UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549 FORM 10-QSB / X / Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period ended SEPTEMBER 30, 1998 /_ / Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission file number : 000-27866 VYREX CORPORATION (Name of small business issuer as specified in its charter) NEVADA 88-0271109 (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 2159 AVENIDA DE LA PLAYA, LA JOLLA, CALIFORNIA, 92037 (Address of principal executive offices) (619) 454-4446 (Issuer's telephone number including area code) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Applicable Only to Issuers Involved in Bankruptcy Proceedings During the Preceding Five Years Check whether the registrant filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan by a court. Yes No --- --- Applicable Only to Corporate Issuers State the number of shares outstanding of each of the issuers classes of common equity, as of latest practicable date: As of September 30, 1998, there are 7,423,455 shares of common stock outstanding and warrants to purchase 1,256,701 shares of common stock outstanding. Transitional Small Business Disclosure Format Yes No X --- ---
VYREX CORPORATION INDEX TO FORM 10-QSB <TABLE> <CAPTION> PART I FINANCIAL INFORMATION PAGE NUMBER <S> <C> Item 1 - Financial Statements Balance Sheets 3 Statements of Operations 4 Statements of Cash Flows 5 Notes to Financial Statements 6 Item 2 - Management's Discussion and 7 Analysis of Financial Condition And Results of Operations PART II OTHER INFORMATION 9 Item 1 - Legal Proceedings 9 Item 2 - Changes in Securities 9 Item 3 - Defaults upon Senior Securities 9 Item 4 - Submission of Matters to a Vote of Security Holders 9 Item 5 - Other Information 9 Item 6 - Exhibits and Reports on Form 8-K 9 Signatures 9 </TABLE> 2
PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS VYREX CORPORATION (a development stage enterprise) Balance Sheets <TABLE> <CAPTION> SEPTEMBER 30, DECEMBER 31, 1998 1997 ---------------------------- (Unaudited) Note <S> <C> <C> ASSETS Current assets: Cash and cash equivalents $ 375,064 $2,041,339 Short-term investments - 999,227 Accounts receivable - 100,000 Interest receivable 1,615 14,348 Prepaid assets 32,978 17,341 ---------------------------- Total current assets 409,657 3,172,255 Furniture and equipment costs, net of accumulated depreciation of $106,720 in 1998 and $71,495 in 1997 102,876 105,810 Notes receivable from related party 39,636 49,506 Debt issuance cost - 119,147 Patents, trademarks and copyrights, net of accumulated amortization of $30,635 in 1998 and $24,449 in 1997 109,584 115,770 ---------------------------- Total assets $ 661,753 $3,562,488 ---------------------------- ---------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities $ 244,109 $ 627,583 Deferred revenue - 100,000 ---------------------------- Total current liabilities 244,109 727,583 Convertible debentures, net, including accrued interest - 950,278 Commitments and contingencies Stockholders' equity: Preferred stock, $.001 par value; 10,000,000 shares authorized; none issued - - Common stock, $.001 par value; 50,000,000 shares authorized; 7,423,455 issued and outstanding in 1998, and 7,121,409 issued and outstanding at December 31, 1997 7,423 7,121 Additional paid-in capital 11,645,898 10,402,159 Deficit accumulated during the development stage (11,235,677) (8,524,653) ---------------------------- Total stockholders' equity 417,644 1,884,627 ---------------------------- Total liabilities and stockholders' equity $ 661,753 $3,562,488 ---------------------------- ---------------------------- </TABLE> Note: The balance sheet at December 31, 1997 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. SEE ACCOMPANYING NOTES. 3
VYREX CORPORATION (a development stage enterprise) Statements of Operations (Unaudited) <TABLE> <CAPTION> FROM THREE MONTHS ENDED NINE MONTHS ENDED INCEPTION SEPTEMBER 30, SEPTEMBER 30, (01/02/1991) 1998 1997 1998 1997 TO DATE ----------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Revenue and licensing agreement $ 1,600 $ - $ 1,600 $ - $ 311,600 Operating expenses: Research and development 311,686 465,387 1,575,513 1,307,329 5,916,223 Marketing and selling 32,881 113,492 191,523 113,492 413,094 General and administrative 188,754 279,062 992,721 931,353 4,294,144 ----------------------------------------------------------------------------------------- Total operating expenses 533,321 857,941 2,759,757 2,352,174 10,623,461 ----------------------------------------------------------------------------------------- Loss from operations (531,721) (857,941) (2,758,157) (2,352,174) (10,311,861) Other income (expense): Interest income 7,811 45,884 63,463 162,576 461,921 Interest expense - - (16,330) - (35,837) Charge from issuance of stock options for arranging bridge financing costs - - - - (1,349,900) ----------------------------------------------------------------------------------------- Total other income (expense) 7,811 45,884 47,133 162,576 (923,816) ----------------------------------------------------------------------------------------- Net loss $ (523,910) $ (812,057) $ (2,711,024) $ (2,189,598) $ (11,235,677) ----------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------- Net loss per common share - basic and diluted $ (0.07) $ (0.11) $ (0.37) $ (0.31) $ (1.78) ----------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------- Shares used in per share computations 7,423,455 7,121,290 7,334,887 7,121,246 6,301,605 ----------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------- </TABLE> SEE ACCOMPANYING NOTES. 4
VYREX CORPORATION (a development stage enterprise) Statements of Cash Flows (Unaudited) <TABLE> <CAPTION> NINE MONTHS ENDED SEPTEMBER 30, CUMULATIVE 1998 1997 FROM INCEPTION ------------------------------------------------------------------- <S> <C> <C> <C> OPERATING ACTIVITIES Net Loss $ (2,711,024) $ (2,189,598) $ (11,235,677) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 41,411 18,723 137,067 Amortization of debt discount and debt issuance cost - - 10,466 Accounts receivable and Interest receivable 112,734 1,015 107,427 Issuance of compensatory notes, stock and stock options 386,401 - 1,947,453 Prepaid assets (15,637) (32,433) (32,978) Accounts payable, accrued liabilities and deferred revenue (483,475) (194,143) 144,112 ------------------------------------------------------------------- Net cash used in operating activities (2,669,590) (2,396,436) (8,922,130) ------------------------------------------------------------------- INVESTING ACTIVITIES Purchases of short-term investments - (3,499,227) (8,440,442) Sale of short-term investments 1,025,737 3,446,410 8,467,932 Purchases of property and equipment (32,291) (35,730) (209,596) Patent and trademark costs - - (133,519) Other assets, including Notes receivable related parties 9,870 261,627 (40,332) ------------------------------------------------------------------- Net cash provided by (used in) investing activities 1,003,316 173,080 (355,957) ------------------------------------------------------------------- FINANCING ACTIVITIES Proceeds (repayment) on Notes and Debentures, net - - 1,273,844 Net proceeds from sale and exercise of stock options - - 950,100 Net proceeds from issuance of common stock - 1,600 7,429,208 ------------------------------------------------------------------- Net cash provided by financing activities - 1,600 9,653,152 ------------------------------------------------------------------- Net increase (decrease) in cash (1,666,274) (2,221,756) 375,065 Cash and equivalents, beginning of period $ 2,041,339 $ 3,187,906 $ - ------------------------------------------------------------------- Cash and equivalents, end of period $ 375,065 $ 966,150 $ 375,065 ------------------------------------------------------------------- ------------------------------------------------------------------- </TABLE> SEE ACCOMPANYING NOTES 5
VYREX CORPORATION (A Development Stage Enterprise) Notes To Financial Statements September 30, 1998 (unaudited) NOTE 1. BASIS OF PRESENTATION The accompanying financial statements have been prepared by the Company in accordance with generally accepted accounting principles for interim financial information. Certain information and disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. In the opinion of the Company's management, the unaudited financial statements contain all adjustments necessary (consisting of normal recurring accruals) for a fair presentation of the financial position as of September 30, 1998, and the results of operations for the three- month and nine-month periods ended September 30, 1998. The results of operations for the periods ended September 30, 1998, are not necessarily indicative of the results to be expected for the full year. For further information, refer to the financial statements and footnotes thereto included in Vyrex's Form 10-K SB for the year ended December 31, 1997. NOTE 2. DEBENTURES On November 6, 1997, the Company entered into two securities purchase agreements (the "Debenture Agreements") with two investors (the "Debenture Holders") and pursuant thereto, the Company issued each Debenture Holder a debenture in the amount of $500,000 (the "Debentures"). Each Debenture accrues interest at 6%, is convertible and or due November 15, 2000. All outstanding debentures were converted into 227,222 shares of stock during the first quarter of 1998. Pursuant to the securities purchase agreements, the purchasers of the Debentures had agreed to each purchase an additional $1,500,000 of Debentures ("Additional Debentures") in multiple tranches during the 21 months following the effective date of the registration statement, which was January 26, 1998, subject to certain conditions, including minimum trading volume, the existence of an effective registration statement, a current NASDAQ listing and other conditions. The Company was notified that it has been delisted from the NASDAQ Stock Market, Inc., effective with the close of business October 21, 1998. NOTE 3. DEVELOPMENT STAGE ENTERPRISE AND LIQUIDITY From inception (January 2, 1991) through September 30, 1998, the Company has not generated operating revenues, is classified as a development stage enterprise and has incurred losses aggregating $11,236,000. As of September 30, 1998, the Company had working capital of $166,000, which will enable the Company to fund its planned operations into the fourth quarter of calendar 1998. As disclosed in Note 2 above, the Company was delisted from the NASDAQ Stock Market, Inc., effective with the close of business October 21, 1998. The Company is listed on the Over-The-Counter Bulletin Board under the symbols VYRX and VYRXW. Accordingly, additional capital will be required to continue operations beyond the fourth quarter. Management is actively pursuing various financing alternatives to adequately fund operations through 1999. Over the longer term, successful completion of the Company's development program and its transition, ultimately, to attaining profitable operations, is dependent upon obtaining additional financing adequate to fulfill its research and development activities, and achieving a level of revenues adequate to support the Company's cost structure. 6
NOTE 4. NET LOSS PER SHARE In 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, EARNINGS PER SHARE. Statement 128 replaced the previously reported primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All net loss per share amounts for all periods have been presented, and where necessary, restated to conform to the Statement 128 requirements. NOTE 5. NEW ACCOUNTING STANDARDS Effective January 1, 1998, the Company adopted the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 130, REPORTING COMPREHENSIVE INCOME ("SFAS 130") and Statement of Financial Accounting Standards No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION ("SFAS 131"). SFAS 130 requires that all components of comprehensive income, including net income, be reported in the financial statements in the period in which they are recognized. Comprehensive income is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources. Net income and other comprehensive income, including foreign currency translation adjustments, minimum pension accrual, and unrealized gains and losses on investments, shall be reported, net of their related tax effect, to arrive at comprehensive income. The adoption of SFAS 130 did not affect results of operations or financial position because the Company's only component of comprehensive income is unrealized gains and losses on investments, which is not significant. SFAS 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. SFAS 131 also establishes standards for related disclosures about products and services, geographic areas and major customers. The adoption of SFAS 131 did not affect results of operations or financial position and did not affect the disclosure of segment information because SFAS 131 is not required to be applied to interim financial statements in the initial year of adoption. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN THIS REPORT AND "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" PRESENTED IN THE COMPANY'S 1997 ANNUAL REPORT ON FORM 10-KSB. INTRODUCTORY NOTE This Quarterly Report on Form 10-QSB contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and the Company intends that such forward-looking statements be subject to the safe harbors created thereby. These forward-looking statements relate to, but are not limited to, (i) future research plans, expenditures and results, (ii) potential collaborative arrangements, (iii) the potential utility of the Company's proposed products and (iv) the need for, and availability of, additional financing. The forward-looking statements included herein are based on current expectations, which involve a number of risks, uncertainties and assumptions regarding the Company's business and technology. These assumptions involve judgments with respect to, among other things, future scientific, economic and competitive conditions, and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the Company. Although the Company believes that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, there can be no assurance that the results contemplated in forward-looking statements will be realized and actual results may differ materially. In light of the significant uncertainties inherent in the forward-looking information included herein, the 7
inclusion of such information should not be regarded as a representation by the Company or any other person that the objectives or plans of the Company will be achieved. RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997 Research and development expenses decreased $154,000, to $312,000, in the three months ended September 30, 1998, compared to $465,000 for the same period during 1997. The decrease is attributable to reductions in payroll and laboratory expenses following completion of certain studies in the second quarter. General and administrative expenses decreased $90,000, to $189,000, in the current period, compared to $279,000 for the same period in 1997. The reduction is attributable to lower consulting, salary and administrative expenses. Marketing expenses decreased $81,000 to $33,000 in the three months ended September 30, 1998, compared to $113,000 for the three months ended September 30, 1997. Reductions in consulting fees and public relations expenses accounted for the expense reduction. Net loss decreased $288,000, to $524,000 in the current period, compared to $812,000 for the same period during 1997. Lower payroll, consulting and administration expenses make up the bulk of the expense savings. Net loss per common share decreased $0.04 to $0.07, compared to $0.11 for the same period during 1997. NINE MONTHS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997 Research and development expenses increased $269,000, to $1,576,000, in the nine months ended September 30, 1998, compared to $1,307,000 for the same period during 1997. A significant part of the increase in expenses was for payroll and consulting fees. The increase was reduced by expense savings of $154,000 for the three months ended September 30, 1998, the details of which are explained above. General and administrative expenses increased $61,000 to $992,000 for the first nine months of this year, compared to $931,000 for the same period during 1997. The additional expenses, which were offset by expense savings of $90,000 for the three months ended September 30, 1998, consisted primarily of payroll costs and legal costs for patents. Marketing expense increased $78,000 to $192,000 for the nine months ended September 30, 1998, compared to $113,000 for the same period in 1997. Marketing expenses consist mainly of payroll expense. The increase in marketing expense was reduced by a savings of $81,000 in the three months ended September 30, 1998. Net loss increased $521,000 to $2,711,000 in the nine months ended September 30, 1998, compared to $2,352,000 for the same period in 1997. Net loss per common share increased $0.06 to $0.37 compared to $0.31 for the same period in 1997. LIQUIDITY AND CAPITAL RESOURCES The company has financed its operations since inception solely through the sales of debt and equity securities. As of September 30, 1998, the Company had working capital of $166,000 which includes $375,000 of cash and equivalents which will enable the company to fund its operations through December 31, 1998. Net cash used in operating activities during the nine months ended September 30, 1998, was $2,670,000 compared to $2,396,000 for the same period during 1997. The net increase in cash used for the nine months ended September 30, 1998, of $274,000 consists of an increase in cash used for the first six months of the year of $402,000 and a reduction in cash used for the third quarter of 1998 of $128,000. On November 6, 1997 the Company entered into agreement with two parties which allows the Company the ability to borrow up to $4.0 million through the issuance of convertible debentures, subject to certain conditions. On November 6, 1997, the Company issued $1.0 million of its 8
debentures which resulted in net proceeds of $947,500 after expenses were deducted. The remaining $3 million is no longer available to the Company as one of the provisions in the term sheet required that the Company be listed on the NASDAQ stock market. During the first quarter of 1998, all outstanding debentures were converted into 227,222 shares of stock. The Company does not anticipate having significant revenues in the foreseeable future and will be required to raise additional funds to continue operations. There can be no assurance that additional funds will be available. PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Not applicable ITEM 2. CHANGES IN SECURITIES Not applicable ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable ITEM 5. OTHER INFORMATION Not applicable ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K The Company did not file any reports on Form 8-K during the three months ended September 30, 1998. SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. VYREX CORPORATION Registrant By: /s/ MARTIN MALK/ -------------------------------- Martin Malk, Chief Financial Officer (Principal Financial Officer) 9