD-Tagging-TM- technology, along with other technologies, to discover small
molecules to develop therapies for spinal cord and other central nervous
system traumas. The Company is utilizing laboratory facilities and services
at The Immune Response Corporation. The Company has also entered into license
agreements with Dr. Jarvik regarding the Company's CD-Tagging-TM- technology.
The Company also has license agreements with Dusan Milkjovic Ph.D and RPS.
The Company anticipates that it may need to enter into collaborative
arrangements with certain parties to further its development of nutraceutical
and pharmaceutical products. To date the Company has not entered into any
collaborative agreements with regard to the development of its proposed
nutraceuticals.
There can be no assurance the Company will be able to negotiate
acceptable collaborative arrangements in the future, or that any
collaborative arrangements will be successful. In addition, there can be no
assurance the Company's collaborative partners will not pursue alternative
technologies or develop alternative compounds either on their own or in
collaboration with others, including the Company's competitors, as a means of
developing treatments for the diseases targeted by the collaborative programs.
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PATENTS AND PROPRIETARY RIGHTS
The Company's success will depend in large part on its ability to obtain
patent protection for its proposed products, both in the United States and
other countries. The patent position of biotechnology and pharmaceutical
companies is highly uncertain and involves complex legal and factual
questions. There is no consistent policy regarding the breadth of claims
allowed in biotechnology and pharmaceutical patents. The Company currently
has eleven (includes CD-Tagging-TM-) patents issued and several patent
applications pending in the United States. There have been foreign
counterparts of certain of these applications filed in other countries on
behalf of the Company. The Company intends to file additional applications as
appropriate for patents covering both its proposed products and processes.
There can be no assurance patents will issue from any of the pending
applications, or for patents that have issued or may be issued, the claims
allowed will be sufficiently broad to protect the Company's technology. In
addition, there can be no assurance any patents issued to the Company will
not be challenged, invalidated or circumvented, or the rights granted
thereunder will provide proprietary protection to the Company. In addition,
any patents obtained by the Company will be of limited duration. All United
States patents issuing from patent applications applied for June 8, 1995 or
thereafter will have a term of 20 years from the date of filing. All United
States patents in force before June 8, 1995 will have a term of the longer
of: (1) 17 years from the date of issuance; or (2) 20 years from the date of
filing. All United States patents issuing from patent applications applied
for before June 8, 1995 will have a term of the longer of (1) 17 years from
the date of issuance; or (2) 20 years from the date of filing. The commercial
success of the Company will also depend in part on the Company's neither
infringing patents issued to competitors nor breaching the technology
licenses upon which the Company's proposed products might be based.
It may become necessary for the Company to obtain licenses of potential
products or other proprietary rights or trade secrets from other parties.
Failure by the Company to obtain such licenses may have a material adverse
impact on the Company. Litigation, which could result in substantial costs to
the Company, may also be necessary to enforce any patents issued to the
Company or to determine the scope and validity of others' proprietary rights.
In addition, the Company may have to participate in interference proceedings
declared by the U.S. Patent and Trademark Office to determine the priority of
inventions which could result in substantial costs to the Company.
The Company also attempts to protect its proprietary technology and
processes by seeking to obtain confidentiality agreements with its
contractors, consultants, employees, potential collaborative partners,
licensees, licensors and others. There can be no assurance these agreements
will adequately protect the Company, that these agreements will not be
breached, or the Company will have adequate remedies for any breach, or that
the Company's trade secrets will not otherwise become known or be
independently discovered by competitors. In addition the Company does not
generally require its principal scientific advisors to enter into
confidentiality agreements, and to the extent there is collaboration between
any of the scientific advisors and the Company, the aspects of such
collaboration will not necessarily remain the trade secrets of the Company.
This approach could increase the risk to the Company that it may not be able
to protect its proprietary information.
There can be no assurance others will not independently develop similar
or more advanced technologies or design around aspects of the Company's
technology which may be patented, or duplicate the Company's trade secrets.
In some cases, the Company may rely on trade secrets to protect its
innovations. There can be no assurance trade secrets will be established, or
secrecy obligations will be honored, or that others will not independently
develop similar or superior technology. To the extent consultants, key
employees or other third parties apply technological information
independently developed by them or by others to Company projects, disputes
may arise as to the proprietary rights to such information which may not be
resolved in favor of the Company.
GOVERNMENTAL REGULATION AND UNCERTAINTY OF PRODUCT APPROVALS
The production and marketing of the Company's proposed products are
subject to strict regulation by federal and state governmental authorities in
the United States and in foreign countries where such potential products may
be produced and marketed. In the United States, the FDA regulates, where
applicable, development, testing, labeling, manufacturing, registration,
notification, clearance or approval, marketing, distribution, record keeping
and reporting requirements for human and animal drugs, medical devices,
biologies, cosmetics and food additives. Most, if not all, of the Company's
proposed products, including its proposed Panavir-Registered Trademark-,
Vantox-Registered Trademark-, and other products may require FDA clearance
prior to marketing. The Federal Environmental Protection Agency ("EPA") has
regulations covering certain areas for some of the Company's proposed
products. Comparable state and local agencies may have similar regulations.
The FDA and EPA regulatory approval processes may take a number of years and
both FDA and EPA regulatory approval may require the expenditure of
substantial resources. The processing,
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formulation, packaging, labeling and advertising of the Company's proposed
nutraceutical products is subject to regulation by one or more federal
agencies, including the FDA, the Federal Trade Commission (the "FTC"), the
Consumer Product Safety Commission, the United States Department of
Agriculture and the Environmental Protection Agency. These activities are
also regulated by various agencies of the state and localities in which the
Company's nutraceutical products may be sold, including without limitation
the California Department of Health and Human Services, Food and Drug branch.
The Nutrition Labeling and Education Act and the Dietary Supplement Act
provide regulations which require that vitamin, mineral and dietary
supplements labels have to provide the same basic nutritional information
found on the labels on most conventional foods. The regulations also require
that health claims made for vitamins, minerals and dietary supplements be
scientifically valid, and mandate nutrition information found on the label to
state the nutrition content per serving. Compliance with these regulations
could adversely affect the Company's operations and its financial condition.
There can be no assurance the production and marketing of the Company's
proposed products or other potential products which may be developed by the
Company in the future, if any, will satisfy then current requirements of the
FDA, EPA, FTC, or comparable state, local and foreign authorities. Delays in
receiving or failure to receive governmental approvals may have a material
adverse impact on the Company. In addition, there can be no assurance that
government regulations applicable to the Company or its proposed products or
the interpretation thereof will not change and thereby prevent the Company
from marketing some or all of its potential products for a period of time or
permanently, or otherwise materially and adversely affect the Company.
Moreover, if regulatory approval of a drug is granted, such approval may
entail limitations on the indicated uses for which the drug may be marketed.
Even if such regulatory approval is obtained, a marketed drug, its
manufacturer and the facilities in which the drug is manufactured are subject
to continual review and periodic inspections. Later discovery of previously
unknown problems with a product, manufacturer or facility may result in
restrictions on such product or manufacturer, including withdrawal of the
potential product from the market, product seizures, a halt in operation and
other materially adverse consequences. The Company is unable to predict the
extent of adverse governmental regulation which might arise from future
federal, state or foreign legislative or administrative action, or the extent
of the impact of such legislative changes on the business of the Company.
DEBT SERVICE AND PENALTIES
On March 22, 1999, the Company obtained a loan for $100,000 at 10%
interest. The Company does not have any revenue to service the debt, and
must obtain additional financing to pay the principal and interest on this
debt when due. The loan is due and payable on March 22, 2000, and is secured
by the general assets of the Company pursuant to applicable provisions of the
Uniform Commercial Code. The Company does not have an existing bank line of
credit or other form of revolving or renewable credit facility.
DILUTIVE AND OTHER ADVERSE EFFECTS OF OUTSTANDING OPTIONS AND WARRANTS
Under the terms of the existing warrants, options issued under the
Company's stock option plan and other outstanding options and warrants, the
holders thereof are given an opportunity to profit from a rise in the market
price of the Common Stock with a resulting dilution in the interests of the
other stockholders. The terms on which the Company may obtain additional
financing may be adversely affected by the existence of such options and
warrants. The holders of the warrants may exercise them at a time when the
Company might be able to obtain additional capital through a new offering of
securities on terms more favorable than those provided by the warrants. In
addition, holders of certain Common Stock of the Company have registration
rights, and the exercise of such rights may involve substantial expense to
the Company.
POSSIBLE DEPRESSIVE EFFECT ON PRICE OF SECURITIES OF FUTURE SALES OF COMMON
STOCK
Actual sales or the prospect of sales of Common Stock under Rule 144 or
otherwise in the future may depress the prices of the Company's securities or
any market that may develop, and also make it difficult to sell the Company's
securities purchased by investors herein. There are options outstanding both
pursuant to the Company's Stock Option Plan and options not pursuant to any
plan which are exercisable for up to 1,846,259 shares of Common Stock. The
vast majority of all of these options and warrants are currently exercisable.
Exercise of any of these warrants or options would result in additional
dilution to the purchaser of the shares offered herein, and exercise of any
significant amount of these options or warrants will result in substantial
additional dilution. Resale of shares acquired upon the exercise of these
options may depress the prices of the Company's securities or make them more
difficult to sell by the investors herein. The sale or availability for sale
of substantial amounts of Common Stock in the public market after this
offering could adversely affect the prevailing market prices of the Company's
securities and could impair the Company's ability to raise additional capital
through the sale of its equity securities.
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POSSIBLE ADVERSE EFFECTS OF AUTHORIZATION AND ISSUANCE OF PREFERRED STOCK
The Company's Board of Directors is authorized to issue up to 10,000,000
shares of preferred stock. The Board of Directors has the power to establish
the dividend rates, liquidation preferences, voting rights, redemption and
conversion terms and privileges with respect to any series of preferred
stock. The issuance of any series of preferred stock having rights superior
to those of the common stock may result in a decrease in the value or market
price of the common stock and could further be used by the Board as a device
to prevent a change in control favorable to the Company. Holders of preferred
stock to be issued in the future may have the right to receive dividends and
certain preferences in liquidation and conversion rights. The issuance of
such preferred stock could make the possible takeover of the Company or the
removal of management of the Company more difficult, and adversely affect the
voting and other rights of the holder of the common stock, or depress the
market price of the warrants, Common Stock or IPO Warrants.
DELISTING FROM NASDAQ STOCK MARKET
The Company was notified that it had been delisted from the NASDAQ
SmallCap Market, effective with the close of business October 21, 1998. As
of October 22, 1998, the Company's securities commenced trading over the
counter under the symbols OTC:BB - VYRX and OTC:BB - VYRXW. As a result,
investors may find it more difficult to dispose of, or to obtain accurate
quotations as to the value of, the Company's securities.
POSSIBLE VOLATILITY OF STOCK PRICE
The market prices for securities of emerging and development stage
companies such as Vyrex have historically been highly volatile. Future
announcements concerning the Company or its competitors, including the
results of testing, technological innovations or new commercial products,
government regulations, developments concerning proprietary rights,
litigation or public concern as to safety of potential products developed by
the Company or others, may have a significant impact on the market price of
the Company's securities.
DISCLOSURES RELATING TO LOW PRICED STOCKS; RESTRICTIONS ON RESALE OF LOW
PRICE STOCKS AND ON BROKER-DEAL SALE; POSSIBLE ADVERSE EFFECT OF "PENNY
STOCK" RULES ON LIQUIDITY FOR THE COMPANY'S SECURITIES
Since the Company's securities were delisted from the NASDAQ SmallCap
Market and the Company has net tangible assets of less than $2,000,000
transactions in the Company's securities are subject to Rule 15g-9 under the
Exchange Act, which imposes additional sales practice requirements on
broker-dealers who sell such securities to persons other than established
customers and "accredited investors" (generally, individuals with a net worth
in excess of $1,000,000 or annual incomes exceeding $200,000 or $300,000
together with their spouses). For transactions covered by this Rule, a
broker-dealer must make a special suitability determination for the purchaser
and have received the purchaser's written consent to the transaction prior to
the sale. Consequently, this Rule may affect the ability of broker-dealers to
sell the Company's securities, and may affect the ability of purchasers in
this offering to sell any of the securities acquired hereby in the secondary
market.
The Commission has adopted regulations which generally define a "penny
stock" to be any non-NASDAQ equity security of a small company that has a
market price (as therein defined) less than $5.00 per share, or with an
exercise price of less than $5.00 per share subject to certain exceptions,
and which is not traded on any exchange or quoted on NASDAQ. For any
transaction by broker-dealers involving a penny stock (unless exempt), the
rules require delivery, prior to a transaction in a penny stock, of a risk
disclosure document relating to the penny stock market. Disclosure is also
required to be made about compensation payable to both the broker-dealer and
the registered representative and current quotations for the securities.
Finally, monthly statements are required to be sent disclosing recent price
information for the penny stock held in an account and information on the
limited market in penny stocks.
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CONTROL BY PRESENT STOCKHOLDERS; POSSIBLE DEPRESSIVE EFFECT ON THE COMPANY'S
SECURITIES
The current officers and directors of the Company will be able to elect
all of the Company's directors and otherwise control the Company's
operations. This concentration of ownership by the Company's officers and
directors may discourage potential purchasers from seeking control of the
Company through the purchase of Common Stock, and this possibility could have
a depressive effect on the price of the Company's securities.
In addition, Dr. Sheldon S. Hendler, Chairman of the Board and Chief
Executive Officer of the Company owns approximately 41% of the outstanding
Common Stock of the Company. As a result thereof Dr. Hendler alone may
control or exert overwhelming influence over the Company's operations.
ANTI-TAKEOVER PROVISIONS - LIMITATION ON VOTING RIGHTS
The Company's Articles of Incorporation and Bylaws contain provisions
that may make it more difficult to acquire control of the Company by means of
tender offer, over-the-counter purchases, a proxy fight, or otherwise. The
Articles of Incorporation also include provisions restricting stockholder
voting rights. The Company's Articles of Incorporation include a provision
that requires that any action required by the stockholders may not be
affected by a written consent, and that special meetings of the stockholders
may only be called by the Board of Directors. This provision makes it
difficult for stockholders to pass any resolution not supported by the Board
of Directors except at a regularly called meeting. The Company's Articles of
Incorporation provide for a staggered term of the Board of Directors, thus
eliminating the ability to elect all of the directors in any one year. This
provision may make the implementation of a change in management a process
requiring more than one year even if supported by a majority of the
stockholders. The Company's Articles of Incorporation provide directors may
only be removed for cause and a vote of 70% of the shareholders. Certain
provisions of the Articles of Incorporation may only be amended by a vote of
70% of the stockholders. As a result of the number of shares currently owned
by management, this provision may for some time have the effect of indirectly
eliminating any possibility stockholders could pass a resolution unless
approved by management, in connection with any question submitted or required
to be submitted to a vote of the stockholders. The Company's Articles of
Incorporation also require that stockholders give advance notice to the
Company of any directorship nominations or other business to be brought by
the stockholders at any stockholder's meeting. This provision makes it more
difficult for stockholders to nominate candidates for the Board of Directors
who are not supported by management. In addition, the Articles of
Incorporation require advance notice for stockholder proposals to be brought
before the annual meeting. The requirements include that the notice must
specify certain information regarding the stockholder and the meeting. This
provision to implement stockholder proposals makes it more difficult even if
a majority of stockholders are in support thereof. The Company is also
subject to certain provisions of California law if more than 50% of its
outstanding securities are held of record by persons with addresses in
California, and if more than 50% of its property, payroll and sales are from
California. These provisions of California law will control the operations of
the Company with respect to certain of the anti-takeover provisions discussed
herein, until such time as either (i) the Company is listed on the New York
or American Stock Exchange or the National Market System of Nasdaq, and it
has 800 stockholders; or (ii) the Company no longer has either more than 50%
of its outstanding securities held by persons with addresses in California,
or less than 50% of its property, payroll and sales are in California. Each
of these provisions may also have the effect of deterring hostile take-overs
or delaying changes in control or management of the Company. In addition, the
indemnification provisions of the Company's Bylaws and Articles of
Incorporation may represent a conflict of interest with the stockholders
since officers and directors may be indemnified prior to any judicial
determinations as to their conduct.
CURRENT PROSPECTUS AND STATE REGISTRATION REQUIRED TO EXERCISE WARRANTS
Holders of the Company's outstanding warrants will only be able to
exercise the warrants if: (i) a current prospectus under the Securities Act
relating to the securities underlying the warrants is then in effect and (ii)
such securities are qualified for sale or exempt from qualification under the
applicable securities laws of the states in which the various holders of the
warrants reside. Although the Company has undertaken to use its best efforts
to maintain the effectiveness of a current prospectus covering the securities
underlying the warrants, there can be no assurance the Company will be able
to do so. The warrants may have no value if a current prospectus, covering
the securities issuable upon the exercise of the warrants, is not kept
effective or if such securities are not qualified, or exempt from
qualification, in the states in which the holders of the warrants reside.
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LACK OF MARKETING EXPERIENCE; DEPENDENCE ON OUTSIDE PARTIES FOR MARKETING AND
DISTRIBUTION; UNCERTAINTY OF MARKET ACCEPTANCE OF PROPOSED PRODUCTS
If successfully developed and approved by applicable regulatory
agencies, the Company intends to market its proposed products currently under
development through contractual arrangements with others such as joint
venture, licensing or similar collaborative agreements and distribution
agreements. This may result in a lack of control by the Company over some or
all of the marketing and distribution of such potential products. There can
be no assurance the Company will be able to enter into any marketing
arrangements on terms acceptable to the Company or that any marketing efforts
undertaken on behalf of the Company will be successful. The Company may, in
the future, determine to directly market certain of its proposed products.
The Company has limited marketing experience and significant additional
capital expenditures and management resources would be required to develop a
direct sales force. In the event the Company elects to engage in direct
marketing activities, there can be no assurance the Company would be able to
obtain the requisite funds or attract and retain the human resources
necessary to successfully market any of its potential products.
The Company's future growth and profitability will depend, in large
part, on the success of its personnel and others conducting marketing efforts
on behalf of the Company in fostering acceptance among the various markets of
the use of the Company's potential products as an alternative to other
available products or otherwise. The Company's success in marketing its
potential products will be substantially dependent on educating its targeted
markets as to the distinctive characteristics and perceived benefits of the
Company's potential products. There can be no assurance that the Company's
efforts or the efforts of others will be successful or that any of the
Company's proposed products will be favorably accepted among the targeted
markets.
LACK OF MANUFACTURING CAPABILITY; DEPENDENCE ON OUTSIDE PARTIES FOR
MANUFACTURING OF PROPOSED PRODUCTS
The Company has no manufacturing facilities or expertise, and does not
intend to manufacture any potential product or products. The Company
initially intends to enter into arrangements with others to manufacture all
of its proposed products and has done so with respect to its nutraceutical
products. The Company does not have any contracts or agreements obligating
any party to manufacture any quantity of nutraceuticals for any price.
Failure to secure such contracts or agreements could have a material adverse
impact on the business and operations of the Company. There can be no
assurance the Company will be able to enter into satisfactory arrangements
for the manufacture of its proposed products with manufacturers whose
facilities and procedures comply with FDA or other regulatory requirements,
that the manufacturers will continue to comply with such standards, or that
such manufacturers will be able to adequately supply the Company with its
product needs. The Company's dependence on third parties for manufacturing
may adversely affect the Company's ability to develop and deliver products on
a timely and competitive basis. The Company may in the future undertake to
manufacture some or all of its proposed products directly. The Company has no
experience with the manufacture of any of its proposed products under
development. In the event the Company were to undertake to manufacture any of
its proposed products, the Company would be required to finance considerable
additional capital expenditures, attract and retain experienced personnel,
develop a manufacturing capability, and comply with extensive government
regulations with respect to its facilities, including among others, FDA
manufacturing requirements. The Company would not be able to develop any
reasonable manufacturing capability without obtaining significant capital in
excess of the funds anticipated from this offering. There can be no assurance
the Company would be able to successfully establish manufacturing operations.
DEPENDENCE ON SUPPLIERS
The materials used in the Company's potential products are currently
available only from a limited number of suppliers. The Company anticipates
there will continue to be a limited number of suppliers for its proposed
products. In the event the Company could not obtain adequate quantities of
necessary materials from its existing suppliers, there can be no assurance
the Company would be able to access alternative sources of supply within a
reasonable period of time or at commercially reasonable rates. Regulatory
requirements applicable to pharmaceutical products tend to make the
substitution of suppliers costly and time-consuming. The Company does not
have any contracts or agreements with any of its raw material suppliers for
its proposed nutraceutical products to provide quantities of raw materials at
specific prices. The Company believes there are numerous suppliers of its raw
materials for its proposed nutraceutical products. There can be no assurance
adequate suppliers will be available or that the lack of such contracts or
agreements will not have a material adverse impact on the business and
operations of the Company. The unavailability of adequate commercial
quantities, the inability to develop alternative sources, a reduction or
interruption in supply or a significant increase in the price of materials
could have a material adverse effect on the Company's
16
<PAGE>
ability to manufacture and market its proposed products.
PRODUCT LIABILITY; AVAILABILITY OF INSURANCE
The design, development and manufacture of the Company's proposed
products involve an inherent risk of product liability claims and associated
adverse publicity. The Company obtained clinical trial product liability
insurance for its Panavir-Registered Trademark- Phase I human clinical trial
and intends to obtain insurance for future clinical trials of
Panavir-Registered Trademark-, Vantox-Registered Trademark-, and other
potential products under development, and for potential product liability
associated with the commercial sale of the Company's proposed products. There
can be no assurance the Company will be able to obtain or maintain insurance
for any of its clinical trials or proposed commercial products. Although the
Company currently maintains liability insurance in connection with its
Panavir-Registered Trademark- trials, there can be no assurance the coverage
limits of the Company's insurance policies will be adequate. Such insurance
is expensive, difficult to obtain and may not be available in the future on
acceptable terms or at all. The Company will also be exposed to product
liability claims in the event that, among other things, the use of its
proposed nutraceutical products result in injury. The Company is required by
the Retired Person's Services, Inc. agreement to have at least $1.0 million
in insurance coverage for product liability on its proposed nutrition
products. The Company intends to require the manufacturers of its
nutraceutical products to add the Company as a named insured to their
existing issuance policies. The Company has not yet received endorsements as
named insured for any insurance policies. The Company also plans to seek
additional coverage of its own. There can be no assurance the Company will be
able to procure additional coverage or that existing or future coverage will
be sufficient to cover potential liabilities. A successful claim brought
against the Company in excess of the Company's insurance coverage would have
a material adverse effect upon the Company.
HAZARDOUS MATERIAL; ENVIRONMENTAL MATTERS
The Company, at present, contracts with outside vendors for manufacture
of its proposed products. However, the Company's research and development
processes at times involve the controlled use of hazardous materials,
chemicals, viruses and various radioactive compounds. In addition, various of
such materials, chemicals, viruses and compounds may be used by the Company
in the future to the extent Vyrex undertakes to perform its own
manufacturing. To the extent certain such materials, chemicals, viruses and
compounds are or will be used by the Company, Vyrex will be subject to
federal, state and local laws and regulations governing the use, manufacture,
storage, handling and disposal of certain materials and waste products.
Although the Company believes its safety procedures for handling and
disposing of materials would comply with the standards prescribed by such
laws and regulations, the risk of accidental contamination or injury from
these materials cannot be completely eliminated. In the event of such an
accident, the Company could be held liable for any damages that result, and
any such liability could exceed the resources of the Company. There can be no
assurance the Company will not be required to incur significant costs to
comply with environmental laws and regulations in the future, or that the
operations, business or assets of the Company will not be affected adversely
or materially by current or future environmental laws or regulations.
HEALTH CARE REFORM
Political, economic and regulatory influences are subjecting the health
care industry in the United States to fundamental changes. Reforms under
consideration may include mandated basic health care benefits, controls on
health care spending through limitations on the growth of private health
insurance premiums and Medicare and Medicaid spending, the creation of large
insurance purchasing groups and fundamental changes to the health care
delivery system. The Company anticipates Congress and certain state
legislatures will continue to review and assess alternative health care
delivery systems and payment methods and public debate of these issues will
likely continue in the future. Due to uncertainties regarding the ultimate
features of reform initiatives and their enactment and implementation, the
Company cannot predict which, if any, of such reform proposals will be
adopted, when they may be adopted or what impact they may have on the Company.
UNCERTAINTY OF HEALTH CARE REIMBURSEMENT
Vyrex's ability to commercialize its proposed products successfully may
depend in part on the extent to which reimbursement for the cost of such
proposed products and related treatment will be available from government
health administration authorities, private health insurers and other
organizations. Third-party payers are increasingly challenging the price of
medical products and services. Significant uncertainty exists as to the
reimbursement status of newly approved health care products, and there can be
no assurance adequate third-party coverage will be available to enable Vyrex
to maintain price levels sufficient to realize an appropriate return on its
investment in product development.
17
<PAGE>
FORWARD-LOOKING STATEMENTS
Prospective investors are cautioned that the statements in this
Prospectus that are not descriptions of historical facts may be
forward-looking statements that are subject to risks and uncertainties.
Actual results could differ materially from those currently anticipated due
to a number of factors, including those identified under "Risk Factors" and
elsewhere in this Prospectus or documents incorporated by reference herein.
ITEM 2. PROPERTIES
Vyrex Corporation leases a 2,000 square foot administrative facility
located in La Jolla, California. Current monthly rental on all the facilities
is approximately $3,000.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock began trading on the Over-The-Counter Bulletin Board
on October 22 1998 under the symbol "VYRX". The Company's Common Stock Warrants
are traded in the over-the-counter market under the symbol "VYRXW." The
Company's Units sold as part of the initial public offering were separated into
Common Stock and Warrants on May 16, 1996. The over-the-counter market
quotations provided reflect inter-dealer prices, without retail mark-ups,
mark-down or commission and may not represent actual transactions.
The following table sets forth the range of high and low sales prices for the
Common Stock on the Nasdaq Small Capitalization Market for the periods
indicated:
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C> <C>
January 1, 1997 March 30, 1997 $ 12.75 $ 6.00
April 1, 1997 June 30, 1997 $ 6.875 $ 6.00
July 1, 1997 September 30, 1997 $ 7.625 $ 5.19
October 1, 1997 December 31, 1997 $ 7.56 $ 4.875
January 1, 1998 March 30, 1998 $ 7.00 $ 5.0625
April 1, 1998 June 30, 1998 $ 6.875 $ 3.875
July 1, 1998 September 30, 1998 $ 4.25 $ 0.31
October 1, 1998 December 31, 1998 $ 1.41 $ 0.16
</TABLE>
As of March 29 1999, the Company's Common Stock was held by approximately 600
stockholders of record. The Company has never paid cash dividends and does
not anticipate paying any cash dividends in the foreseeable future.
18
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS AND PLAN OF OPERATION
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION
WITH THE FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE
HEREIN
OVERVIEW
Since its inception in January 1991, the Company has devoted
substantially all of its efforts and resources to research and development
related to the study of biological oxidation and antioxidation directed to
the development of potential therapeutic products for the treatment of
various diseases and conditions. Currently the Company's research focuses
mainly on targeted antioxidant therapeutics, nutraceuticals and gene
discovery. The Company is a development stage company, has never generated
any revenue from product sales and has relied primarily on equity financing,
licensing revenues, and various debt instruments for its working capital. The
Company has been unprofitable since its inception, and expects to incur
substantial additional operating losses over at least the next several years.
With the ever increasing difficulty of biotechnology companies being
able to raise funds in the capital markets, the Company has and is
continuing to seek collaborative partners to license its existing technology
with a view to raising funding. In addition in line with the short term
strategy of seeking to commercialize existing technology and defer research
and development activity until such time as the Company has adequate
operating funds. During 1998 the Company closed down its research
laboratories, scaled back staff in all areas, as well as reducing other
operating expenses. The net loss for 1998 amounted to $3,388,000 compared to
$3,296,000 in 1997. The 1998 net loss includes $484,000 of non cash charges
relating to cashless exercise of stock options and stock options granted to
consultants. As of December 31, 1998, the Company's accumulated deficit was
approximately $11,913,000.
The Company's business is subject to significant risks, including the
risks inherent in its research and development efforts, uncertainties
associated with obtaining and enforcing patents, the lengthy and expensive
regulatory approval process and competition from other biotechnology
companies. See "Risk Factors."
YEAR 2000 EXPOSURE
The Company has determined that it will not need to modify or replace
significant portions of its hardware or software so that its computer systems
will function properly with respect to the Year 2000 issue. The vendor of
the Company's accounting system has confirmed that the software used by the
Company is Year 2000 compliant. The other automated systems are used
primarily for non-essential word processing and spreadsheet work. The
automated systems are supported by a staff member with additional support
being provided by an outside consultant. The Company is in the process of
verifying that there is no adverse effect on the Company's core business
operations due to non-Year 2000 compliance of customers, suppliers, and
financial institutions. The Company expects to have any necessary changes
implemented by December 31 1999. While the Company believes its planning
efforts are adequate to address its Year 2000 concerns, there can be no
guarantee that the systems of other companies on which the Company's systems
and operations rely will be converted on a timely basis and will not have a
material effect on the Company. The cost of the Year 2000 initiatives is not
expected to exceed $10,000.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND 1997
Royalties of $1,600 were earned in 1998. No revenues were earned in 1997.
Research and Development expense decreased $168,000 to $1,779,000 in
1998 compared to $1,947,000 for 1997. The decrease was due to various
factors. Firstly Consulting fees decreased by $135,000, and other research
and development expenses were down by $276,000. The reduction in consulting
fees and other research and development expenses was due to a strategic
change in financing strategy related to the Company's CD-Tagging-TM- and
epitope tagging projects. The Company is planning to outlicense the
technology and is currently in negotiation with a prospective licensee. The
Company expects research
19
<PAGE>
and development costs to increase if funding can be obtained and the
candidate drug and nutrition products proceed towards or commence human
clinical trials. These decreases were partially offset by an increase in
salary expense of $243,000, due to a cashless exercise of employee stock
options resulting in a non cash salary expense of $394,000. Excluding the
non-cash exercise, salary expense would have decreased by $151,000.
Marketing expenses were reduced by $15,000 to $207,000 in 1998 compared
to $222,000 for 1997. The decrease arises from a decrease in consulting fees
of $50,000 and a decrease in other marketing expenses of $21,000, partially
offset by an increase in marketing payroll of $56,000. General and
administrative expenses increased $140,000 to $1,444,000 in 1998 compared to
$1,304,000 in 1997. The increase in other general and administrative
expenses was due to a non-cash patent impairment charge of $107,000 as well
as increases in financial related expenses to support increased investor
relations, public relations, and fund raising activities.
Interest income decreased $130,000 to $66,000 in 1998 compared to
$196,000 for 1997. The decrease was as a result of lower cash balances. The
Company incurred interest expense of $27,000 in 1998 compared to $20,000 in
1997. The increase in interest expense related to the issuance of the
Company's convertible debentures in November of 1997. The debentures were
converted to equity in March 1998.
Basic and diluted loss per share was $0.46 per share in both 1998 and
1997. The higher net loss was offset by an increase in the weighted average
shares outstanding.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operation since inception through the sale
of debt and equity securities. As of December 31, 1998, the Company had a
working capital deficit of ($275,000) compared to with working capital of
$2,445,000 at December 31, 1997. The decrease in working capital is the
result of the Company's operating loss.
For the twelve months ended December 31, 1998, the Company used
$2,975,000 of cash in operating activities, compared to $3,112,000 during
1997. The decrease in cash usage was primarily related to decreases in
salaries, consulting fees and other expenses. In addition salaries to
management and science staff were deferred until such time as the company has
the funds to fund the payroll. As of December 31, 1998 deferred payroll
amounted to approximately $113,000.
The Company generated $999,000 and $1,090,000 of cash in investing
activities during 1998 and 1997, primarily from the sale of short term
investments. The Company generated $14,000 of cash in financing activities
during 1998 compared to $875,000 during 1997. The Company did not raise
additional financing in 1998. During 1997, the Company issued $1.0 million
in convertible debentures.
While the Company expects revenues during 1999, it is not anticipated
that they will be significant and therefore without additional financing it
is uncertain whether the Company can continue as a going concern. The
Company is actively pursuing collaborations with potential partners in both
the pharmaceutical and nutraceutical divisions with the objective of raising
financing to enable the Company to continue operations. As of March 30,
1999 the Company does not have any commitments for financing. On March 22,
1999, the Company obtained a 10% loan for $100,000. The loan is due and
payable on March 22, 2000, and is secured by a pledge of the company's
assets. It is anticipated that this loan will enable the Company to continue
operating until the summer of 1999, at which time it is anticipated that
additional funds will have been raised through strategic collaborations,
which in turn should allow the Company to generate further revenues. The
Company does not have any lease or other commitments, other than a lease on
a secondary office which expires on April 30, 1999. The Company does not
have an existing bank line of credit or other form of revolving or renewable
credit facility. There can be no assurance the company will generate revenue
during 1999, or that funds will be available through the public or private
markets.
PLAN OF OPERATION
During the 12 month period following the balance sheet date, the Company
intends to focus substantially all of its efforts and resources on research
and development related to the study of targeted antioxidant therapeutics,
gene discovery and nutraceuticals. Most of these efforts will involve
development of its potential products, and the remainder will involve other
current projects developed from its ongoing research. During such 12 month
period, the Company expects to retain additional staff, and lease additional
facilities as the demands of the business requires. The Company will also
continue discussions with
20
<PAGE>
potential collaborative partners concerning development, manufacture and
marketing of anti-oxidant pharmaceutical compounds, epitope tagging,
CD-Tagging-TM-, nutraceuticals and possibly other potential products which
may include joint ventures and acquisitions.
ITEM 7. FINANCIAL STATEMENTS
The financial statements of the Company and other information required by this
item are set forth herein in a separate section beginning with the Index to the
Financial Statements on page F1.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE:
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
The information required by Item 9 of Form 10-K SB is incorporated by
reference to the information contained in the section captioned "Election of
Directors" and "Compliance with Section 16(a) of the Exchange Act" in the
Registrants definitive proxy statement for the Annual Meeting of Shareholders
("Proxy Statement") to be filed with the Commission on or before April 30,
1998.
ITEM 10. EXECUTIVE COMPENSATION.
The information required by Item 10 of Form 10-K SB is incorporated by
reference to the information contained in the section captioned "Executive
Compensation" in the Proxy Statement to be filed with the Commission on or
before April 30, 1998.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by Item 11 of Form 10-K SB is incorporated by
reference to the information contained in the section captioned "Security
Ownership of Certain Beneficial Owners and Management" in the Proxy Statement
to be filed with the Commission on or before April 30, 1998.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Item 12 of Form 10-K SB is incorporated by
reference to the information contained in the section captioned "Certain
Relationships and Related Transactions" in the Proxy Statement to be filed
with the Commission on or before April 30, 1998.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
Exhibit 23.1: Consent of Ernst & Young LLP
21
<PAGE>
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/ SHELDON S. HENDLER
Sheldon S. Hendler,
President, Chief Executive Officer,
and Chairman of the Board
By: /s/ MARTIN MALK
Martin Malk,
Chief Financial Officer
Date: March 29, 1999
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Sheldon S. Hendler, as his or her true and lawful
attorney-in-fact and agents, with full power of substitution, for him or her and
in his or her name, place and stead, in any and all capacities, to sign any and
all amendments (including post-effective amendments) to this Registration
Statement, and to sign any registration statement for the same offering covered
by this Registration Statement, and to sign any registration statement for the
same offering covered by this Registration Statement that is to be effective
upon filing pursuant to Rule 462(b) promulgated under the Securities Act of
1933, and all post-effective amendments thereto, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agents, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorney-in-fact and agents, or their substitutes
may lawfully do or cause to be done by virtue hereof.
In accordance with the Exchange Act, this Report has been SIGNED by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
Signature Title Date
--------- ----- ----
/s/ CARL M. LEWIS General Counsel, Secretary March 29, 1999
- ------------------------ and Director
Carl M. Lewis
/s/ JOYCE M. HENDLER Director March 29, 1999
- ------------------------
Joyce M. Hendler
/s/ DENNIS J. CARLO Director March 29, 1999
- ------------------------
Dennis J. Carlo
/s/ NOLAN E. PENN Director March 29, 1999
- ------------------------
Nolan E. Penn
/s/ GREGORY F. GILBERT Director March 29, 1999
- ------------------------
Gregory F. Gilbert
22
<PAGE>
Vyrex Corporation
(a development stage enterprise)
Index to Financial Statements
Report of Ernst & Young, LLP, Independent Auditors................F-2
Balance Sheets....................................................F-4
Statements of Operations..........................................F-5
Statements of Stockholders' Equity (Net Capital Deficiency).......F-6
Statements of Cash Flows..........................................F-8
Notes to Financial Statements.....................................F-9
F-1
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Stockholders
Vyrex Corporation
We have audited the accompanying balance sheets of Vyrex Corporation (a
development stage enterprise) as of December 31, 1998 and 1997, and the
related statements of operations, stockholders' equity (net capital
deficiency) and cash flows for the years then ended, and for the period from
January 2, 1991 (inception) through December 31, 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. The financial statements for the period from January 2, 1991
(inception) through December 31, 1995, were audited by other auditors whose
report dated February 9, 1996 expressed an unqualified opinion on those
statements. The financial statements for the period January 2, 1991
(inception) through December 31, 1995 include total revenues and net loss of
$310,000 and $3,408,199, respectively. Our opinion on the statements of
operations, stockholders' equity (net capital deficiency) and cash flows for
the period January 2, 1991 (inception) through December 31, 1995, insofar as
it relates to amounts for prior periods through December 31, 1995, is based
solely on the report of other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. 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 and the report
of other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material
respects, the financial position of Vyrex Corporation (a development stage
enterprise) at December 31, 1998 and 1997, and the results of its operations
and its cash flows for the years then ended and the period from January 2,
1991 (inception) through December 31, 1998 in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note 1,
the Company has incurred recurring operating losses, has a working capital
deficiency and has a net capital
F-2
<PAGE>
deficiency. These conditions raise substantial doubt about the Company's ability
to continue as a going concern. The financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classifications of liabilities that
may result from the outcome of this uncertainty.
ERNST & YOUNG LLP
San Diego, California
March 15, 1999,
except for Note 10, as to which the date is
March 29, 1999
F-3
<PAGE>
Vyrex Corporation
(a development stage enterprise)
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 80,007 $ 2,041,339
Short-term investments, available-for-sale - 1,013,575
Other assets 24,979 117,341
------------ ------------
Total current assets 104,986 3,172,255
Furniture and equipment, net of accumulated depreciation
of $107,037 in 1998 and $71,495 in 1997 79,903 105,810
Notes receivable from related parties 32,117 49,506
Debt issue costs - 119,147
Patents, trademarks and copyrights, net of accumulated
amortization and impairment charges totaling $140,219
in 1998 and $24,449 in 1997 - 115,770
------------ ------------
Total assets $ 217,006 $3,562,488
------------ ------------
------------ ------------
LIABILITIES AND STOCHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
Current liabilities:
Accounts payable and accrued liabilities $ 279,570 $ 627,583
Deferred revenue 100,000 100,000
------------ ------------
Total current liabilities 379,570 727,583
Convertible debentures, net including accrued interest - 950,278
Stockholders' equity (net capital deficiency):
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 and 7,121,409 issued and outstanding in 1998 and
1997, respectively
7,423 7,121
Additional paid-in capital 11,743,078 10,402,159
Deficit accumulated during the development stage (11,913,065) (8,524,653)
------------ ------------
Total stockholders' equity (net capital deficiency) (162,564) 1,884,627
------------ ------------
Total liabilities and stockholders' equity (net capital deficiency) $ 217,006 $ 3,562,488
------------ ------------
------------ ------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
Vyrex Corporation
(a development stage enterprise)
Statements of Operations
<TABLE>
<CAPTION>
CUMULATIVE
YEARS ENDED DECEMBER 31 FROM
1998 1997 INCEPTION
----------- ----------- ------------
<S> <C> <C> <C>
Licensing and royalty revenue $ 1,600 $ - $ 311,600
Operating expenses:
Research and development 1,779,009 1,946,925 6,119,719
Marketing and selling 206,523 221,570 428,093
General and administrative 1,443,719 1,303,876 4,745,143
----------- ----------- ------------
Total operating expenses 3,429,251 3,472,371 11,292,955
----------- ----------- ------------
Loss from operations (3,427,651) (3,472,371) (10,981,355)
Other income (expense):
Interest income 65,748 196,038 464,206
Interest expense (26,509) (19,507) (46,016)
Charge from issuance of stock options for
bridge financing - - (1,349,900)
----------- ----------- ------------
Totals other income (expense) 39,239 176,531 (931,710)
----------- ----------- ------------
Net loss $(3,388,412) $(3,295,840) $(11,913,065)
----------- ----------- ------------
----------- ----------- ------------
Net loss per share - basic and diluted $ (0.46) $ (0.46) $ (1.88)
----------- ----------- ------------
----------- ----------- ------------
Shares used in per share computations 7,357,211 7,121,332 6,342,001
----------- ----------- ------------
----------- ----------- ------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-5
<PAGE>
Vyrex Corporation
(a development stage enterprise)
Statements of Stockholders' Equity (Net Capital Deficiency)
From inception to December 31, 1998
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------------ PAID-IN
SHARES AMOUNT CAPITAL
--------- ------- -----------
<S> <C> <C> <C>
Issuance (at $.002 per share) for acquisition of technology
retroactively reduced for 150,000 shares returned and retired on
October 1, 1995 3,350,000 $ 3,350 $ 3,350
Issuance (at $.002 per share) for cash 500,000 500 500
Issuance (at $1.00 per share) for cash 800,000 800 799,200
Issuance as compensation (at $1.00 per share) 32,500 33 32,467
Issuance (at $2.00 per share) upon conversion of note payable 100,000 100 199,900
Issuance (at $3.00 per share) for cash, net of issuance costs of $4,086 33,000 33 94,881
Net loss - - -
--------- ------- -----------
Balance at December 31, 1993 4,815,500 4,816 1,130,298
Issuance (at $3.00 per share) for cash, net of issuance costs of $21,000 99,000 99 275,901
Issuance (at $3.00 per share) in lieu of finder's fee 7,000 7 20,993
Issuance (at $3.00 per share) in lieu of finder's fee 5,000 5 14,995
Issuance (at $3.00 per share) for cash, net of issuance costs of $41,844 24,990 25 33,101
Net loss - - -
--------- ------- -----------
Balance at December 31, 1994 4,951,490 4,952 1,475,288
Issuance (at $3.00 per share) for cash, net of issuance costs of $46,976 149,940 150 402,694
Issuance (at $3.00 per share) in settlement of account payable 6,041 6 18,117
Issuance (at par value) as compensation for services related to prior
issuances of common stock 83,000 83 (83)
Issuance (at $3.00 per share) as compensation for services related to
offering 13,334 13 39,989
Issuance (at $3.00 per underlying share) of options for 450,000
shares as compensation for arranging bridge financing - - 1,349,900
Net loss - - -
--------- ------- -----------
Balance at December 31, 1995 5,203,805 5,204 3,285,905
Proceeds from initial public offering (at $6.50 per unit), net of
issuance costs of $1,135,453 1,057,097 1,057 5,734,620
Sale of option to purchase 300,000 shares at $3.00 per share - - 50,000
Exercise of stock options (at $3.00 per share) for cash 300,000 300 899,700
Conversion of notes payable and related accrued interest (at $3.00
per share) 86,015 86 257,959
Exercise of stock options (at $.00022 per share) for cash 450,000 450 (350)
Issuance of units as compensation for legal services (at $4.55 per
share) 24,292 24 110,505
Net loss - - -
--------- ------- -----------
Balance at December 31, 1996 7,121,209 7,121 10,338,339
<CAPTION>
DEFICIT TOTAL
ACCUMULATED STOCKHOLDERS'
DURING THE EQUITY (NET
DEVELOPMENT CAPITAL
STAGE DEFICIENCY)
----------- ------------
<S> <C> <C>
Issuance (at $.002 per share) for acquisition of technology
retroactively reduced for 150,000 shares returned and retired on
October 1, 1995 $ - $ 6,700
Issuance (at $.002 per share) for cash 1,000
Issuance (at $1.00 per share) for cash - 800,000
Issuance as compensation (at $1.00 per share) - 32,500
Issuance (at $2.00 per share) upon conversion of note payable - 200,000
Issuance (at $3.00 per share) for cash, net of issuance costs of $4,086 - 94,914
Net loss (1,085,932) (1,085,932)
----------- ------------
Balance at December 31, 1993 (1,085,932) 49,182
Issuance (at $3.00 per share) for cash, net of issuance costs of $21,000 - 276,000
Issuance (at $3.00 per share) in lieu of finder's fee - 21,000
Issuance (at $3.00 per share) in lieu of finder's fee - 15,000
Issuance (at $3.00 per share) for cash, net of issuance costs of $41,844 - 33,126
Net loss (467,683) (467,683)
----------- ------------
Balance at December 31, 1994 (1,553,615) (73,375)
Issuance (at $3.00 per share) for cash, net of issuance costs of $46,976 - 402,844
Issuance (at $3.00 per share) in settlement of account payable - 18,123
Issuance (at par value) as compensation for services related to prior
issuances of common stock - -
Issuance (at $3.00 per share) as compensation for services related to
offering - 40,002
Issuance (at $3.00 per underlying share) of options for 450,000
shares as compensation for arranging bridge financing - 1,349,900
Net loss (1,854,584) (1,854,584)
----------- ------------
Balance at December 31, 1995 (3,408,199) (117,090)
Proceeds from initial public offering (at $6.50 per unit), net of
issuance costs of $1,135,453 - 5,735,677
Sale of option to purchase 300,000 shares at $3.00 per share - 50,000
Exercise of stock options (at $3.00 per share) for cash - 900,000
Conversion of notes payable and related accrued interest (at $3.00
per share) - 258,045
Exercise of stock options (at $.00022 per share) for cash - 100
Issuance of units as compensation for legal services (at $4.55 per
share) - 110,529
Net loss (1,820,614) (1,820,614)
----------- ------------
Balance at December 31, 1996 (5,228,813) 5,116,647
</TABLE>
(CONTINUED)
SEE ACCOMPANYING NOTES.
F-6
<PAGE>
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------------ PAID-IN
SHARES AMOUNT CAPITAL
--------- ------- -----------
<S> <C> <C> <C>
Balance at December 31, 1996 7,121,209 7,121 10,338,339
Exercise of warrants, 200 shares at $8.00 per share 200 - 1,600
Warrants issued in conjunction with debenture offering - - 62,220
Net loss - - -
--------- ------- -----------
Balance at December 31, 1997 7,121,409 7,121 10,402,159
Issuance of stock as partial consideration for placement of debentures 8,000 8 49,992
Issuance of stock on conversion of debentures 227,222 227 807,414
Issuance of shares upon cashless exercise of stock options 66,824 67 396,513
Issuance of 375,000 stock options for services - - 87,000
Net loss - - -
--------- ------- -----------
Balance at December 31, 1998 7,423,455 $ 7,423 $11,743,078
--------- ------- -----------
--------- ------- -----------
<CAPTION>
DEFICIT TOTAL
ACCUMULATED STOCKHOLDERS'
DURING THE EQUITY (NET
DEVELOPMENT CAPITAL
STAGE DEFICIENCY)
----------- ------------
<S> <C> <C>
Balance at December 31, 1996 (5,228,813) 5,116,647
Exercise of warrants, 200 shares at $8.00 per share - 1,600
Warrants issued in conjunction with debenture offering - 62,220
Net loss (3,295,840) (3,295,840)
----------- ------------
Balance at December 31, 1997 (8,524,653) 1,884,627
Issuance of stock as partial consideration for placement of debentures - 50,000
Issuance of stock on conversion of debentures - 807,641
Issuance of shares upon cashless exercise of stock options - 396,580
Issuance of 375,000 stock options for services - 87,000
Net loss (3,388,412) (3,388,412)
----------- ------------
Balance at December 31, 1998 $(11,913,065) $ (162,564)
------------ ------------
------------ ------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-7
<PAGE>
Vyrex Corporation
(a development stage enterprise)
Statements of Cash Flows
<TABLE>
<CAPTION>
CUMULATIVE
YEARS ENDED DECEMBER 31, FROM
1998 1997 INCEPTION
----------- ----------- ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(3,388,412) $(3,295,840) $(11,913,065)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation, amortization and impairment 160,602 35,815 266,724
charges
Interest receivable 17,854 33,631 3,506
Loss on disposal of fixed assets 7,366 - 7,366
Issuance of compensatory notes, stock and
stock options 483,580 - 2,044,632
Other assets 92,362 (17,341) 75,021
Accounts payable and accrued liabilities (348,013) 122,937 279,574
Accrued interest on convertible debentures - 9,041 9,041
----------- ----------- ------------
Net cash used in operating activities (2,974,661) (3,111,757) (9,227,201)
----------- ----------- ------------
INVESTING ACTIVITIES
Purchase of short-term investments - (3,499,227) (8,440,442)
Sale of short-term investments 1,025,736 4,393,830 8,467,931
Purchases of furniture and equipment (32,290) (68,655) (209,595)
Proceeds on sale of fixed assets 6,000 - 6,000
Patent, trademark, and copyrights costs - - (133,519)
Other assets, including notes receivable from
related parties - 263,798 (50,202)
----------- ----------- ------------
Net cash provided by (used in) investing activities 999,446 1,089,746 (359,827)
----------- ----------- ------------
FINANCING ACTIVITIES
Net proceeds from issuance of common stock - 1,600 7,429,208
Exercise of stock options and sale of options - - 950,100
Proceeds from issuance of convertible debentures - 873,844 873,844
Proceeds from note payable 13,883 - 413,883
Advances from potential investors - - 100,000
Repayment of advances - - (100,000)
----------- ----------- ------------
Net cash provided by financing activities 13,883 875,444 9,667,035
----------- ----------- ------------
Net increase (decrease) in cash and cash (1,961,332) (1,146,567) 80,007
equivalents
Cash and cash equivalents, beginning of the period 2,041,339 3,187,906 -
----------- ----------- ------------
Cash and cash equivalents, end of the period $ 80,007 $ 2,041,339 $ 80,007
----------- ----------- ------------
----------- ----------- ------------
SUPPLEMENTAL CASH FLOW INFORMATION
Conversion of notes payable and related accrued
interest $ - $ - $ 258,045
----------- ----------- ------------
----------- ----------- ------------
Issuance of stock as consideration for
conversion of debentures $ 857,641 $ - $ 857,641
----------- ----------- ------------
----------- ----------- ------------
Issuance of stock upon cashless exercise of
stock option $ 396,580 $ - $ 396,580
----------- ----------- ------------
----------- ----------- ------------
Stock options issued for services $ 87,000 $ - $ 87,000
----------- ----------- ------------
----------- ----------- ------------
Warrants issued in connection with convertible
debentures $ - $ 62,220 $ 62,220
----------- ----------- ------------
----------- ----------- ------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-8
<PAGE>
Vyrex Corporation
(a development stage enterprise)
Notes to Financial Statements
December 31, 1998
1. BASIS OF PRESENTATION AND THE COMPANY
BASIS OF PRESENTATION
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. This basis of accounting
contemplates the recovery of the Company's assets and the satisfaction of its
liabilities in the normal course of business. As of December 31, 1998, the
Company has an accumulated deficit of $11,913,065, net capital deficiency of
$162,564 and negative working capital of $272,584. Due to the Company's
recurring losses and net capital deficiency, there can be no assurance that
the Company will be able to obtain additional operating capital, which may
impact the Company's ability to continue as a going concern. The accompanying
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the
amounts and classification of liabilities that may result from the possible
inability of the Company to continue as a going concern.
The Company is seeking collaborative or other arrangements with larger
pharmaceutical and nutraceutical companies, under which such companies would
provide additional capital to the Company in exchange for exclusive or
non-exclusive licensees or other rights to certain of the technologies and
products the Company is developing. Competition for corporate partnering
arrangements with major pharmaceutical and nutraceutical companies is
intense, with a large number of biopharmaceutical companies attempting to
arrive at such arrangements. Accordingly, although the Company is presently
engaged in discussions with a number of candidate companies, there can be no
assurance that an agreement will arise from these discussions in a timely
manner, or at all, or that any agreement that may arise from these
discussions will successfully reduce the Company's short-term or long-term
funding requirements.
The Company's major activities through December 31, 1998 have been limited to
conducting research and development related to its proposed products and
raising funds for such activities. These activities have not generated any
recurring revenues; accordingly, the Company has been in the development
stage since its inception. 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 revenue
adequate to support the Company's cost structure. There can be no assurance
F-9
<PAGE>
Vyrex Corporation
(a development stage enterprise)
Notes to Financial Statements (continued)
1. BASIS OF PRESENTATION AND THE COMPANY (CONTINUED)
that the Company will be successful in these areas. To supplement its
existing resources, the Company will require additional capital through the
sale of debt or equity. There can be no assurance that such capital will be
available on favorable terms, or at all, and if additional funds are raised
by issuing equity securities, dilution to existing stockholders is likely to
result.
THE COMPANY
Vyrex Corporation (the "Company") was incorporated on January 2, 1991 in the
State of Nevada. The Company's operations focus primarily on the discovery
and development of biopharmaceuticals for the treatment and prevention of
various disorders including AIDS, respiratory diseases, cancer and aging and
it is involved in various stages of the investigation and development of
several potential therapeutic products. The Company is using contractors for
manufacturing and testing of the products it is developing and is seeking
strategic partners to market and distribute them. Management expects the
Company to continue to use contractors and strategic partners until such
time, if any, that it has sufficient resources to conduct such activities on
its own.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consists of cash and highly liquid U.S. Government
Securities with remaining maturities, when acquired, of three months or less.
SHORT-TERM INVESTMENTS
Short-term investments classified as available-for-sale consist of U.S.
Government Securities and are carried at amounts which approximate fair
value. As of December 31, 1997, the difference between amortized cost and the
estimated fair value of investments was not material. Realized gains and
losses and declines in value judged to be other-than temporary, if any, in
available-for-sale securities are included in interest income. The cost of
securities is based on the specific identification method.
FURNITURE AND EQUIPMENT
Furniture and equipment are stated at cost. Depreciation is provided using
the straight- line method over the estimated useful lives of the assets which
range from 3 to 5 years.
F-10
<PAGE>
Vyrex Corporation
(a development stage enterprise)
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PATENTS, TRADEMARKS AND COPYRIGHTS
Certain costs of filing for patents, trademarks and copyrights are
capitalized as incurred. Such costs are amortized on a straight-line basis
over the lesser of their statutory lives or estimated useful lives commencing
on the date of issuance.
INTEREST EXPENSE
Interest expense includes the amortization of debt discount and debt issuance
cost.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of", the Company records impairment losses on
long-lived assets used in operations when indicators of impairment are
present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. In December 1998, the
Company recorded an impairment loss on patents totaling approximately
$107,000 due to indicators of impairment resulting from the net capital
deficiency. The impairment loss is reflected in general and administrative
expenses.
STOCK OPTIONS
Statement of Financial Accounting Standards ("SFAS") No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, establishes the use of the fair value based method
of accounting for stock-based compensation arrangements, under which
compensation cost is determined using the fair value of stock-based
compensation determined as of the grant date, and is recognized over the
periods in which the related services are rendered. The statement also
permits companies to elect to continue using the implicit value accounting
method specified in Accounting Principles Board Opinion No. 25 to account for
stock-based compensation. The Company has elected to retain the implicit
value based method, and has disclosed the pro forma effect of using the fair
value based method to account for its stock-based compensation to employees
and directors of the Company.
Options granted to consultants are valued based on the fair value of the
consideration received or the fair value of the equity instruments issued,
whichever is more reliably measurable, and expensed over the term of the
consulting agreement.
F-11
<PAGE>
Vyrex Corporation
(a development stage enterprise)
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET LOSS PER SHARE
Net loss per share is computed using the weighted-average number of common
shares outstanding during the periods presented. Shares issuable upon
conversion of preferred stock and upon exercise of outstanding stock options
and warrants are not included since the effect would be antidilutive.
NEW ACCOUNTING PRONOUNCEMENTS
During 1998, the Company adopted SFAS 130, REPORTING COMPREHENSIVE INCOME.
SFAS 130 establishes new rules for the reporting and display of comprehensive
income and its components; however, the adoption of this statement has no
impact on the Company's net loss or stockholders' equity. SFAS 130 requires
unrealized gains or losses on the Company's available-for-sale securities and
foreign currency translation adjustments. The Company did not have any
components of comprehensive income at December 31, 1998 or 1997.
During 1998, the Company adopted SFAS 131, SEGMENT INFORMATION. SFAS 131
amends the requirements for public enterprise to report financial and
descriptive information about its reportable operating segments. The Company
currently operates in one business and operating segment and the adoption of
this standard did not have a material impact on the Company's financial
statements as reported.
3. FURNITURE AND EQUIPMENT
Furniture and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
--------- ---------
<S> <C> <C>
Office furniture and equipment $ 120,611 $ 119,593
Laboratory equipment 66,329 57,712
--------- ---------
186,940 177,305
Less accumulated depreciation 107,037 71,495
--------- ---------
Total $ 79,903 $ 105,810
--------- ---------
--------- ---------
</TABLE>
Depreciation expense was $44,832 and $17,100 for the years ended December 31,
1998 and 1997, respectively.
F-12
<PAGE>
Vyrex Corporation
(a development stage enterprise)
Notes to Financial Statements (continued)
4. RELATED PARTY TRANSACTIONS
NOTES RECEIVABLE
On December 23, 1996, the Company loaned $50,000 to its then Vice President,
Chemistry. The loan was in the form of a secured note bearing 7% interest, with
principal and interest payable on demand. The loan was repaid in full in January
1999.
EMPLOYMENT AGREEMENT
Dr. Sheldon Hendler, the Company's Chairman and CEO entered into a one year
employment agreement on October 1, 1995. The agreement automatically renews
on the anniversary date for an additional year unless previously terminated
by the Company. Dr. Hendler's salary under the agreement is set by the Board
of Directors and is currently $226,013 per year. The Company has the right to
terminate Dr. Hendler's employment agreement for cause or as a result of
death or permanent disability. In certain events relating primarily to merger
or reorganization and similar changes in the nature of the Company, Dr.
Hendler is entitled to continue his employment or voluntarily terminate the
agreement and receive a severance payment of 2.99 times his annual average
salary and fringe benefits during the five years preceding the date of
termination.
5. WARRANTS
As of December 31, 1998, the Company had outstanding warrants to purchase a
total of 1,156,701 shares of common stock. 1,139,701 of the warrants with an
exercise price of $8.00 will expire on January 31, 2000 and the remaining
17,000 warrants with an exercise price of $7.50 will expire on November 6,
2000. The warrants are subject to adjustments in the event of stock splits,
stock dividends and similar events.
6. LICENSE AND COLLABORATION AGREEMENTS
On October 7, 1997, the Company entered into an agreement with Retired
Persons Services, Inc. (RPS), the entity which administers the AARP Pharmacy
Service. The agreement called for the Company to provide $100,000 worth of
dietary supplement products. The Company designed and contract manufactured
pilot batches of the products and initiated safety and stability studies. RPS
will manufacture the final product and pay the Company royalty based on
sales. The Company recorded $100,000 of deferred revenue since the amount
represents an advance against royalties.
F-13
<PAGE>
Vyrex Corporation
(a development stage enterprise)
Notes to Financial Statements (continued)
6. LICENSE AND COLLABORATION AGREEMENTS (CONTINUED)
On August 1, 1997, the Company entered into a collaboration agreement with
The Immune Response Corporation, Inc. to develop treatments for spinal cord
and other central nervous system traumas. The agreement calls for a 50/50
split of any funds raised or profits realized in connection with the venture.
As part of the agreement, the Company licensed its CD-Tagging technology to
The Immune Response Corporation for use in the research and development on
products within the scope of the venture of the treatments mentioned above.
7. 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 "Initial Debenture"), resulting in
proceeds, net of $125,156 of issuance costs of $873,844. The debentures were
converted to common stock in 1998.
8. INCOME TAXES
At December 31, 1998, the Company had net operating loss carryforwards
available to reduce future taxable income, if any, of approximately
$15,760,000 and $13,126,000 for federal and California income tax purposes,
respectively. The federal net operating loss begins to expire in 2006.
California net operating losses of approximately $386,000 expired in 1998 and
will continue to expire in 1999. The difference between the federal and
California tax loss carryforwards is primarily related to the expiration of
California loss carryforwards and capitalization of research and development
expenditures for California tax purposes. At December 31, 1998, the Company
also had research and development credit carryforwards of approximately
$459,000 and $234,000 for federal and state income tax reporting purposes,
respectively. Pursuant to Internal Revenue Code Sections 382 and 383 use of
the Company's net operating loss and credit carryforwards may be limited if a
cumulative change in ownership of more than 50% occurs with in a three year
period.
F-14
<PAGE>
Vyrex Corporation
(a development stage enterprise)
Notes to Financial Statements (continued)
8. INCOME TAXES (CONTINUED)
Temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes
(the loss and tax credit carryforwards described above) give rise to the
Company's deferred income taxes. The components of the Company's deferred tax
assets as of December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Net operating loss carryforwards $ 6,271,000 $ 4,349,000
Research and development credit carryforwards 612,000 452,000
Other 117,000 -
----------- -----------
7,000,000 4,801,000
Valuation allowance (7,000,000) (4,801,000)
----------- -----------
----------- -----------
$ - $ -
----------- -----------
----------- -----------
</TABLE>
A valuation allowance has been recorded against the deferred tax assets as the
ultimate realization of these assets is uncertain.
9. STOCK OPTION PLAN
The Company's 1993 Stock Option Plan (the "Plan") was adopted by the Board of
Directors in February 1994. Pursuant to the Plan, the Company may grant both
incentive stock options and nonstatutory stock options. Incentive stock options
may be granted only to employees, while consultants, employees, officers and
directors are eligible for the grant of nonstatutory options. The total number
of shares of common stock of the Company reserved and available for grant under
the Plan is 2,875,000 shares.
The maximum term of stock options granted under the Plan is ten years, but if
the optionee at the time of the grant has voting power over more than 10% of the
Company's outstanding capital stock, the maximum term is five years. The
exercise price of incentive stock options granted under the Plan must be at
least equal to the fair market value of such shares on the date of grant. The
exercise price of nonstatutory stock options granted under the Plan must be at
least 85%, or 110% with respect to holders of 10% of the voting power of the
Company's outstanding capital stock, of the fair market value of the stock
subject to the option on the date of the grant.
F-15
<PAGE>
Vyrex Corporation
(a development stage enterprise)
Notes to Financial Statements (continued)
9. STOCK OPTION PLAN (CONTINUED)
Activity with respect to the stock option plan is summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED-
SHARES STOCK AVERAGE
AVAILABLE OPTIONS OPTION EXERCISE EXERCISE
FOR GRANT OUTSTANDING PRICE PRICE
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 916,191 1,958,809 $3.00 - $7.50 $3.01
Granted (658,800) 658,800 $6.00 - $10.25 $3.01
Canceled 1,021,400 (1,021,400) $3.00 - $7.13 $3.01
--------- ----------
Balance at December 31, 1997 1,278,791 1,596,209 $3.00 - $8.63 $4.26
Granted (962,000) 962,000 $0.41 - $5.97 $1.64
Exercised 134,441 (134,441) $5.50 - $5.94 $5.94
Canceled 577,509 (577,509) $3.00 - $8.65 $2.91
--------- ----------
Balance at December 31, 1998 1,028,741 1,846,259
--------- ----------
--------- ----------
</TABLE>
Following is a further breakdown of the options outstanding as of December 31,
1998:
<TABLE>
<CAPTION>
WEIGHTED-
WEIGHTED- AVERAGE
RANGE OF AVERAGE WEIGHTED- EXERCISE PRICE
EXERCISE OUTSTANDING REMAINING AVERAGE OPTIONS OF OPTIONS
PRICES OPTIONS LIFE IN YEARS EXERCISE PRICE EXERCISABLE EXERCISABLE
- ------------------- ----------------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
$0.41 - $0.53 425,000 9.77 0.44 150,000 0.44
$3.00 617,968 3.61 3.00 577,874 3.00
$5.63 - $7.60 803,291 9.08 5.87 677,768 5.87
----------------- ----------------- ----------------- ----------------- -----------------
1,846,259 7.41 3.66 1,405,842 3.66
----------------- ----------------- ----------------- ----------------- -----------------
----------------- ----------------- ----------------- ----------------- -----------------
</TABLE>
The Company has elected to follow Accounting Principles Board Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES (APB 25). Under APB 25, because the
exercise price of the Company's employee stock options equals the market price
of the underlying stock on the date of the grant, no compensation expense is
recognized. Pro forma information regarding net loss and loss per share is
required by SFAS 123, and has been determined as if the Company had accounted
for its employee stock options under the fair value method of SFAS 123. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions: risk-free
interest rate of 6.0%; divided yield of 0%; the volatility factor of the
expected market price of the Company's common stock of 145% and 78% in 1998 and
1997, respectively and a weighted-average expected life of the options of 60
months.
F-16
<PAGE>
Vyrex Corporation
(a development stage enterprise)
Notes to Financial Statements (continued)
9. STOCK OPTION PLAN (CONTINUED)
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options. For purposes of pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting period. The
Company's pro forma information follows (in thousands except for earnings per
share information).
<TABLE>
<CAPTION>
1998 1997
----------------- -----------------
<S> <C> <C>
Pro forma net loss $(4,577,000) $(4,079,000)
Pro forma net loss per share $ (0.62) $ (0.57)
</TABLE>
The weighted-average fair value of options granted in 1998 and 1997 is $2.73
and $5.36, respectively.
The pro forma effect on net loss for 1998 and 1997 is not representative of
the pro forma effect on net loss in future years because it does not take
into consideration pro forma compensation expense related to grants made
prior to 1995.
10. SUBSEQUENT EVENT
In March 1999, the Company received $100,000 through the issuance of a note
payable to an individual. The loan accrues interest at 10% and matures in
March 2000.
F-17
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-3 No. 333-40665 and Form S-8 No. 333-50571) of our report dated March 15,
1999, with respect to the financial statements of Vyrex Corporation, included
in the Annual Report (Form 10-KSB) for the year ended December 31, 1998.
ERNST & YOUNG LLP
San Diego, California
March 29, 1999
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