374Water Inc. — Annual Report 2000

Apr 6, 2000

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 ---- ---- - 1 - 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 2 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 3 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 4 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. 5 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 6 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 7 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. 8 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. 9 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 10 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. 11 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 12 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. 13 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 14 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 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 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 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:

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 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 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 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 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.

22 VYREX CORPORATION ANNUAL REPORT ON FORM 10-KSB YEAR ENDED DECEMBER 31, 1999 EXHIBIT INDEX

(1) Incorporated by reference to Exhibit 3 to the Company's Form SB-2 filed December 1, 1995. 23 Vyrex Corporation (a development stage enterprise) Index to Financial Statements

F-1 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 J.H. COHN LLP San Diego, California March 22, 2000 F-3 Vyrex Corporation (a development stage enterprise) Balance Sheets

SEE ACCOMPANYING NOTES. F-3 Vyrex Corporation (a development stage enterprise) Statements of Operations

SEE ACCOMPANYING NOTES. F-4 Vyrex Corporation (a development stage enterprise) Statements of Stockholders' Deficiency From inception to December 31, 1999

F-5 Vyrex Corporation (a development stage enterprise) Statements of Stockholders' Deficiency (continued) From inception to December 31, 1999

SEE ACCOMPANYING NOTES.

SEE ACCOMPANYING NOTES. F-6 Vyrex Corporation (a development stage enterprise) Statements of Cash Flows

SEE ACCOMPANYING NOTES. F-7 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 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 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 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:

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 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 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 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:

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 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:

Following is a further breakdown of the options outstanding as of December 31, 1999:

F-15 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:

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 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