10KSB/A 1 d10ksba.htm FORM 10-KSB AMENDMENT NO. 1 Form 10-KSB Amendment No. 1
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-KSB/A

(Amendment No. 1)

 

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2007

Commission file number: 000-27866

 

 

Vyrex Corporation

(Name of small business issuer as specified in its charter)

 

 

 

Delaware   88-0271109

(State or other jurisdiction of

corporation or organization)

 

(IRS Employer

Identification No.)

21615 N. 2nd Avenue, Phoenix, Arizona

(Address of principal executive offices)

(623) 780-3321

(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 $.0001
   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 if 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.  ¨

Check if the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

Large accelerated filer  ¨    Accelerated filer  ¨    Non-accelerated filer  ¨    Smaller reporting company  x

Indicate by check mark whether the issuer is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

State issuer’s revenues for its most recent year: $25,500

State the aggregate market value of the voting and non-voting common equity held by non-affiliates 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 June 29, 2007, the last business day of the issuer’s most recently completed second fiscal quarter: $96,315.

As of March 31, 2008, the issuer had 25,882,878 shares of common stock outstanding.

 

 

 


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Explanatory Note

The purpose of this Amendment No. 1 on Form 10-K/A is to respond to comments received from the U.S. Securities and Exchange Commission’s Division of Corporation Finance in its letters dated July 17, 2008, August 20, 2008 and October 8, 2008, regarding our previously filed Annual Report on Form 10-K for the fiscal year ended December 31, 2007, filed with the U.S. Securities and Exchange Commission on March 31, 2008 (“Original Form 10-K”). This amendment amends the following:

 

   

Item 8A (Controls and Procedures) has been amended to include disclosure regarding the conclusions of our principal executive and principal financial officers regarding the effectiveness of our disclosure controls and procedures as of December 31, 2007 as required by Item 307 of Regulation S-B.

 

   

The Report of Independent Registered Public Accounting Firm has been amended to cover only the Company’s financial statements as of and for the years ended December 31, 2007 and 2006.

 

   

The financial statements have been amended to indicate that the financial information from prior to 2006 is unaudited.

 

   

The certifications filed as Exhibits 31.1 and 31.2 to the Original Form 10-K have been revised to conform to the exact wording required by Item 601(b)(31) of Regulation S-B.

There are no changes to the Original Form 10-K other than those outlined above. Except as required to reflect the changes noted above, this Amendment No. 1 on Form 10-K/A does not attempt to modify or update any other disclosures set forth in our Original Form 10-K. Furthermore, this Amendment No. 1 on Form 10-K/A does not purport to provide a general update or discussion of any other developments of the Company subsequent to the filing of the Original Form 10-K.


Table of Contents

Vyrex Corporation

Annual Report on Form 10-KSB

Year Ended December 31, 2007

INDEX

 

         PAGE
  PART II   
ITEM 7.   FINANCIAL STATEMENTS    1
ITEM 8A.   CONTROLS AND PROCEDURES    1
  PART III   
ITEM 13.   EXHIBITS    2
SIGNATURES    3


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PART II

 

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 F-1.

 

ITEM 8A. CONTROLS AND PROCEDURES.

The Company, under the supervision and with the participation of its management, including the Chief Executive Officer and President, evaluated the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and President concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2007.

Management’s Annual Report on Internal Control Over Financial Reporting.

Management of the Company is responsible for establishing and maintaining adequate control over financial reporting. Our internal control system was designed to provide reasonable assurance to our management and Board of Directors regarding the preparation and fair presentation of financial statements.

All internal controls over financial reporting, no matter how well designed, have inherent limitations, including the possibility of human error and the circumvention of overriding of controls. Therefore, even effective internal control over financial reporting can provide only reasonable, and not absolute, assurance with respect to financial statement preparation and presentation. Further, because of changes in conditions, the effectiveness of internal controls over financial reporting may vary over time. Because of its inherent limitations, internal controls over financial reporting may also fail to prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance of achieving their control objectives.

Our management, including our chief executive officer and chief financial officer, assessed the effectiveness of our internal control over financial reporting as of December 31, 2007. In making its assessment of internal control over financial reporting, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on this evaluation, our management concluded that, as of December 31, 2007, our internal control over financial reporting was effective based on those criteria.

This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

Changes in Internal Control Over Financial Reporting.

There have been no changes in internal control over financial reporting.

 

1


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ITEM 13. EXHIBITS

 

Exhibit No.

  

Description

31.1

   Certification of the Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

   Certification of the Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

   Certification of the Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

   Certification of the Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002.

 

2


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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 INCORPORATED
Dated: November 14, 2008   By:  

/s/ George Konrad

    George Konrad
    President and Principal 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.

 

Signature

 

Title

 

Date

/S/ George Konrad

  President, Chief Executive Officer, Chief Financial Officer , Treasurer and Director (principal executive, financial and accounting officer)   November 14, 2008

/S/ Fred Barker

  Vice President, Secretary and Director   November 14, 2008

/S/ Richard H. Davis.

  Director   November14, 2008

 

3


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Vyrex Corporation

Annual Report on Form 10-KSB/A

Year Ended December 31, 2007

INDEX TO FINANCIAL STATEMENTS

 

     Page

Report of Independent Registered Public Accounting Firm

   F-2

Balance Sheets

   F-3

Statements of Operations

   F-4

Statement of Stockholders’ Equity (Deficiency)

   F-5

Statements of Cash Flows

   F-8

Notes to Financial Statements

   F-9

 

F-1


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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Audit Committee, Board of Directors and Stockholders of Vyrex Corporation

We have audited the accompanying balance sheets of Vyrex Corporation (a development stage enterprise) as of December 31, 2007 and 2006, and the related statements of operations, changes in stockholders’ equity (deficiency), and cash flows for the years then ended. 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.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Vyrex Corporation (a development stage enterprise) as of December 31, 2007 and 2006, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

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.

/s/ Berenfeld Spritzer Shechter & Sheer, LLP

Certified Public Accountants and Advisors

Coral Gables, Florida

March 28, 2008

 

F-2


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Vyrex Corporation

(a development stage enterprise)

Balance Sheets

For the years ended December 31, 2007 and 2006

 

     December 31  
     2007     2006  

Assets

    

Current assets:

    

Cash

   $ 4,125     $ 3,721  

Accounts receivable

     5,736       5,265  
                

Total assets

   $ 9,861     $ 8,986  
                

Liabilities and stockholders’ deficiency

    

Current liabilities:

    

Accounts payable

   $ 200,609     $ 126,158  

Accrued liabilities and accrued vacation

     85,372       63,995  

Accrued payroll

     20,637       20,637  

Notes payable

     200,000       217,000  
                

Total liabilities

     506,618       427,790  
                

Commitments and contingencies

    

Stockholders’ deficiency:

    

Preferred stock, $.0001 par value; 50,000,000 shares authorized; none issued

     —         —    

Common stock, $.0001 par value; 200,000,000 shares authorized; 1,019,144 issued and outstanding

     102       102  

Additional paid-in capital

     13,129,473       13,114,487  

Deficit accumulated during the development stage

     (13,626,332 )     (13,533,393 )
                

Total stockholders’ deficiency

     (496,757 )     (418,804 )
                

Total liabilities and stockholders’ deficiency

   $ 9,861     $ 8,986  
                

The accompanying notes are an integral part of these financial statements.

 

F-3


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Vyrex Corporation

(a development stage enterprise)

Statements of Operations

For the years ended December 31, 2007 and 2006 and for the period

from January 2, 1991 (Date of Inception) through December 31, 2007 (Unaudited)

 

    

 

Years ended December 31,

    Cumulative from
Inception through
December 31, 2007

(Unaudited)
 
     2007     2006    

Licensing and royalty revenue

   $ 25,465     $ 43,465     $ 922,129  
                        

Operating expenses:

      

Research and development

     7,500       7,525       6,493,778  

Marketing and selling

         438,664  

General and administrative

     74,497       121,995       6,525,162  

Loss on disposal of fixed assets

         13,664  
                        

Total operating expenses

     81,997       129,520       13,471,268  
                        

Loss from operations

     (56,532 )     (86,055 )     (12,549,139 )
                        

Other income (expense):

      

Interest income

       332       476,376  

Other income

         4,434  

Gain on sale of investment in available-for-sale securities

       13,878       13,878  

Interest expense

     (36,407 )     (21,040 )     (221,981 )

Charge from issuance of stock options for bridge financing

         (1,349,900 )
                        

Total other expense

     (36,407 )     (6,830 )     (1,077,193 )
                        

Net loss

   $ (92,939 )   $ (92,885 )   $ (13,626,332 )
                        

Net loss per share – basic and diluted

   $ (0.09 )   $ (0.09 )  
                        

Weighted-average common shares outstanding – basic and diluted

     1,019,144       1,019,144    
                        

The accompanying notes are an integral part of these financial statements.

 

F-4


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Vyrex Corporation

(a development stage enterprise)

Statements of Changes in Stockholders’ Equity (Deficiency)

For the Period from January 2, 1991 (Inception)

through December 31, 2007

 

    

 

Common Stock

   Additional
paid-in capital
    Accumulated
other
comprehensive
income
   Deficit
accumulated
during the
development
stage
    Total
stockholders’
equity
(deficiency)
 
     Shares    Amount          

Issuance (at $.02 per share) for acquisition of technology retroactively reduced for 18,000 shares returned and retired on October 1, 1995

   402,000    $ 40    $ 6,660     $ —      $ —       $ 6,700  

Issuance (at $.02 per share) for cash

   60,000      6      994       —          1,000  

Issuance (at $8.33 per share) for cash

   96,000      10      799,990       —        —         800,000  

Issuance as compensation (at $8.33 per share)

   3,900      —        32,500       —        —         32,500  

Issuance (at $16.67 per share) upon conversion of note payable

   12,000      2      199,998       —        —         200,000  

Issuance (at $25.00 per share) for cash, net of issuance costs of $4,086

   3,960      —        94,914       —        —         94,914  

Net loss

   —        —        —         —        (1,085,932 )     (1,085,932 )
                                           

Balance at December 31, 1993 (unaudited)

   577,860      58      1,135,056       —        (1,085,932 )     49,182  

Issuance (at $25.00 per share) for cash, net of issuance costs of $21,000

   11,880      1      275,999       —        —         276,000  

Issuance (at $25.00 per share) in lieu of finder’s fee

   840      —        21,000       —        —         21,000  

Issuance (at $25.00 per share) in lieu of finder’s fee

   600      —        15,000       —        —         15,000  

Issuance (at $25.00 per share) for cash, net of issuance costs of $41,844

   2998      —        33,126       —        —         33,126  

Net loss

   —        —        —         —        (467,683 )     (467,683 )
                                           

Balance at December 31, 1994 (unaudited)

   594,178      59      1,480,181       —        (1,553,615 )     (73,375 )

Issuance (at $25.00 per share) for cash, net of issuance costs of $46,976

   17,993      2      402,842       —        —         402,844  

Issuance (at $25.00 per share) in settlement of account payable

   725      —        18,123       —        —         18,123  

Issuance (at par value) as compensation for services related to prior issuances of common stock

   9,960      1      (1 )     —        —         —    

Issuance (at $25.00 per share) as compensation for services related to offering

   1,600      —        40,002       —        —         40,002  

Issuance (at $25.00 per share) of options for 54,000 shares as compensation for arranging bridge financing

   —        —        1,349,900       —        —         1,349,900  

Net loss

   —        —        —         —        (1,854,584 )     (1,854,584 )
                                           

Balance at December 31, 1995 (unaudited)

   624,456      62      3,291,047       —        (3,408,199 )     (117,090 )

Proceeds from initial public offering (at $54.17 per unit), net of issuance costs of $1,135,453

   126,852      13      5,735,664       —        —         5,735,677  

Sale of option to purchase 36,000 shares (at $25.00 per share)

   —        —        50,000       —        —         50,000  

Exercise of stock options (at $25.00 per share) for cash

   36,000      4      899,996       —        —         900,000  

Conversion of notes payable and related accrued interest (at $25.00 per share)

   10,322      1      258,044       —        —         258,045  

 

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Vyrex Corporation

(a development stage enterprise)

Statements of Changes in Stockholders’ Equity (Deficiency)

For the Period from January 2, 1991 (Inception)

through December 31, 2007

 

    

 

Common Stock

   Additional
paid-in capital
   Accumulated
other
comprehensive
income
   Deficit
accumulated
during the
development
stage
    Total
stockholders’
equity
(deficiency)
 
     Shares    Amount           

Exercise of stock options (at $.0019 per share) for cash

   54,000    5    95    —      —       100  

Issuance of units as compensation for legal services (at $37.92 per share)

   2,915    —      110,529    —      —       110,529  

Net loss

   —      —      —      —      (1,820,614 )   (1,820,614 )
                                

Balance at December 31, 1996 (unaudited)

   854,545    85    10,345,375    —      (5,228,813 )   5,116,647  

Exercise of warrants, 24 shares at $66.67 per share

   24    —      1,600    —      —       1,600  

Warrants issued in conjunction with debenture offering

   —      —      62,220    —      —       62,220  

Net loss

   —      —      —      —      (3,295,840 )   (3,295,840 )
                                

Balance at December 31, 1997 (unaudited)

   854,569    85    10,409,195    —      (8,524,653 )   1,884,627  

Issuance of stock as partial consideration for placement of debentures

   960    —      50,000    —      —       50,000  

Issuance of stock on conversion of debentures

   27,267    3    807,638    —      —       807,641  

Issuance of shares upon cashless exercise of stock options

   8,019    1    396,579    —      —       396,580  

Issuance of 45,000 stock options for services

   —      —      87,000    —      —       87,000  

Net loss

   —      —      —      —      (3,388,412 )   (3,388,412 )
                                

Balance at December 31, 1998 (unaudited)

   890,815    89    11,750,412    —      (11,913,065 )   (162,564 )

Issuance (at $2.83 per share) for cash

   14,329    1    40,599    —      —       40,600  

Issuance of 5,640 stock options for services

   —      —      6,580    —      —       6,580  

Issuance of 30,000 warrants for services

   —      —      30,500    —      —       30,500  

Net loss

   —      —         —      (788,548 )   (788,548 )
                                

Balance at December 31, 1999 (unaudited)

   905,144    90    11,828,091    —      (12,701,613 )   (873,432 )

Forgiveness of accrued compensation

   —      —      422,559    —      —       422,559  

Issuance (at $7.50 per share) for cash

   36,000    4    269,996    —      —       270,000  

Exercise of stock options (at $.83 per share) for cash

   30,000    3    24,997    —      —       25,000  

Exercise of warrants (at $.83 per share) for cash

   12,000    1    9,999    —      —       10,000  

Issuance (at $8.33 per share) for cash

   18,000    2    149,998    —      —       150,000  

Reduction of exercise price for options and warrants

         148,000    —      —       148,000  

Net loss

            —      (335,487 )   (335,487 )
                                

Balance at December 31, 2000 (unaudited)

   1,001,144    100    12,853,640    —      (13,037,100 )   (183,360 )

Issuance of 6,000 stock options for services

   —      —      18,500    —      —       18,500  

Issuance of 24,000 warrants for services

   —      —      50,000    —      —       50,000  

Net loss

   —      —      —      —      (202,185 )   (202,185 )
                                

Balance at December 31, 2001 (unaudited)

   1,001,144    100    12,922,140    —      (13,239,285 )   (317,045 )

 

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Vyrex Corporation

(a development stage enterprise)

Statement of Stockholders’ Equity (Deficiency)

For the Period from January 2, 1991 (Inception)

through December 31, 2007

 

    

 

Common Stock

   Additional
paid-in capital
   Accumulated
other
comprehensive
income
    Deficit
accumulated
during the
development
stage
    Total
stockholders’
equity
(deficiency)
 
     Shares    Amount          

Balance at December 31, 2001 (unaudited)

   1,001,144    $ 100    $ 12,922,140      $ (13,239,285 )   $ (317,045 )

Modification of stock options

           2,000          2,000  

Issuance of stock upon exercise of warrants at $.83 per share

   18,000      2      14,998          15,000  

Forgiveness of accrued compensation

           140,978          140,978  

Issuance of 2,400 warrants for services

           2,000          2,000  

Issuance of 600 warrants for services

           300          300  

Net loss

                (3,763 )     (3,763 )
                                           

Balance at December 31, 2002 (unaudited)

   1,019,144      102      13,082,416        (13,243,048 )     (160,530 )

Issuance of 12,000 warrants in connection with debt issuance

           6,000          6,000  

Net loss

                (90,540 )     (90,540 )
                                           

Balance at December 31, 2003 (unaudited)

   1,019,144      102      13,088,416        (13,333,588 )     (245,070 )

Forgiveness of accrued compensation

           26,071          26,071  

Net loss

                (37,800 )     (37,800 )

Effect of change in fair value of available-for-sale securities

            $ 12,231         12,231  
                     

Comprehensive loss

                  (25,569 )
                                           

Balance at December 31, 2004 (unaudited)

   1,019,144      102      13,114,487      12,231       (13,371,388 )     (244,568 )

Net loss

                (69,120 )     (69,120 )

Effect of change in fair value of available-for-sale securities

              3,515         3,515  
                     

Comprehensive loss

                  (65,605 )
                                           

Balance at December 31, 2005 (unaudited)

   1,019,144    $ 102    $ 13,114,487    $ 15,746     $ (13,440,508 )   $ (310,173 )

Net loss

                (92,885 )     (92,885 )

Effect of securities sold Dec 2006

              (15,746 )       (15,746 )

Comprehensive loss

                  (108,631 )
                                           

Balance at December 31, 2006

   1,019,144    $ 102    $ 13,114,487    $ —       $ (13,533,393 )   $ (418,804 )
                     

Net loss

                (92,939 )     (92,939 )
                     

Issuance of 25,000 warrants in connection with debt issuance

           14,986        $ 14,986  
                                           

Balance at December 31, 2007

   1,019,144    $ 102    $ 13,129,473    $ —       $ (13,626,332 )   $ (496,757 )
                                           

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

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Vyrex Corporation

(a development stage enterprise)

Statements of Cash Flows

For the years ended December 31, 2007 and 2006 and for the period

from January 2, 1991 (Date of Inception) through December 31, 2007 (Unaudited)

 

     Years ended
December 31,
    Cumulative
from Inception to
December 31, 2007
(unaudited)
 
   2007     2006    

Operating activities

      

Net loss

   $ (92,939 )   $ (92,885 )   $ (13,626,332 )

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

      

Depreciation, amortization and impairment charges

         336,329  

Accretion of debt discount

     14,986         20,986  

Interest receivable

         3,506  

Loss on disposal of fixed assets

         13,664  

Issuance of compensatory notes, stock, stock options and warrants

         2,302,512  

Gain on sale of available-for-sale securities

       (13,878 )     (13,878 )

Other income

         (4,434 )

Changes in operating assets and liabilities:

      

Accounts receivable and other assets

     (471 )     17,235       94,264  

Accounts payable and accrued liabilities

     95,828       55,688       805,272  
                        

Net cash provided by (used in) operating activities

     17,404       (33,840 )     (10,068,111 )
                        

Investing activities

      

Sale of available-for-sale securities

       18,311       18,311  

Purchase of short-term investments

         (8,440,442 )

Sale of short-term investments

         8,467,931  

Purchases of fixed assets

         (209,595 )

Proceeds on sale of fixed assets

         10,000  

Patent, trademark and copyright costs

         (133,519 )

Other assets, including notes receivable from related parties

         (4,202 )
                        

Net cash provided by (used in) investing activities

       18,311       (291,516 )
                        

Financing activities

      

Net proceeds from issuance of common stock

         7,889,808  

Exercise of stock options and sale of options

         975,100  

Exercise of warrants

         25,000  

Proceeds from short-term loan

         875,230  

Proceeds from notes payable

       17,000       808,114  

Repayment of notes payable

     (17,000 )       (209,500 )

Advances from potential investors

         100,000  

Repayment of advances

         (100,000 )
                        

Net cash provided by (used in) financing activities

     (17,000 )     17,000       10,363,752  
                        

Net increase in cash and cash equivalents

     404       1,471       4,125  

Cash and cash equivalents, beginning of period

     3,721       2,250       —    
                        

Cash and cash equivalents, end of period

   $ 4,125     $ 3,721     $ 4,125  
                        

Supplemental cash flow information

      

Forgiveness of debt

       $ 589,608  

Conversion of notes payable and related accrued interest

       $ 258,045  

Issuance of stock as consideration for conversion of debentures

       $ 857,641  

Issuance of stock upon cashless exercise of stock options

       $ 396,580  

Warrants issued in connection with convertible debentures and notes payable

       $ 68,220  

The accompanying notes are an integral part of these financial statements.

 

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Vyrex Corporation

(a development stage enterprise)

NOTES TO FINANCIAL STATEMENTS

NOTE 1—BASIS OF PRESENTATION AND THE COMPANY

Basis of Presentation

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America 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, 2007, the Company has an accumulated deficit of $13,626,332 and stockholders’ deficiency of $496,757. 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 potential inability of the Company to continue as a going concern.

The Company’s principal activities during 2007 involved seeking a merger partner for its public shell. The sought-after Merger occurred in February 2008. See Note 8 – “Subsequent Event.” The Company’s activities, both during its biotech phase and since the Merger, 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 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 in Nevada on January 2, 1991. Its initial biotech operations ceased in all material respects in October 2005. Since the February 2008 Merger, the Company’s primary focus has been to develop, commercialize and market the proprietary PowerVerde renewable energy power systems.

In October 2005, the Company reincorporated its domicile from Nevada to Delaware. The new Delaware Company had an authorized capitalization of 250,000,000 shares of capital stock, consisting of 200,000,000 shares of common stock, $0.0001 par value per share, and 50,000,000 shares of preferred stock, $0.0001 par value per share. Pursuant to the reincorporation merger agreement, the Delaware Company issued 12/100th of a share of common stock of the Delaware Company for each share of common stock of the Company outstanding as of the date of the merger, and the Delaware Company was the surviving corporation of the merger with the same board members as the Company.

As a result of the reincorporation transaction, the Company increased its authorized capital stock from 60,000,000 (50,000,000 of common stock and 10,000,000 of preferred stock) to 250,000,000 (200,000,000 of common stock and 50,000,000 of preferred stock), and the par value of the Company’s capital stock changed from $0.001 per share to $0.0001 per share.

The Company cannot assure that its current cash reserves and other resources will fund the business through at least December 31, 2008. The Company cannot assure that it will be able to continue the business through December 31, 2008 unless additional funds are received.

 

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NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Stock Options and Warrants

Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards 123 (revised 2004), ‘Share-Based Payments: (SFAS 123(R)’). The Company adopted SFAS 123(R) using the modified prospective basis. Under this method, compensation costs recognized beginning January 1, 2006 included in costs related to 1) all share-based payments granted prior to but not yet vested as of January 1, 2006, based on previously estimated grant-date fair values, and 2) all share-based payments granted subsequent to December 31, 2005 based on the grant-date fair value estimated in accordance with the provisions of SFAS 123 (R). The Company has used the Black-Scholes option pricing model to estimate the fair value of stock options granted subsequent to the date of adoption of SFAS 123(R).Options and warrants granted to consultants and other non-employees 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 or other agreements.

Revenue Recognition

Licensing and royalty revenue from royalty agreements is recognized in accordance with the terms of the specific agreement, which generally includes a quarterly minimum payment by the licensee.

Income Taxes

The Company accounts for income taxes pursuant to the asset and liability method which requires deferred income tax assets and liabilities to be computed for temporary differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in future periods based on enacted laws and rates applicable to the periods in which the temporary differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The income tax provision is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.

Accounting for Uncertainty in Income Taxes

We adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes- an interpretation of FASB Statement No. 109” (“FIN 48”), on January 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement 109, “Accounting for Income Taxes”, and prescribes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

Based on our evaluation, we have concluded that there are no significant uncertain tax positions requiring recognition in our financial statements. Our evaluation was performed for the tax years ended December 31, 2004, 2005 and 2006, the tax years which remain subject to examination by major tax jurisdictions as of December 31, 2007.

We may from time to time be assessed interest or penalties by major tax jurisdictions, although any such assessments historically have been minimal and immaterial to our financial results. In the event we have received an assessment for interest and/or penalties, it has been classified in the financial statements as selling, general and administrative expense.

Net Loss Per Share

Basic net loss per share is computed using the weighted-average number of common shares outstanding during the periods presented. Diluted earnings per share have not been presented because the assumed conversion of convertible notes payable and the exercise of the Company’s outstanding options and warrants would have been antidilutive. Options and warrants will have a dilutive effect only

 

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when the average market price of the common stock during the period exceeds the exercise price of the options or warrants. The number of shares potentially issuable at December 31, 2007 and 2006 upon the conversion or exercise that were not included in the computation of net loss per share totaled 264,275 and 276,875, respectively.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates.

Recent Accounting Developments

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141R (revised 2007), “Business Combinations” (“SFAS 141R”). SFAS 141R replaces SFAS 141 and establishes principles and requirements for how an acquirer recognizes and measures its financial statements in the identifiable assets acquired, including goodwill, the liabilities assumed and any non-controlling interest in the acquiree. SFAS 141R also establishes disclosure requirements to enable users of the financial statements to evaluate the nature and financial effects of the business combination. This statement is effective for fiscal years beginning after December 15, 2008. We are currently evaluating the impact the adoption of SFAS 141R will have on our financial position and results of operations.

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS 160”). SFAS 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS 160 also establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. This standard is effective for fiscal years beginning after December 15, 2008. We are currently evaluating the impact the adoption of SFAS 160 will have on our financial position and results of operations.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities . SFAS No. 159 permits entities to choose to measure eligible financial instruments at fair value. The unrealized gains and losses on items for which the fair value option has been elected should be reported in earnings. The decision to elect the fair value options is determined on an instrument by instrument basis, it should be applied to an entire instrument, and it is irrevocable. Assets and liabilities measured at fair value pursuant to the fair value option should be reported separately in the balance sheet from those instruments measured using another measurement attribute. SFAS No. 159 is effective as of the beginning of the first fiscal year that begins after November 15, 2007. The Company is currently analyzing the potential impact of adoption of SFAS No. 159 to its financial statements.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements , (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company does not anticipate that adoption of this standard will have a material impact on its financial statements.

 

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NOTE 3—WARRANTS

Activity with respect to warrants for the purchase of the Company’s common stock is summarized as follows:

 

     Warrants
Outstanding
   Exercise Price    Weighted
Average
Exercise Price

Balance at January 1, 2006

   12,000    $ 0.92    $ 0.92

Issued in 2006

   25,000    $ 0.87    $ 0.87

Balance at December 31, 2006

   37,000    $ 0.87 - $0.92    $ 0.89

Balance at December 31, 2007

   25,000    $ 0.87    $ 0.87

The 12,000 warrants issued prior to January 1, 2006 expired in 2007. The 25,000 warrants outstanding at December 31, 2007 will expire in October 2009.

NOTE 4—CONCENTRATION OF CREDIT RISK

Concentrations of credit risk with respect to accounts receivable are significant due to the Company only having one customer, although the payment terms are generally short. No write-offs have been initiated during the course of the contract.

NOTE 5—INCOME TAXES

At December 31, 2007, the Company had net operating loss carryforwards available to reduce future taxable income, if any, of approximately $16,285,911 and $3,969,755 for Federal and California income tax purposes, respectively; however, $3,313,914 of the net operating loss carryforwards for California expired in 2007. The Federal net operating loss begins to expire in 2011. The difference between the Federal and California tax loss carryforwards is primarily related to the expiration of California loss carryforwards. At December 31, 2007, the Company also had research and development credit carryforwards of approximately $486,000 and $250,000 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, 2007 and 2006 are as follows:

 

     2007     2006  

Net operating loss carryforwards

   $ 5,888,000     $ 6,134,000  

Research and development credit carryforwards

     736,000       736,000  

Other

     27,000       30,000  
                
     6,651,000       6,900,000  

Valuation allowance

     (6,651,000 )     (6,900,000 )
                
   $ —       $ —    
                

As the ultimate realization of the potential benefits of the Company’s net operating loss carryforwards is considered unlikely by management, the Company has offset the deferred tax assets attributable to those potential benefits through valuation allowances in 2007 and 2006 and, accordingly, the Company did not recognize any benefit from income taxes in the accompanying statements of operations to offset its pre-tax losses. The valuation allowance decreased by $249,000 as a result of the expiration of a portion of the net operating loss carryforwards.

NOTE 6—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 nonqualified stock options. Incentive stock options may be granted only to employees, while consultants, employees, officers and directors are eligible for the grant of nonqualified options. The total number of shares of common stock of the Company reserved and available for grant under the Plan is 465,000 shares.

 

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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 nonqualified 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. At December 31, 2007, a total of 264,275 stock options are exercisable.

Activity with respect to the stock option plan is summarized as follows:

 

     Stock
Options
Outstanding
    Option Exercise
Price
   Weighted-
Average
Exercise Price

Balance at January 1, 2006

   311,471        $ 11.04

Expired

   (34,596 )   $ 3.39 - $62.50    $ 3.39 - $62.50

Balance at December 31, 2006

   276,875        $ 10.73

Expired

   (12,600 )   $ 2.85 - $49.38    $ 3.39 - $62.50
           

Balance at December 31, 2007

   264,275        $ 9.40
           

Shares available for grant at December 31, 2007

   200,725       
           

The following is a further breakdown of the options outstanding as of December 31, 2007:

 

Range of Exercise Prices

   Outstanding
Options
   Weighted-
Average
Remaining
Life in Years
   Weighted-
Average
Exercise Price
   Options
Exercisable
   Weighted-
Average
Exercise Price
of Options
Exercisable

$  0.83 - $4.67

   216,000    3.83    $ 2.86    216,000    $ 2.86

     $25.00

   21,000    2.32      25.00    21,000      25.00

$47.92 - $50.00

   27,275    1.17      49.16    27,275      49.16
                  
   264,275    3.44      9.40    264,275      9.40
                            

NOTE 7—NOTES PAYABLE AND RELATED CONVERSION AND STOCK OPTIONS

At December 31, 2007, the Company had an outstanding note payable with a principal balance of $200,000 which bore interest at an annual rate of 10%. The note was collateralized by substantially all of the assets of the Company and was due on March 10, 2006. The investor had the option to convert the principal amount into Vyrex common shares at a price of $2.08 during the first year, $4.17 the second year and $6.25 the third year. Further in connection with the Promissory Note, the investor was issued warrants, exercisable within three years from the date of issuance, entitling the investor to purchase 12,000 Vyrex common shares at an exercise price of $0.917 per share. The Company determined the fair market value of these warrants were $0.50 per warrant utilizing the Black-Scholes option pricing model. The $6,000 was treated as a discount to the note and was accreted over the term of the loan. As further consideration for the loan, the Company agreed to amend the strike price terms of the right to convert the principal amount of the Promissory Note into Vyrex common shares from $4.17 to $2.08 the second year and from $6.25 to $4.17 the third year. In March of 2006 the private investor agreed to extend the note an additional six months to September 2006. The right to convert the principal amount into Vyrex Common Shares at a strike price of $4.17 in the third year was extended to September of 2006. In September of 2006, the private investor agreed to extend the note to March 2007. The right to convert the principal amount into Vyrex Corporation common shares at a strike price of $2.917 per share in the third year was extended to March 2007. The private investor was issued a warrant exercisable within three (3) years from the date of issuance entitling the Lender to purchase Vyrex Corporation common

 

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shares in the amount of twelve thousand (12,000) shares at an exercise price of $0.92 per share. Interest on the unpaid balance continued to accrue at the rate of 10% per year. In March of 2007, the private investor agreed to extend the maturity date of the note until June of 2007. The right to convert the principal amount into Vyrex Corporation common shares at a strike price of $2.917 per share in the third year was extended to June 2007. In July 2007 the private investor agreed to extend the maturity date of the principal sum of $200,000 to September 2007. The private investor had again agreed to extend the maturity date of the note together with all accrued interest from September 30, 2007 to March 31, 2008. The $200,000 note was paid in full pursuant to the issuance of 250,000 shares of the Company’s common stock immediately prior to the Merger.

During October 2006, the Company obtained a note from a private investor group to loan the Company $17,000. The note along with the accrued interest was due and payable at the time of Vyrex Corporation receipt of funds from a merger or acquisition or no later than one year from the date of the note. The note bears a rate of 10% interest per year. Further in connection with the Promissory Note warrants were issued in the total amount of 25,000, split equally between the partners, exercisable within three years from the date of issuance at an exercise price per share of $0.87. The Company determined the fair value of these warrants to be $14,986 ($0.60 per warrant) utilizing the Black-Scholes option pricing model. The warrants were recorded as an increase to additional paid-in-capital with a corresponding discount to the note payable to be accreted over the term of the loan. The note was paid in full during the fourth quarter 2007.

NOTE 8—SUBSEQUENT EVENT

On February 11, 2008, Vyrex Corporation (“Vyrex” or the “Company”), PowerVerde, Inc. (“PowerVerde”) and Vyrex Acquisition Corporation (“VAC”), a wholly-owned subsidiary of Vyrex, all Delaware corporations, entered into an Agreement and Plan of Merger (the “Merger Agreement”). Pursuant to the terms of the Merger Agreement, on February 12, 2008, VAC merged with and into PowerVerde, with PowerVerde remaining as the surviving corporation and a wholly-owned subsidiary of Vyrex (the “Merger”). As consideration for the Merger, as of the closing of the Merger, each issued and outstanding share of common stock of PowerVerde was converted into the right to receive 1.2053301 shares of the common stock of Vyrex and each share of VAC was converted into one share of PowerVerde common stock. As a result of the Merger, the former shareholders of PowerVerde hold 95% of the common stock of Vyrex. Pursuant to the Merger Agreement, PowerVerde paid $233,000 in accounts payable and other liabilities owed by Vyrex.

In addition, immediately prior to execution of the Merger Agreement, Vyrex paid a $200,000 promissory note through issuance of 250,000 shares of common stock and issued an additional 25,000 shares of common stock as payment for certain consulting and administrative services.

In connection with the Merger, all of the Company’s officers and directors resigned, and the following individuals were appointed to their respective positions set forth beside their names below:

 

Name

  

Title

    
George Konrad    President, Treasurer and Director   
Fred Barker    Vice President, Secretary and Director   
Richard H. Davis    Director   

The merger transaction will be accounted for as a recapitalization of Vyrex and the financial statements just subsequent to the merger transaction will consist of the historical balance sheet of both companies, the historical results of operations of Vyrex, and the operations of the legal parent, PowerVerde.

 

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Exhibit Index

 

Exhibit No.

  

Description

31.1

   Certification of the Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

   Certification of the Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

   Certification of the Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

   Certification of the Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002.