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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, 1999
/_ / 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)
(858) 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: $6,600,000 as of March 30, 2000.
State the number of shares outstanding of each of the issuer's classes of common
equity, as of latest practicable date:
Common Stock - 7,542,867 as of March 30, 2000 Warrants to purchase common
stock - 267,000 as of March
30, 2000.
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, 2000 is incorporated by
reference into Part III hereof.
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 (the "Company") is a Nevada Corporation formed in
1991. The Company 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 research has been 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.
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 unable to fund any additional
development and is seeking a joint venture with a pharmaceutical company to
provide the necessary funding for further clinical development. Preliminary
pre-clinical data was provided to several pharmaceutical companies to review,
pursuant to confidentiality and non-disclosure agreements. To date, the
Company has not received a commitment from any potential partners. 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 has filed patent
disclosures concerning their uses and will continue pre-clinical development
as funding becomes available.
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
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
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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. The Company has, to date, been unable to obtain 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. Additional development work was undertaken in 1999. Based
on the results of their preliminary work, the companies have been seeking a
pharmaceutical partner or outside financing source to provide funding for
further development and commercialization of the compounds. To date the
companies have been unable to obtain a strategic alliance with a
pharmaceutical partner and have been unable to secure any additional funding
from other sources.
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 were, most recently 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 Company completed pilot
production of these potential products with contract manufacturers and conducted
stability and safety studies. The Company 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 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. Total reported sales by
RPS for all four products through December 31, 1999, was $473,935. There can be
no assurance that a
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significant market will develop for the products or that any products will
continue to be sold or produce any 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. The preliminary agreement entered into
in 1998 lapsed and there are no current discussions underway with regard to
any subsequent agreement. There can be no assurance that any further
discussions will be undertaken with Uncle Ben's, Inc. or that any further
agreement will ever be reached.
GENE DISCOVERY. The Company reviewed its gene and protein discovery
programs during 1999, including CD-Tagging-TM-, and due to competitive
technology made a decision to terminate the gene discovery program in its
entirety.
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. As a result of its decision to
terminate its gene discovery program in 1999, the Company terminated all of
its license agreements with Dr. Jarvik for CD-Tagging and Epitope Tagging
Technologies and returned all rights to the technologies.
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 further 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 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. In addition, there can
be no assurance that the Company will be in a position to meet its annual
minimum license fee and thereby maintain any rights to the covered compound.
During 1998 the Company continued development of the compounds licensed from
Dr. Miljkovic. The Company was notified in 1999 that all claims set forth in
Dr. Miljovic's United States and PCT patent applications were allowed. During
1999, the Company sought potential collaborative partners to produce and
market the proprietary compounds covered by the patent. The Company has not,
to date, entered into agreements with potential partners but is continuing
its effort to do so. There can be no assurance that the Company will enter
into any collaborative agreement to further develop or market any of these
products.
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. In 1999, the companies continued to seek a pharmaceutical
partner or outside financing for further development and commercialization of
technology arising from the collaboration. To date the companies have been
unable to obtain a pharmaceutical partner or any funding to further develop
the proprietary compounds. There can be no assurance that the companies will
be able to secure any funding in the future for this project, and , in the
absence of a collaborative partnership or additional funding, the project may
be terminated.
UNCLE BEN'S, INCORPORATED. On January 22, 1998, the Company entered into
an exclusive development agreement with
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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. The preliminary agreement entered into
in 1998 lapsed and there are no current discussions underway with regard to
any subsequent agreement. There can be no assurance that any further
discussions will be undertaken with Uncle Ben's, Inc. or that any further
agreement will ever be reached.
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.
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. Vyrex terminated its license covering CD-Tagging
in conjunction with its decision to terminate its gene discovery program and
reconveyed all rights therein to Dr. Jarvik
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.
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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
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 was 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 was
responsible for fees and costs associated with the patent applications
covering the universal epitope technology. Pursuant to the Company's
termination of all license agreements with Dr. Jarvik, the Company has no
further obligations with regard to any costs of fees associated with U.S. or
foreign filing or prosecution of any patent matters involving CD-Tagging or
Epitope-Tagging .
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 seeks 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 proprietary rights relating to, compounds or processes competitive with
those of the Company. See "Business ) Competition."
The prosecution and maintenance of U.S. and foreign patent matters is
expensive and may require the commitment of significant funds to maintain its
existing patents and patent applications or prosecute, or file, new patent
applications. The Company can make no assurance that it will be able to
maintain existing patents and patent applications or prosecute new patent
applications unless it is able to obtain significant funding in the future.
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
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
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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.
The prosecution and maintenance of trademark matters is expensive and
may require the commitment of significant funds to maintain its existing
trademarks and trademark applications, or prosecute, or file, new trademark
applications. The Company can make no assurance that it will be able to
maintain existing trademarks and trademark applications or prosecute new
trademark applications unless it is able to obtain significant funding in the
future.
EMPLOYEES
On December 31, 1999, the Company employed three individuals, one in an
executive position, and two in administration. In an effort to reduce
operating expenses as well as terminating its clinical and gene discovery
programs 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 is not
contemplating but may hire an undetermined number of new employees over the
next 12 to 24 months, should the Company obtain additional funding and expand
its activities. The Company's success will depend in large part upon its
ability to raise additional capital and maintain operations.
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.
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
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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
products. The Company does not have any contracts with any suppliers of the
raw materials used in the development of its proposed products.
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.
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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 can sustain any significant research and
development efforts, that such efforts, if undertaken, 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 attempting to develop nutraceutical products which
the Company believes may be sold before any of its proposed pharmaceutical
products will be sold. However, as of December 31, 1999, 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. There can be no assurance
that RPS will continue to market the Company's products or that the Company
will receive any significant revenue as a result of RPS' sales.
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, 1999 the Company had a deficit
accumulated in the development stage of $12,702,000. The Company expects to
incur substantial additional rating 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
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alliances and other arrangements with corporate partners. There can be no
assurance such collaborative arrangements or additional funds will 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. To date, the Company's existing technology has not
generated any significant revenue and there can be no assurance such revenue
will be realized. 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, 1999 deferred payroll amounted to
approximately $558,000. As of December 31, 1999, there were three employees.
One in a scientific and executive role and two in administration. The Company
has been unable to retain other scientific and management personnel due to
the shortage of operating cash.
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
technology, along with other technologies, to discover small molecules to
develop therapies for spinal cord and other central nervous system traumas.
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,
biologics, 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, 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
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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 was originally due and payable on March 22, 2000, and is
secured by the general assets of the Company with applicable provisions of
the Uniform Commercial Code. The principal amount of the loan was increased
in August of 1999 to $160,000. The loan was renegotiated to provide that the
interest only on the $100,000 was due on March 22, 2000, and was paid on
time. Interest only on the $60,000 will be due and payable on August 17,
2000. The remaining principal balances with 8% interest was extended one year
and will be due and payable on March 22, and August 17, of 2001. 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
Certain warrants issued in connection with private and public
placement of Company's stock prior to April 1, 1996, expired on January 31,
2000., and are no longer exercisable. Under the terms of existing, options
issued under the Company's stock option plan and other outstanding options,
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. The holders of the options 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 options. 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 2,323,259 shares of
Common Stock. The vast majority of all of these options are currently
exercisable. Exercise of any of these options would result in additional
dilution to the purchaser of the shares offered herein, and exercise of any
significant amount of these options 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 Shareholders to
sell any of the Company's securities 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.
CONTROL BY PRESENT STOCKHOLDERS; POSSIBLE DEPRESSIVE EFFECT ON THE COMPANY'S
SECURITIES
The current officers and directors of the Company may 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
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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
ALL of the Company's outstanding warrants issued in connection with
any private placement prior to April 1, 1996, or issued in connection with
the Company's Initial Public Offering, expired on January 31, 2000, and, to
the extent any such warrants were unexercised as of that date, they are no
longer exercisable. With regard to any other warrants, the holders 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.
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
15
<PAGE>
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 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
16
<PAGE>
proposed commercial products. 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 .
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.
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 report 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 $2,000.
ITEM 3. LEGAL PROCEEDINGS
17
<PAGE>
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 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, 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
January 1, 1999 March 30, 1999 $0.8125 $0.1875
April 1, 1999 June 30, 1999 $0.6875 $0.3438
July 1, 1999 September 30, 1999 $0.4375 $0.2812
October 1, 1999 December 31, 1999 $0.2812 $0.0938
</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.
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 and nutraceuticals. The Company
is a development stage company, has never generated any substantial 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.
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 the Company's short term strategy will be to
continue efforts to commercialize existing technology and to selectively
defer research and development activity until such time as the Company has
adequate operating funds. During 1999 the Company continued to close down its
research facilities and projects and further scaled back staff in all areas,
as well as reducing other operating expenses. The net loss for 1999 amounted
to $789,000 compared to $3,388,000 in 1998. As of December 31, 1999 the
Company's accumulated deficit was approximately $12,702,000.
18
<PAGE>
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 did 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 confirmed that the software used by the Company
was 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 suffered no adverse incidents related to the
Year 2000 and believes there was no adverse effect on the Company's core
business operations due to non-Year 2000 compliance of customers, suppliers,
and financial institutions.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999 AND 1998
The Company started earning royalty income in 1999. Royalty income
for the first year was $71,000 from the sale of four nutritional formulations
by the Retired Persons Services, Inc. The Company is entitled to a royalty of
15% on the sale of this formulation. In addition, the Company earned $6,600
in license fees. A license fee of $1,600 was earned in 1998.
There has been a drastic decrease in operation expenses due to the
Company's decision to discontinue its genomics program and terminate its
licenses for Epitope Tagging and CD-Tagging technology. In addition,
administrative expenses were reduced mid year with the resignation of the
Chief Financial Officer and the Executive Vice President and General Counsel
due to funding constraints.
Research and development expenses decreased $1,484,000 to $295,000
in 1999 compared to $1,779,000 in 1998. The decrease in research and
development expenses is attributed to the fact that there were no consulting
services during this period and no compensation expenses incurred compared to
$258,000 and $394,000 respectively in 1998. Salary expenses decreased
$464,000 and purchased services decreased $191,000.
No marketing and selling expenses were incurred during 1999 compared
to $207,000 in 1998. General and administrative expenses decreased $881,000
to $563,000 in 1999 compared to $1,444,000 in 1998. Salaries decreased
$255,000, patent expenses $149,000, financial expenses $95,000, and public
relations $69,000.
Net loss decreased $2,599,000 to $789,000 during 1999 compared to
$3,388,000 in 1998. Basic and diluted loss per share decreased $0.35 to $0.11
during 1999 compared to $0.46 in 1998. The lower net loss per common share is
due to the increase in 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, 1999, the Company had
a working capital deficit of ($755,000) compared to a working capital deficit
of $275,000 at December 31, 1998. The decrease in working capital is the
result of the Company's operating loss.
For the twelve months ended December 31, 1999, the Company used
$330,000 of cash in operating activities, compared to $2,975,000 during 1998.
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, 1999 deferred payroll amounted to
approximately $558,000.
The Company generated $36,000 and $1,013,000 of cash in investing
activities during 1999 and 1998, primarily from the sale of short term
investments. The Company generated $217,000 of cash in financing activities
during 1999. The Company sold $41,000 of common stock in 1999 and obtained
loans in the amount of $176,000.
19
<PAGE>
While the Company may have revenues during 2000, 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, 2000 the Company raised $270,000 through the private sale of
securities. The Company does not currently have any other commitments for
financing. 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 was originally due and payable on March 22, 2000, and is
secured by the general assets of the Company with applicable provisions of
the Uniform Commercial Code. The principal amount of the loan was increased
in August of 1999 to $160,000. The loan was renegotiated to provide that the
interest only on the $100,000 was due on March 22, 2000, and interest only on
the $60,000 will be due and payable on August 17, 2000. The March 22, 2000
interest payment was paid within the prescribed terms. The remaining
principal balances with 8% interest was extended one year and will be due and
payable on March 22, and August 17, of 2001. It is anticipated that the
$270,000 raised will enable the Company to continue operating until the fall
of 2000. Additional funds will have to be raised by that time to enable the
Company to continue operations. The Company does not have any lease or other
commitments. 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 2000, or that funds will
be available through the public or private markets.
PLAN OF OPERATION
The Company is currently operating with a new Board of Directors and
a new Chief Executive Officer, G. Dale Garlow. During the 12 month period
following the balance sheet date, the Company intends to focus substantially
all of its efforts and resources on selective clinical studies and marketing
its existing products. Most of these efforts will involve development of
strategic relationships with other partners to develop and market the
Company's products. The Company will also continue discussions with potential
collaborative partners concerning development, manufacture and marketing of
anti-oxidant pharmaceutical compounds, and nutraceuticals.
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:
On April 21, 1999, Ernst & Young LLP resigned as independent auditors of
Vyrex Corporation. On April 22, 1999, Vyrex Corporation engaged J.H. Cohn,
LLP to succeed Ernst & Young LLP as independent auditors.
Ernst & Young's report on the financial statements for the past two years,
included in the financial statements filed with the Company's Form 10-KSB for
the year ending December 31, 1998, includes limitations based on the
assumption that the Company will continue as a going concern. Other than the
uncertainty inherent in the going concern assumption, such financial
statements did not contain an adverse opinion or a disclaimer of opinion nor
was it modified as to uncertainty, audit scope or accounting principles. The
prior financial statement report of Ernst & Young, included in the financial
statements filed with the Company's Form 10-KSB for the year ending December
31, 1997, did not contain any limitation based on the Company's ability to
continue as a going concern.
The board of directors of Vyrex Corporation approved the change in
independent auditors.
20
<PAGE>
There were no disagreements between the Company and Ernst & Young LLP, within
the two-year period ended December 31, 1998, and the interim period of
January 1, 1999 through April 21, 1999, on matters of accounting principles
or practices, financial statement disclosure or auditing scope of procedure.
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,
2000.
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, 2000.
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, 2000.
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, 2000.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
Exhibit 23.1: Consent of J. H. Cohn LLP, Independent Public Accountants.
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/ G. DALE GARLOW
------------------------------
G. Dale Garlow
Chief Executive Officer,
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/SHELDON S. HENDLER Director March 29, 2000
- --------------------------
Carl M. Lewis
/s/G. DALE GARLOW Director March 29, 2000
- --------------------------
/s/RICHARD G. MCKEE, JR. Director March 29, 2000
- --------------------------
</TABLE>
22
<PAGE>
VYREX CORPORATION
ANNUAL REPORT ON FORM 10-KSB
YEAR ENDED DECEMBER 31, 1999
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
<S> <C>
3.1 BYLAWS *(1)
4.1 ATTACHED AS EXHIBIT 3.1
23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
</TABLE>
(1) Incorporated by reference to Exhibit 3 to the Company's Form SB-2 filed
December 1, 1995.
23
<PAGE>
Vyrex Corporation
(a development stage enterprise)
Index to Financial Statements
<TABLE>
<CAPTION>
<S> <C>
Report of J.H. Cohn LLP, Independent Public Accountants.....................F-2
Balance Sheets..............................................................F-3
Statements of Operations....................................................F-4
Statements of Stockholders' Deficiency......................................F-5
Statements of Cash Flows....................................................F-7
Notes to Financial Statements...............................................F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
Vyrex Corporation
We have audited the accompanying balance sheet of VYREX CORPORATION (a
development stage enterprise) as of December 31, 1999, and the related
statements of operations, stockholders' deficiency and cash flows for the
year then ended, and for the period from January 2, 1991 (inception) through
December 31, 1999. 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
years ended December 31, 1998, 1997 and 1996, were audited by other auditors
whose report dated March 15, 1999 (except as to Note 10 to the 1998 financial
statements for which the date was March 29, 1999), expressed an unqualified
opinion and included an explanatory paragraph discussing uncertainty
regarding Vyrex Corporation's ability to continue as a going concern. Total
revenues and net losses for the three years ended December 31, 1998, 1997 and
1996 were $1,600 and $8,504,866, respectively. Our opinion on the statements
of operations, stockholders' deficiency and cash flows for the period from
January 2, 1991 (inception) through December 31, 1999, insofar as it relates
to amounts for the years ended December 31, 1998, 1997 and 1996, 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 reports
of other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports 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, 1999, and its results of operations and cash
flows for the year then ended and for the period from January 2, 1991
(inception) through December 31, 1999, 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 a net capital deficiency. These conditions raise substantial
doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1.
The financial statements do not include any adjustments that may result from
the outcome of this uncertainty.
F-2
<PAGE>
J.H. COHN LLP
San Diego, California
March 22, 2000
F-3
<PAGE>
Vyrex Corporation
(a development stage enterprise)
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,184 $80,007
Other assets 24,979
------------------------------------
Total current assets 3,184 104,986
Furniture and equipment, net of accumulated depreciation of
$132,425 in 1999 and $107,037 in 1998 41,591 79,903
Notes receivable from related parties 32,117
Patents, trademarks and copyrights, net of accumulated
amortization and impairment charges totaling $140,219
in 1999 and 1998 - -
------------------------------------
Total assets $ 44,775 $217,006
====================================
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable and accrued liabilities $ 713,183 $ 279,570
Deferred revenue 28,910 100,000
Notes payable to related parties 16,114
------------------------------------
Total current liabilities 758,207 379,570
Notes payable 160,000 -
------------------------------------
Total liabilities 981,207 379,570
------------------------------------
Commitments and contingencies
Stockholders' deficiency:
Preferred stock, $.001 par value; 10,000,000 shares authorized; none
issued - -
Common stock, $.001 par value; 50,000,000 shares authorized; 7,542,867
and 7,423,455 issued and outstanding in 1999 and 1998, respectively
7,543 7,423
Additional paid-in capital 11,820,638 11,743,078
Deficit accumulated during the development stage (12,701,613) (11,913,065)
------------------------------------
Total stockholders' deficiency (873,432) (162,564)
------------------------------------
Total liabilities and stockholders' deficiency $ 44,775 $ 217,006
====================================
</TABLE>
SEE ACCOMPANYING NOTES.
F-3
<PAGE>
Vyrex Corporation
(a development stage enterprise)
Statements of Operations
<TABLE>
<CAPTION>
CUMULATIVE
YEARS ENDED DECEMBER 31 FROM
1999 1998 INCEPTION
------------------------------------------------------------
<S> <C> <C> <C>
Licensing and royalty revenue $ 77,690 $ 1,600 $ 389,290
------------------------------------------------------------
Operating expenses:
Research and development 294,502 1,779,009 6,414,221
Marketing and selling 206,523 428,093
General and administrative 562,974 1,436,353 5,300,751
------------------------------------------------------------
Total operating expenses 857,476 3,421,885 12,143,065
------------------------------------------------------------
Loss from operations (779,786) 3,420,285 (11,753,775)
------------------------------------------------------------
Other income (expense):
Interest income 321 65,748 464,527
Gain (loss) on disposal of fixed assets 1,137 (7,366) (6,229)
Interest expense (10,220) (26,509) (56,236)
Charge from issuance of stock options
for bridge financing - - (1,349,900)
------------------------------------------------------------
Total other income (expense) (8,762) 31,873 (947,838)
------------------------------------------------------------
Net loss $ (788,548) $(3,388,412) $ (12,701,613)
============================================================
Net loss per share - basic and diluted $ (0.11) $ (0.46) $ (1.96)
============================================================
Shares used in per share computations 7,474,491 7,357,211 6,483,562
============================================================
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
Vyrex Corporation
(a development stage enterprise)
Statements of Stockholders' Deficiency
From inception to December 31, 1999
<TABLE>
<CAPTION>
COMMON STOCK
------------------------------------
SHARES AMOUNT
------------------------------------
<S> <C> <C>
Issuance (at $.002 per share) for acquisition of technology
retroactively reduced for 150,000 shares returned and retired on 3,350,000 $3,350
October 1, 1995
Issuance (at $.002 per share) for cash 500,000 500
Issuance (at $1.00 per share) for cash 800,000 800
Issuance as compensation (at $1.00 per share) 32,500 33
Issuance (at $2.00 per share) upon conversion of note payable 100,000 100
Issuance (at $3.00 per share) for cash, net of issuance costs of 33,000 33
$4,086
Net loss - -
------------------------------------
Balance at December 31, 1993 4,815,500 4,816
Issuance (at $3.00 per share) for cash, net of issuance costs of 99,000 99
$21,000
Issuance (at $3.00 per share) in lieu of finder's fee 7,000 7
Issuance (at $3.00 per share) in lieu of finder's fee 5,000 5
Issuance (at $3.00 per share) for cash, net of issuance costs of 24,990 25
$41,844
Net loss - -
------------------------------------
Balance at December 31, 1994 4,951,490 4,952
Issuance (at $3.00 per share) for cash, net of issuance costs of 149,940 150
$46,976
Issuance (at $3.00 per share) in settlement of account payable 6,041 6
Issuance (at par value) as compensation for services related to prior
issuances of common stock 83,000 83
Issuance (at $3.00 per share) as compensation for services related to 13,334 13
offering
Issuance (at $3.00 per underlying share) of options for 450,000
shares as compensation for arranging bridge financing - -
Net loss - -
------------------------------------
Balance at December 31, 1995 5,203,805 5,204
Proceeds from initial public offering (at $6.50 per unit), net of
issuance costs of $1,135,453 1,057,097 1,057
Sale of option to purchase 300,000 shares at $3.00 per share - -
Exercise of stock options (at $3.00 per share) for cash 300,000 300
Conversion of notes payable and related accrued interest (at $3.00 86,015 86
per share)
Exercise of stock options (at $.00022 per share) for cash 450,000 450
Issuance of units as compensation for legal services (at $4.55 per 24,292 24
share)
Net loss - -
------------------------------------
Balance at December 31, 1996 7,121,209 7,121
</TABLE>
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED TOTAL
ADDITIONAL DURING THE STOCKHOLDERS'
PAID-IN DEVELOPMENT EQUITY
CAPITAL STAGE (DEFICIENCY)
----------------------------------------------------
<S> <C> <C> <C>
Issuance (at $.002 per share) for acquisition of technology
retroactively reduced for 150,000 shares returned and retired on $ 3,350 $ - $ 6,700
October 1, 1995
Issuance (at $.002 per share) for cash 500 1,000
Issuance (at $1.00 per share) for cash 799,200 - 800,000
Issuance as compensation (at $1.00 per share) 32,467 - 32,500
Issuance (at $2.00 per share) upon conversion of note payable 199,900 - 200,000
Issuance (at $3.00 per share) for cash, net of issuance costs of 94,881 - 94,914
$4,086
Net loss - (1,085,932) (1,085,932)
----------------------------------------------------
Balance at December 31, 1993 1,130,298 (1,085,932) 49,182
Issuance (at $3.00 per share) for cash, net of issuance costs of 275,901 - 276,000
$21,000
Issuance (at $3.00 per share) in lieu of finder's fee 20,993 - 21,000
Issuance (at $3.00 per share) in lieu of finder's fee 14,995 - 15,000
Issuance (at $3.00 per share) for cash, net of issuance costs of 33,101 - 33,126
$41,844
Net loss - (467,683) (467,683)
----------------------------------------------------
Balance at December 31, 1994 1,475,288 (1,553,615) (73,375)
Issuance (at $3.00 per share) for cash, net of issuance costs of 402,694 - 402,844
$46,976
Issuance (at $3.00 per share) in settlement of account payable 18,117 - 18,123
Issuance (at par value) as compensation for services related to prior
issuances of common stock (83) - -
Issuance (at $3.00 per share) as compensation for services related to 39,989 - 40,002
offering
Issuance (at $3.00 per underlying share) of options for 450,000
shares as compensation for arranging bridge financing 1,349,900 - 1,349,900
Net loss - (1,854,584) (1,854,584)
----------------------------------------------------
Balance at December 31, 1995 3,285,905 (3,408,199) (117,090)
Proceeds from initial public offering (at $6.50 per unit), net of
issuance costs of $1,135,453 5,734,620 - 5,735,677
Sale of option to purchase 300,000 shares at $3.00 per share 50,000 - 50,000
Exercise of stock options (at $3.00 per share) for cash 899,700 - 900,000
Conversion of notes payable and related accrued interest (at $3.00 257,959 - 258,045
per share)
Exercise of stock options (at $.00022 per share) for cash (350) - 100
Issuance of units as compensation for legal services (at $4.55 per 110,505 - 110,529
share)
Net loss - (1,820,614) (1,820,614)
----------------------------------------------------
Balance at December 31, 1996 10,338,339 (5,228,813) 5,116,647
(CONTINUED)
</TABLE>
F-5
<PAGE>
Vyrex Corporation
(a development stage enterprise)
Statements of Stockholders' Deficiency (continued)
From inception to December 31, 1999
<TABLE>
<CAPTION>
ADDITIONAL
COMMON STOCK 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
Issuance (at $.34 per share) for cash 119,412 120 40,480
Issuance of 47,000 stock options for services 6,580
Issuance of 250,000 warrants for services 30,500
Net loss
----------------------------------------------------
Balance at December 31,1999 7,542,867 $ 7,543 $ 11,820,638
====================================================
</TABLE>
SEE ACCOMPANYING NOTES.
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED TOTAL
DURING THE STOCKHOLDERS'
DEVELOPMENT EQUITY
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)
Issuance (at $.34 per share) for cash 40,600
Issuance of 47,000 stock options for services 6,580
Issuance of 250,000 warrants for services 30,500
Net loss (788,548) (788,548)
------------------------------------
Balance at December 31,1999 $ (12,701,613) $ (873,432)
====================================
</TABLE>
SEE ACCOMPANYING NOTES.
F-6
<PAGE>
Vyrex Corporation
(a development stage enterprise)
Statements of Cash Flows
<TABLE>
<CAPTION>
CUMULATIVE
YEARS ENDED DECEMBER 31, FROM
1999 1998 INCEPTION
------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (788,548) $ (3,388,412) $ (12,701,613)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation, amortization and impairment 35,449 160,602 302,173
charges
Interest receivable - 17,854 3,506
(Gain) loss on disposal of fixed assets (1,137) 7,366 6,229
Issuance of compensatory notes, stock, stock
options 37,080 483,580 2,081,712
and warrants
Changes in operating assets and liabilities:
Other assets 24,979 92,362 100,000
Accounts payable and accrued liabilities 433,613 (348,013) 713,187
Deferred revenue (71,090) - (71,090)
Accrued interest on convertible debentures - 9,041
------------------------------------------------------
Net cash used in operating activities (329,654) (2,974,661) (9,556,855)
------------------------------------------------------
INVESTING ACTIVITIES
Purchase of short-term investments (8,440,442)
Sale of short-term investments 1,025,737 8,467,931
Purchases of furniture and equipment (32,291) (209,595)
Proceeds on sale of fixed assets 4,000 6,000 10,000
Patent, trademark and copyrights costs (133,519)
Other assets, including notes receivable from
related parties 32,117 13,883 (4,202)
------------------------------------------------------
Net cash provided by (used in) investing 36,117 1,013,329 (309,827)
activities
------------------------------------------------------
FINANCING ACTIVITIES
Net proceeds from issuance of common stock 40,600 7,469,808
Exercise of stock options and sale of options 950,100
Proceeds from short-term loan 873,844
Proceeds from note payable 176,114 576,114
Advances from potential investors 100,000
Repayment of advances (100,000)
------------------------------------------------------
Net cash provided by financing activities 216,714 9,869,866
------------------------------------------------------
Net increase (decrease) in cash and cash (76,823) (1,961,332) 3,184
equivalents
Cash and cash equivalents, beginning of the 80,007 2,041,339
period
------------------------------------------------------
Cash and cash equivalents, end of the period $ 3,184 $ 80,007 $ 3,184
======================================================
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 and warrants issued for services $ 37,080 $ 87,000 $ 124,080
======================================================
Warrants issued in connection with convertible
debentures $ 62,220
===================
</TABLE>
SEE ACCOMPANYING NOTES.
F-7
<PAGE>
Vyrex Corporation
(a development stage enterprise)
Notes to Financial Statements
1. BASIS OF PRESENTATION AND THE COMPANY
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles which contemplate continuation of
Vyrex Corporation (the "Company") as a going concern and the realization of
the Company's assets and the satisfaction of its liabilities in the normal
course of business. As of December 31, 1999, the Company has an accumulated
deficit of $12,701,613, a stockholders' deficiency of $873,432 and negative
working capital of $755,023. Due to the Company's recurring losses and
stockholders' 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, there can be no assurance that an
agreement will arise in a timely manner, or at all, or that any agreement
that may arise will successfully reduce the Company's short-term or long-term
funding requirements.
The Company's major activities through December 31, 1999 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
significant 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-8
<PAGE>
1. BASIS OF PRESENTATION AND THE COMPANY (CONCLUDED)
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
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.
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.
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.
F-9
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 stockholders'
deficiency. The impairment loss is reflected in general and administrative
expenses.
STOCK OPTIONS
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, "Acconting for Stock Issued to Employees" ("APB 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.
NET LOSS PER SHARE
Net loss per share is computed using the weighted-average number of common
shares outstanding during the periods presented. Diluted earnings per share
has not been presented because the assumed exercise of the Company's
outstanding options and warrants would have been antidilutive. Options and
warrants will have a dilutive effect only when the average market price of
the common stock during the period exceeds the exercise price of the options
or warrants.
F-10
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONCLUDED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect certain reported amounts and disclosures. Accordingly, actual
results could differ from those estimates.
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board had issued certain pronouncements as
of December 31, 1999, that will become effective in subsequent periods;
however, management does not believe that any of those pronouncements will
affect any financial accounting measurements or disclosures the Company will
be required to make based on its current operations.
3. FURNITURE AND EQUIPMENT
Furniture and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
----------------- ----------------
<S> <C> <C>
Office furniture and equipment $116,188 $120,611
Laboratory equipment 57,828 66,329
----------------- ----------------
174,016 186,940
Less accumulated depreciation 132,425 107,037
================= ================
Totals $ 41,591 $ 79,903
================= ================
</TABLE>
Depreciation expense was $35,449 and $44,832 for the years ended December 31,
1999 and 1998, respectively.
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 balance of the loan was
repaid in January 1999.
F-11
<PAGE>
4. RELATED PARTY TRANSACTIONS (CONCLUDED)
NOTES PAYABLE
The Company had outstanding notes payable to board members and a related
party totalling $16,114 at December 31, 1999. All were short-term, unsecured
and bear interest at an annual rate of 10%. The notes are due on either June
2, 2000 or December 31, 2000.
EMPLOYMENT AGREEMENT
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.
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 the 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, the Chairman and CEO 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, 1999, the Company had outstanding warrants to purchase a
total of 1,406,701 shares of common stock. On January 31, 2000, 1,139,701 of
the warrants (exercise price $8.00) expired, and on November 5, 2000, 17,000
warrants (exercise price $7.50) will expire. During 1999, in connection with
an agreement with a consultant, 50,000 warrants with an exercise price of
$0.50 expiring on March 21, 2002, 50,000 warrants with an exercise price of
$1.00 expiring on March 21, 2002, and 150,000 warrants with an exercise price
of $0.25 expiring on August 16, 2002 were granted. The fair value of these
warrants granted in 1999 of $30,500 has been charged to general and
administrative expenses in the accompanying Statements of Operations. The
warrants are subject to adjustments in the event of stock splits, stock
dividends and similar events.
F-12
<PAGE>
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 ("AARP"). The agreement called for the Company to provide
dietary supplement products. The Company designed and contract manufactured
pilot batches of the products and initiated safety and stability studies. RPS
manufactures the final product and pays the Company a royalty based on sales.
The Company received a $100,000 advance in future royalties in 1998 that has
been reflected as deferred revenue in 1998. The Company recognized
approximately $71,000 of the deferred revenue attributed to royalties earned
on sales by AARP in 1999.
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% 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, Inc. 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.
F-13
<PAGE>
8. INCOME TAXES
At December 31, 1999, the Company had net operating loss carryforwards
available to reduce future taxable income, if any, of approximately
$15,707,000 and $14,639,000 for Federal and California income tax purposes,
respectively. The Federal net operating loss begins to expire in 2006.
California net operating losses of approximately $463,000 expired in 1999 and
will continue to expire in 2000. 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, 1999, the Company
also had research and development credit carryforwards of approximately
$478,000 and $248,000 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 within a three year
period.
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, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
----------------- ----------------
<S> <C> <C>
Net operating loss carryforwards $6,635,000 $6,271,000
Research and development credit carryforwards 639,000 612,000
Other 413,000 117,000
----------------- ----------------
7,687,000 7,000,000
Valuation allowance (7,687,000) (7,000,000)
================= ================
$ - $ -
================= ================
</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.
F-14
<PAGE>
9. STOCK OPTION PLAN (CONTINUED)
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.
During 1999, the Company granted options to acquire 47,000 shares of common
stock to consultants and professional advisors. In connection therewith, the
Company recorded consulting expense of $6,580.
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 January 1, 1998 1,318,791 1,556,209 $3.00 - $8.63 $4.26
Granted (987,291) 987,291 $0.41 - $5.97 $1.64
Exercised 134,441 (134,441) $5.50 - $5.94 $5.94
Canceled 400,800 (400,800) $3.00 - $7.38 $5.94
---------------------------
Balance at December 31, 1998 866,741 2,008,259 $0.41 - $8.63 $3.58
Granted (492,000) 492,000 $0.56 - $3.00 $1.43
Canceled 177,000 (177,000) $3.00 - $8.65 $3.06
---------------------------
Balance at December 31, 1999 551,741 2,323,259
===========================
</TABLE>
Following is a further breakdown of the options outstanding as of December 31,
1999:
<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 - $0.56 742,000 6.75 $ 0.46 269,500 $ 0.46
$3.00 791,668 4.08 3.00 630,231 3.00
$5.63 - $7.60 789,591 4.19 5.85 582,820 5.85
----------------- -----------------
2,323,259 4.97 3.16 1,482,551 3.16
================= ================= ================= ================= =================
</TABLE>
F-15
<PAGE>
9. STOCK OPTION PLAN (CONCLUDED)
The Company has elected to follow APB 25 for options granted to employees.
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 6.3%;
dividend yield of 0%; the volatility factor of the expected market price of
the Company's common stock of 15% and 145% in 1999 and 1998, respectively,
and a weighted-average expected life of the options of 48 and 60 months in
1999 and 1998, respectively.
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:
<TABLE>
<CAPTION>
1999 1998
-----------------------------------
<S> <C> <C>
Pro forma net loss $(1,981,000) $(4,577,000)
Pro forma net loss per share $ (0.27) $ (0.62)
</TABLE>
The weighted-average fair value of options granted in 1999 and 1998 is $0.14
and $2.73, respectively.
The pro forma effect on net loss for 1999 and 1998 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.
F-16
<PAGE>
10. NOTES PAYABLE
At December 31, 1999, the Company had outstanding notes payable with an
aggregate principal balance of $160,000 which were short-term in nature, and
bore interest at an annual rate of 10%. Accrued interest of approximately
$9,000 at December 31, 1999 is included in accounts payable and accrued
expenses in the accompanying balance sheet. These notes had a maturity date
of March 22, 2000 and August 17, 2000, and are collateralized by
substantially all of the Company's assets.
Subsequent to December 31, 1999, the due dates for these notes were extended
by one year and the interest rate was reduced to 8%. In addition, the strike
price of the warrants granted to the consultant in 1999, (see Note 5) who was
also the lender, was reduced to $.10 per share.
11. SUBSEQUENT EVENTS
In February 2000, the Company received $15,000 through the issuance of a note
payable to an individual. The loan bears interest at 10% and matures in
August 2000.
In March 2000, the Company raised $270,000 through the private sale of
300,000 shares of common stock.
F-17
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the Registration
Statement on Form S-3 (No. 333-40665) and the Registration Statement on
Form S-8 (No. 333-50571) which were previously filed by Vyrex
Corporation (the "Company") of our report on our audits of the
financial statements of the Company as of December 31, 1999 and for the
year then ended and for the period from January 2, 1991 (inception)
through December 31, 1999, dated March 22, 2000, which report appears
elsewhere in this Annual Report on Form 10-KSB of the Company for the
fiscal year ended December 31, 1999, and contained an explanatory
paragraph raising substantial doubt as to the Company's ability to
continue as a going-concern.
J.H. COHN LLP
San Diego, California
March 29, 2000
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