20FR12G/A 1 form_f-20.htm NERIUM BIOTECHNOLOGY 20FR12GA 9-30-2010 form_f-20.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 20-F
Pre-effective Amendment No. 2
 
x
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934 [Fee Required]
 
Commission File No. 000-54051
 
NERIUM BIOTECHNOLOGY, INC.
 
11467 Huebner Road, Suite 175, San Antonio, Texas, USA 78230
 
Dennis R. Knocke, President
Phone (210) 822-7908; Fax     (210) 561-0386
E-mail – dknocke@nerium.com
 
Securities registered or to be registered pursuant to Section 12(b) of the Act.       None
 
Securities registered or to be registered pursuant to Section 12(g) of the Act.       Common Stock
 
Securities for which there is a reporting obligation to Section 15(d) of the Act.     None
 
Indicate the numbers of outstanding shares of each of the issuers’ classes of capital or common stock as of September 30, 2010.
31,340,033
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes    o              No x
 
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes      o           No     o
 
Note-Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such 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      o            No     x
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12-2 of the Exchange Act        (Check one):
 
Large Accelerated Filer   o           Accelerated Filer   o             Non-Accelerated Filer     x
 
*Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
 
International Financial Reporting Standards as issued by the International Accounting Standards Board   o  Other    o
 
*If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
 
Item 17 x                                Item 18 o
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).             Yes   o         No   x
 
 
 
 
   
 
Page No.
   
Part I
   
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47
   
Part II
   
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Part III
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Certifications
  
 
 
2
 
 
The following is a glossary of terms used frequently throughout this prospectus and the summary hereof.
 
Abortifacients
A drug or other agent used to cause abortion.
Adjuvant therapy
A treatment method used in addition to the primary therapy.
Alpha 3 Marker
A specific receptor (chemical group or molecule, such as a protein) present on the cell surfaces of certain organs and tissues which has an “affinity” for a specific chemical group, molecule, or virus.
Angiogenesis
The formation of new blood vessels, which usually accompanies the growth of malignant tissue.
Antiviral
A substance or process that destroys a virus or suppresses its replication.
Anvirzel™
The Company’s lead product used in the treatment of cell proliferative disease (cancer).
Apoptosis
Also known as programmed cell death, is a form of cell death in which a programmed sequence of events leads to the destruction of cells without releasing harmful substances into the surrounding area.
Autophagy
A process involving the degradation of a cell’s own components.
bFGF
Basic fibroblast growth factor. When activated, it is hypothesized that bFGF mediates the formation of new blood vessels, a process also known as angiogenesis.
Board of Directors
The board of directors of the Company.
Canadian GAAP
Canadian generally accepted accounting principles.
Cardenolide
A type of steroid.
Cardiac Glycosides
Naturally occurring drugs whose actions include both beneficial and toxic effects on the heart.
Caspase
Enzymes which play an essential role in apoptosis.
CD4+
 
An immune system cell that has the ability to recognize a viral attack on a normal cell and mark such infected cell for “attack” by immune system “killer T cells”.
cGMP
Honduran “current Good Manufacturing Practices”.
Chemotherapy
The use of chemicals or drugs to treat disease; the term is typically used to refer to cancer treatment.
Company
Nerium Biotechnology, Inc.
Common Shares
The common shares in the capital of the Company.
 
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Cytochrome C
A protein present in mitochondrial membranes, it is important in the energy generation machinery of the cell. In addition, when cells are damaged as a result of apoptosis, the release of cytochrome c is a part of the cascade of reactions leading to programmed cell death.
Cytotoxic
Toxic to cells.
Digitalis
A drug that regulates the rate and strength of the heartbeat.
Emetics
Substances which induce vomiting.
Mitochondria
Parts of a cell where aerobic production (also called cell respiration) takes place.
Nerium oleander
See “Oleander”.
NF-kB
Proteins that are involved in the control of a large number of normal cellular and organismal processes, such as immune and inflammatory responses, developmental processes, cellular growth and apoptosis.
Oleander
An ornamental plant found natively in tropical and subtropical climates.
Oleandrin
A cardiac glycoside extracted from oleander.
Oxygen Free Radicals
An oxygen molecule that contains at least one unpaired electron and is hypothesized to be extremely reactive and damaging to body proteins and fats, and to DNA, the hereditary material of cells.
Phoenix Biotech, Ltd.
A British Virgin Islands corporation acquired by the Company in 2006.
Proliferative
To grow or multiply by quickly generating new tissue, parts or cells.
Radiotherapy
Also known as radiation therapy, it is the process by which high-energy radiation from x-rays, gamma rays, neutrons, and other sources are used to kill cancer cells and shrink tumors.
Sanitary Registers
A term used in most Latin American countries to represent the drug approval process by the health ministry for that country.
SEDAR
System for Electronic Document Analysis and Retrieval located at the following URL: http://www.sedar.com
Share Exchange Agreement
The agreement entered into between the Company and Phoenix Biotechnology Inc. whereby the Company acquired Phoenix Biotech, Ltd.
Therapeutic
The treatment, remediation, or cure of a disorder or disease.
Transduction
A process by which a cell converts one kind of signal or stimulus into another.
USFDA
United States Food and Drug Administration.
 
 
4
 
Part I
 
 
The following is a listing of the Company’s Directors, Senior Management, Advisors, and Auditors.
 
A.           DIRECTORS AND SENIOR MANAGEMENT.
 
1.      Directors:
 
Dennis R. Knocke, 11467 Huebner Road, Suite 175, San Antonio, TX 78230, USA
J. Peter Nettelfield, 11467 Huebner Road, Suite 175, San Antonio, TX 78230, USA
John F. O’Donnell, 500-220 Bay Street, Toronto, Ontario, M5J 2W4, Canada
Gustavo A. Ulloa, Jr., Colonia Florencia Sur, Tegucigalpa, Honduras
John C.C. Wansbrough, 333 Bloor Street East, Toronto, Ontario, M4W 1G9, Canada
Peter A. Leininger, MD, 11467 Huebner Road, Suite 175, San Antonio, TX 78230, USA
 
2.      Senior Management.
 
Dennis R, Knocke, President and CEO, 11467 Huebner Road, Suite 175, San Antonio, TX 78230
Joseph B. Nester, CFO, V.P. Operations, Secretary, and Treasurer, 11467 Huebner Road, Suite 175, San Antonio, TX 78230
 
B.           ADVISERS
 
1.      Bankers- Texas Capital Bank, 7373 Broadway, Suite 100, San Antonio, TX 78209
2.           Legal Advisors:  John F. O’Donnell, 500-220 Bay Street, Toronto, Ontario, M5J 2W4
Hank Vanderkam, 406 McGowen, Houston, TX 77006
 
C.           AUDITORS
 
 MSCM, LLP, Chartered Accountants, 701 Evans Ave, 8th Floor, Toronto, Ontario, M9C 1A3
 
 
The Company is only registering its outstanding shares.  The shares were previously registered in Canada (the Ontario Securities Commission) on November 26, 2008.  The Company is not raising any funds by means of this registration.
 
 
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A. SELECTED FINANCIAL DATA:   (In US$)
 
   
9 months
9-30-10
    
9 months
9-30-09
    
2009
    
2008
    
2007
     2006(A)  
    UNAUDITED                                          
Revenue
   $ 221,550     $ 296,771     $ 359,582     $ 395,226     $ 253,169     $ 207,030  
Loss from Operations
   $ 1,145,903     $ 937,287     ($ 1,302,269 )   ($ 1,448,431 )   ($ 1,104,165 )   ($ 212,124 )
Net Loss
   $ 1,145,594     $ 935,562     ($ 1,301,183 )   ($ 1,428,738 )   ($ 1,074,508 )   ($ 212,124 )
Net Loss Per Share (Basic & Diluted)
   $ 0.05     $ 0.03     $ (0.04 )   $ (0.05 )   $ (0.04 )   ($ 0.01 )
Number of Shares Outstanding
     31,340,033       30,314,568       30,369,568       30,515,156       29,110,046       25,910,046  
Total Assets
   $ 649,968     $ 995,683     $ 749,021     $ 1,394,365     $ 1,121,732     $ 410,605  
Total Liabilities
   $ 46,341     $ 36,612     $ 64,171     $ 173,178     $ 62,685     $ 22,741  
Shareholders’ Equity Capital
   $ 603,627     $ 959,071     $ 684,850     $ 1,221,187     $ 1,059,047     $ 387,864  
 
(A)
Operations for 2006 reflect activity from June 1, 2006 (date of incorporation) to December 31, 2006.
 
The Company has not declared or paid any dividends during the reporting periods noted above.
 
B.          CAPITALIZATION  AND INDEBTEDNESS
 
The Company’s capital consists of a single class of common stock.  The Company is authorized to issue an unlimited number of common shares.  The shares are no par shares.  The Company has no indebtedness other than accounts payable and accrued liabilities, all of which are unsecured.
 
C.          REASON FOR THE OFFER AND USE OF PROCEEDS.
 
The Company is not offering any additional shares for sale, but only registering its existing outstanding securities. Accordingly, the Company will receive no proceeds as a result of this registration.
 
The Company is registering the shares in the United States because they have already been registered in Canada and because a number of the shareholders are U.S. persons.
 
D.          RISK FACTORS RELATED TO THE COMPANY’S PRODUCTS
                      
Going Concern Opinion
Under United States reporting standards the Company’s auditors would likely issue a going concern opinion.
 
Anvirzel™ is Not a Cure for Cancer
Anvirzel™ is not a cure for cancer.  Anvirzel™ may or may not have the desired effect of inhibiting the growth of tumors or causing the elimination or reduction of tumors.   Effectiveness has not been demonstrated in clinical trials.
 
 
6
 
Lack of Approval in Major North American Markets
While Anvirzel™ has been approved for sale by the health ministry in Honduras (through the issuance of a Sanitary Register), neither Health Canada nor the USFDA have approved Anvirzel™ for use in Canada or the United States, respectively.  The Company has no intention to seek Health Canada or USFDA approval for Anvirzel™ (due to the impending five (5) year “phase out” of the drug, to be replaced with next generation drugs).
 
Outside of individual use, the granting of which is at the discretion of the respective agencies, sales of Anvirzel™ in the United States and Canada is limited, the result of which will be limited revenue from major North American markets.  The Company has no regulatory exemptions in either the US or Canada.
 
While the Company intends to seek Health Canada and USFDA approval for some of its developmental stage products, there can be no assurance that such approval will ever be granted.  Failure to receive such approval may have a material impact on revenue generation by the Company.
 
Use of Cardiac Glycosides May Cause Unwanted Side Effects
Possible side effects that may be associated with the administration of a cardiac glycoside, such as Anvirzel™, include allergic reaction, pain and increased sexual activity.  Such potential side effects may deter some patients from undergoing treatment with Anvirzel™.  The Company is not aware of any reports of life threatening side effects associated with the use of Anvirzel™.
 
Combining Therapeutic Dosages of Different Cardiac Glycoside Could Be Dangerous
Cardiac glycosides are well known to be toxic to humans. Overdosing of cardiac glycosides can lead to cardiac arrhythmia, cardiac toxicity and death.  Anvirzel™ contains cardiac glycosides in sub-therapeutic amounts. Clinical testing on humans and animals has demonstrated Anvirzel™ and its cardiac glycoside components are below toxic levels and are safe. However, when used in combination with other cardiac glycosides (such as digoxin) for congestive heart failure, Anvirzel™ may have a toxic effect due to the patient exceeding the maximum tolerated dosage for cardiac glycosides.
 
Positive Immune Response Not Independently Proven
Positive immune response after treatment with the Company’s antiviral drugs is based on evidence gathered from internal clinical trials and has not been verified by independent third parties. A positive immune response does not equal a cure.  There is no evidence that oleandrin has cured, or has the ability to cure, any viral-related diseases.  The Company does not claim that use of the antiviral drugs will cause a positive immune response.
 
Lack of Physician Acceptance
Physician education and acceptance of a medical product in the major markets is limited to scientific journals, news media, and experience with treating patients that have chosen to add alternative treatment to their therapies until a product is approved in their respective countries.  As Anvirzel™ has not been approved by either Health Canada or the USFDA, the ability for the Company to educate physicians as to the potential benefits of Anvirzel™ may be limited.
 
 
7
 
The Company’s Products, including Anvirzel™, May Become Obsolete
The biotechnology industry has been characterized by the frequent introduction of new products.  Accordingly, the Company may be adversely affected by the new products and technology developed by its competitors.  In addition, as the potential benefits of oleander extract enter the public domain, the Company’s competitors may seek to develop, on an expedited basis, products which compete with the Company’s products.  The Company is aware that Phoenix Biotechnology, Inc. currently has an oleander extract product in a Phase 1 clinical study at the M.D. Anderson Cancer Center, Houston, Texas.
 
The Company Intends to “Phase-Out” Anvirzel™
The Company expects to phase out the sale of Anvirzel™ within five (5) years as new products are developed, notwithstanding that Anvirzel™ is a current source of revenue for the Company.  There can be no assurances that the new product(s) intended to replace Anvirzel™ will generate comparable or increased revenues or be approved in major markets.
 
GENERAL RISK FACTORS
 
An investment in securities of the Company should be considered highly speculative due to the nature of the Company’s business and its stage of development and should be considered only by investors who can afford the total loss of their investment.
 
An investment in securities of the Company involves a significant degree of risk.  The risks related to the Company and its business includes the following:
Marketability
THERE IS NO MARKET FOR THE COMMON SHARES AND SHAREHOLDERS MAY NOT BE ABLE TO RESELL THEM.
 
Necessity for Additional Capital
The Company has limited cash and revenues.  The Company may need to raise further capital through the sale of additional equity capital to continue to implement its business plan.  The Company anticipates the need for $1,462,000 in additional capital to fully implement its business plan over the next twelve months.
 
Speculative Nature of Securities
There is no assurance that the Company will be successful in implementing its business plan. The Company has limited funds available to it and the only source of significant future funds presently available to the Company is through the sale of equity capital.  THE SHARES OF THE COMPANY ARE SPECULATIVE.
 
Currency Risk
The Company is exposed to currency risk as the Subsidiaries’ business is carried out in Honduran Lempira and the Company maintains Honduran Lempira denominated bank accounts but uses U.S. dollars as its reporting currency.  Unfavorable changes in the exchange rate between Honduran Lempira and U.S. dollars may materially affect the foreign exchange gain/losses.  The Company does not use derivative instruments to reduce its exposure to foreign currency risk.
 
 
8
 
Reliance on Key Personnel
The Company’s success depends, in large part, upon the continuing contributions of its key technical, marketing, sales and management personnel.  The loss of the service of several key people within a short period of time could have a material adverse effect upon the Company’s financial condition and operations.  The Company’s future success is also dependent upon its continuing ability to attract and retain other highly qualified personnel.  Competition for such personnel is intense, and the Company’s inability to attract and retain additional key employees could have a material adverse effect on the Company’s financial condition and operations.
 
Conflicts of Interest
The Company may, in the future, raise further funds through the sale of securities to other companies which may be associated with the directors or officers of the Company, and as such, the directors and officers of the Company may increase their ownership and/or control positions in the Company without an equal opportunity to participate in such financing being granted to the other shareholders.  Under certain circumstances, shareholder approval of such actions may be required. As certain directors and officers are involved with other companies, there may be potential conflicts of interest and they will only expend a limited amount of their time managing the affairs of the Company.
 
Limited Experience of Management
Most of the current officers and directors of the Company have limited experience with biotechnology companies.  There can be no assurance that management of the Company has, or will acquire, other skills that may be required to enable the Company to be profitable.
 
Dependence on Ability to Obtain Technical, Administrative and Sales Staff
The Company anticipates it will require more administrative, executive, scientific, engineering, manufacturing and marketing employees.  The Company has no binding arrangements to fulfill its staffing requirements and there is no assurance it will be able to successfully accomplish this requirement.  If the Company is not able to do so, it will diminish the Company’s ability to operate effectively.
 
The Company Operates in a Competitive Market Sector
The medical, drug and biotechnology businesses are highly competitive.  The Company and its products will be competing with various other manufacturers with existing technological support and acceptance in the same markets the Company will target.  Many of these other products are well-established, have substantial sales volume, and are produced and marketed by companies with much greater financial resources, facilities, organization and experience than the Company.  If the potential benefits of oleander extract enter the public domain, competitive companies with substantially more resources than the Company may try to develop products competitive with the Company’s products.
 
Intellectual Property Protection may be Uncertain
In respect of certain of its proprietary rights, the Company may need to secure licenses from third parties and/or assignments of rights from independent contractors. This is particularly applicable to intellectual property which may arise under sponsored research agreements with public universities. While no licensing agreements have been entered in to to-date, there is no assurance that the Company will secure the necessary licenses or assignments to execute on its business plan.  The loss of any proprietary rights which may be protected or protectable under any of the foregoing future intellectual property safeguards may result in the loss of a competitive advantage over present or potential competitors.
 
 
9
 
The Company has registered the mark Anvirzel™ in certain jurisdictions in Latin America and the Caribbean and plans to apply for additional protection as funds allow, but does not have the rights to use the mark in the United States and Canada.  Neither the Company nor its licensors have registered all of its trademarks or copyrights.  The Company may decide not to take additional steps to secure its rights in certain copyrights, trademarks and/or patents to which it may be entitled.  Failure to do so, in the case of copyrights and trademarks, may reduce the access of the Company to the courts, and to certain remedies of statutory damages and attorneys’ fees, to which it may be entitled in the event of a violation of the Company’s proprietary and intellectual rights by third parties.  Similarly, the failure to seek protections of any patentable materials to which the Company may be entitled may result in loss of patent protection should a third party copy the patentable technology or process.
 
The loss of any proprietary rights which are protectable under any of the foregoing intellectual property safeguards may result in the loss of a competitive advantage over present or potential competitors, with a resulting decrease in the profitability for the Company.  There is no guarantee that such a loss of competitive advantage could be remedied or overcome by the Company at a price which the Company would be willing or able to pay.
 
There has not been any action brought against the Company alleging intellectual property violations.
 
High Start-up and Operating Risks During Initial Operations
The Company will incur start-up losses during its development period and initial period of operations and will experience lower revenues and operating margins than an established company until the customer base grows to a more optimal operating level.  There can be no assurance that we will be able to achieve satisfactory operating results within the expected period of time or develop and have in operation sufficient level of employees to operate the facility.
 
The Company May Not Be Able to Successfully Develop its Current Product Line
Although the Company believes that Anvirzel™, HIviral and HEP-viral can be profitably developed and manufactured, there may be unanticipated technological, regulatory and marketing issues that may make the products unfeasible to produce or to market.  In addition, delays in the production and release testing of Anvirzel™ in the Company’s pharmaceutical clean room facilities can occur due to unforeseen development obstacles, some of which are beyond the Company’s control.  If the Company is unable to complete the products as planned, its revenue and earnings growth could be materially adversely affected.
 
Failure of Promotional Activities
Although there are certain expectations with respect to the projected results of promotion activities, particular promotions may not reach anticipated levels of success.  If early advertising and promotion is not successful, the likelihood of the Company expending all of its funds prior to the Company reaching a level of profitability will be increased.
 
The Company May Be Unable to Manage Rapid Growth
The Company’s business plan will, if successfully implemented, result in the rapid expansion of its business on a widespread basis.  Rapid expansion of the Company’s operations may place a significant strain on the Company’s management, financial and other resources.  The ability to manage future growth will depend upon the Company’s ability to monitor operations, control costs, maintain regulatory compliance, maintain effective quality controls and significantly expand internal management and technical, information and accounting systems, and to attract, assimilate and retain additional qualified personnel.
 
 
10
 
The Company does not carry Product Liability Insurance
Insurance carriers are currently reluctant to provide product liability insurance for biotechnology products due to the limited claims history for such products.  The Company has no plans to obtain such insurance and may be unable to secure product liability insurance, or be unable to secure such insurance except on terms unacceptable to the Company.  In the event of major product liability litigation or a major award against the Company during a time when the Company has no available insurance, the Company may sustain significant losses of its operating capital.
 
The Company is Subject to Extensive Regulation
The healthcare industry is subject to extensive regulation relating to licensure, conduct of operations, ownership of facilities, addition of facilities and services and prices for services.  Currently, the Company and many of its patients rely on regulatory guidance applicable to individual use importation of Anvirzel. (See Risk Factor, Lack of Approval in North America), on page 7 for a discussion of the regulatory guidelines for the importation of Anvirzel.
 
Each jurisdiction in which the Company may operate has its own regulatory scheme addressing the development, testing, labeling, manufacturing, registration, notification, clearance or approval, marketing, distribution, record-keeping and reporting requirements for human drugs.
 
While the Company currently has a  Sanitary Register issued by the Ministry of Health of the Republic of Honduras for  the manufacture, sale and distribution of Anvirzel™, HIviral and HEP-viral, as well as approvals for sale and distribution in the Republics of El Salvador and Guatemala for Anvirzel™, there can be no assurances that the Sanitary Register will be extended.
 
Rules and regulations governing the sales of pharmaceuticals are subject to the laws of the issuing countries, as well as the terms and conditions of international treaties.  Given that the Company’s operations take place only in Honduras, the Sanitary Register only shows approval under Honduran regulations for manufacturing, sale, and distribution in Honduras.  Additional regulatory approval may be required for some or all products developed by the Company if the Company expands operations to other jurisdictions.  Failure to achieve initial approval will require modification and redesign of the Company’s products or, at worst, elimination of the product.  The Company may not have the financial resources to modify its products or implement new designs.
 
Risks Applicable to Selling Products in Foreign Countries
Sales of products in foreign countries expose the Company to certain risks, including the difficulty and expense of maintaining foreign sales distribution channels, barriers to trade, potential fluctuations in foreign currency exchange rates, political and economic instability, availability of suitable export financing, accounts receivable collections, tariff regulations, foreign taxes, export licensing requirements and other foreign regulations that may apply to the export of its products.  In addition, the Company may experience difficulties in providing prompt and cost-effective service of its products in foreign countries.
 
 
11
 
 
CORPORATE STRUCTURE
 
Name and Incorporation
 
The Company was incorporated under the Canada Business Corporations Act by Articles of Incorporation on June 1, 2006.
 
The registered office of the Company is currently located at 500-220 Bay St., Toronto, Ontario M5J 2W4.
 
Mr. John F. O’Donnell, Esq. is the Company’s agent at this address.  The Company’s executive offices are located at 11467 Huebner Road, Suite 175, San Antonio, TX 78230. (1) The Company was incorporated to acquire Phoenix Biotech Ltd., a British Virgin Islands corporation, and its five majority owned Latin American subsidiaries, from Phoenix Biotechnology, Inc., a Texas corporation. Effective December 31, 2006, the Company entered into a Share Exchange Agreement (the “Share Exchange Agreement”) with Phoenix Biotechnology Inc. (“Phoenix US”), whereby the Company acquired a 100% ownership in Phoenix Biotech Ltd. (“Phoenix BVI”), which was incorporated in the British Virgin Islands on June 23, 2006, in exchange for the issuance of 22,610,045 common shares of the Company (“Common Shares”) to Phoenix US shareholders.  These shares are presently held in what is known as the Phoenix Biotechnology Trust, with Mr. Hank Vanderkam as trustee, until such time that they are distributed to the shareholders of Phoenix Biotechnology, Inc as beneficiaries of the Trust.  The Phoenix Biotechnology Trust has been and remains supportive of the corporate goals of the Company. (2) The Company now owns, indirectly, four Latin America corporations, collectively known as the Salud Integral Group, located in Honduras and El Salvador, which integrate the manufacturing, marketing, and sales of Anvirzel.
 
Phoenix BVI currently holds a majority ownership in four Latin American subsidiaries (collectively, the “Subsidiaries”), as follows:  99% ownership of Drogueria Salud Integral S. de R.L. (with the additional 1% being owned directly by the Company), 99.94% ownership of Salud Integral de C.V., 99.99% ownership of Farmacia Salud Integral, S. de R.L. and 91% ownership of Salud Integral de El Salvador LTDA. De. C.V.
 
Prior to the Share Exchange Agreement, Phoenix BVI and the Subsidiaries were controlled by Phoenix US.  Phoenix US and the Company are ultimately controlled by the same shareholders.
 
GENERAL DEVELOPMENT OF THE COMPANY’S BUSINESS
 
General
 
The Company is a biotechnology company involved in the development of oleander-based products for the treatment of certain forms of proliferative diseases, viral infections and skin conditions (See: “Table 1 – Products and Stages of Development”). Anvirzel™, the Company’s lead product, is an oleander extract-based botanical drug which contains cardiac glycosides. Anvirzel™ is used as an adjuvant (or, in some cases, stand-alone) agent in the treatment of certain types of cancer, and is manufactured and sold through the Company’s Latin American operations, based in Tegucigalpa, Honduras. Neither Health Canada nor the US FDA have approved Anvirzel™ for use in Canada or the United States.  The Company is only authorized to market Anvirzel™ in Honduras, El Salvador and Guatemala.
 
 
12
 
Anvirzel™ is not a cure for cancer and the Company does not intend to seek approval to market Anvirzel™ in the United States or Canada.  At this time, the Company intends to stop sales of Anvirzel™ within a five year period as another form of administration, preferably an oral route, is developed and approved for use.
 
According to a Non-Confidential Technology Description produced by the Office of Technology Development at The University of Texas M.D. Anderson Cancer Center located in Houston, Texas, entitled “Oleander Extracts with Potential Uses for Treating Cancer and Viral Infections,” one aspect of anticancer research is the search for novel, safe, and effective compounds from plants that have therapeutic potential. One such plant may be Nerium oleander, an ornamental plant found natively in tropical and subtropical climates. Extracts may possibly be used as an anticancer therapeutic, as well as an antiviral agent.
 
Scientists at M. D. Anderson Cancer Center are investigating oleander extracts as potential anticancer therapeutics. An extract of oleander such as Phoenix Biotechnology, Inc.’s investigational drug product PBI-05204 which contains oleandrin has shown promise in the treatment of certain types of tumors in certain species, including humans. Previous research using Anvirzel™ or pure oleandrin has resulted in numerous peer-reviewed scientific articles having been published.
 
The Company has a Sponsored Research Agreement with scientists at M.D. Anderson Cancer Center’s Virology and Gene Therapy Program to perform research into the use of oleander extract in the treatment of AIDS and HIV.  The initial step was to document response in a Petri dish (in-vitro).  Those results were positive and have lead to the next step; that being to study the effect, if any, in a large animal (monkey) model.  If that step is positive, the third step will be to enter into a clinical human study.
 
The Company has experienced net losses in every quarter over the last two years and would have likely received a going concern opinion from the independent auditors had the quarterly financial reports been audited and prepared pursuant to United States reporting standards.
 
DESCRIPTION OF THE BUSINESS OF THE COMPANY
 
Stated Business Objectives or Overview
 
The Company is involved in the research, development, manufacture and sale of oleander extract-based products for the treatment of certain types of cancers, viral infections and skin ailments.  The Company is focusing its research efforts as follows:
 
 
1.
To develop products which conform with the new paradigm for the socially responsible approach to the treatment of cancer as described by the National Cancer Institute.  The new paradigm seeks to develop therapeutic agents and treatment regimens that will enable physicians to eventually deal with cancer as a chronic condition rather than an acute condition and enable patients to live extended lives with a high or improved quality of life;
 
 
13
 
 
2.
To develop products for use in the treatment of certain forms of viral infections; and
 
3.
To develop dermal cream products (both cosmetic and non-cosmetic) for the treatment of various skin conditions.
 
(See: “Table 1 – Products and Stages of Development”)
 
In connection with its research and development activities, the Company plans to continue to engage third party consultants and research facilities to assist the Company in gathering additional clinical data on the use of oleander extract as a medicinal tool and also to facilitate human clinical trials for new products.
 
History of Cardiac Glycosides Use
 
The use of plants such as Nerium oleander containing cardiac glycosides for medicinal purposes has been reported in ancient texts for more than 1,500 years. They have been used traditionally as arrow poisons, abortifacients, emetics, diuretics and heart tonics.   Despite their potential to cause side effects, application of plants containing cardiac glycosides for treatment of malignant disease may extend back to Arab physicians in the 8th century. The potential use of cardenolide-like compounds for the treatment of cancer was initially investigated forty years ago.  However, such use was abandoned because of the toxicity of these compounds. It was only recently that Scandinavian oncologists such as J. Haux have suggested that the apoptosis (cell death) produced by cardiac glycosides such as digitalis in human tumor cells occurred at concentrations that could be achieved without toxicity in humans and therefore, this agent and plant extracts containing related cardiac glycosides (e.g. oleandrin from Nerium oleander) may be useful in the treatment of cancer.
 
Within the past ten years there has been a substantial increase in the number of studies reported in peer-reviewed science journals that deal with the effects of cardiac glycosides on the growth of human malignant tumor cells. It is now recognized that certain cardiac glycosides are involved in complex cell signal transduction mechanisms that may have important consequences in their application to the prevention and/or treatment of malignant diseases. Thus, it is reasonable to bring this history of the use of plant extracts containing cardiac glycosides to the point of clinical tests in patients with cancer.
 
To date, however, there is only a single plant extract containing cardiac glycosides that has been developed for treatment of solid tumor types of cancer and completed testing for dosage and safety in a USFDA Phase 1 Clinical Trial in the United States. This product is Anvirzel™, a hot-water extract of the Nerium oleander plant that is approved for use in Honduras, El Salvador and Guatemala.  In those jurisdictions where it is approved, Anvirzel™ is intended to be used as either a standalone treatment or as an adjuvant therapy in combination with other approved cancer treatments.
 
 
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The published conclusion of the Phase 1 Clinical Trial, which focused on dosage and safety and was conducted at the Cleveland Clinic in Cleveland, Ohio, concluded that:  “Anvirzel™ can be safely administered at doses up to 1.2ml/m2/d (2.4cc). No dose limiting toxicities were found.”  For a product to be approved for sale in the United States, a new drug must pass all three FDA-mandated clinical trials.  At this time, the Company has no intention of proceeding past the Phase 1 Clinical Trial as it believes that new product development will allow it to market products with higher concentrations of oleandrin and better routes of administration. It is therefore the intention of the Company to continue with development of new oleandrin-based products and, if such products are shown to be as or more effective than Anvirzel™, commence the FDA approval process (being commencement of the three clinical trial phases) for such new products.  As such, it is not the intention of the Company to ever apply to have Anvirzel™ approved for sale in the United States or Canada and one should not expect any USFDA or Health Canada approval for Anvirzel™.  The Company expects to phase out the sale of Anvirzel™ within a five (5) year time frame as new products are developed.
 
(IMAGE)
 
Structure of Oleandrin
 
General Manufacturing Process
 
Starting with its U.S.-based, environmentally responsible and earth-friendly farming operations, fields of organically grown Nerium oleander plants provide the raw material for the Company’s botanical extracts. The Company owns 5,000 Nerium oleander plants grown in D’Hanis, Texas, with the capacity to provide a renewable biomass for an estimated 20,000 patients annually.
 
The Company utilizes a proprietary method of grinding the Nerium oleander leaves to process the plants into the biomass used for manufacturing of its products. The Company’s wholly-owned subsidiary, Droguería Salud Integral, has a manufacturing facility in Tegucigalpa, Honduras, that operates under Honduran “current Good Manufacturing Practices” (cGMP) standards and is inspected by the Honduran health ministry to confirm compliance with such standards.  Droguería Salud Integral is located inside the pharmaceutical manufacturing plant of Francelia Laboratories, whose cGMP clean room is fully operational and is currently producing Anvirzel™.
 
 
15
 
Quality controls are maintained at each step of production.  Testing for oleandrin concentration, pH levels and pesticide contamination occur not only in the field where the Nerium oleander plants are grown, but also during the manufacture process.  Finally, all finished product is release-tested a third time at facilities located in the United States.
 
The Company currently has three products approved to market in Honduras, El Salvador and Guatemala and numerous products under development (See: “Table 1 –Products and Stages of Development”).  Current marketable products include Anvirzel™ (intramuscular injection), HIviral (intramuscular injection) and HEP-viral (intramuscular injection).  A description of such products is set out below.
 
Anvirzel™ (intramuscular injection)
 
General
 
 Anvirzel™, the Company’s lead product, is a patented botanical drug derived from the ornamental plant Nerium oleander and is approved as a treatment in those suffering from cancer in Honduras, El Salvador and Guatemala.  The Honduran Sanitary Registry of Anvirzel™, which makes it a legal prescription drug in Honduras, was initially based primarily on the anecdotal efficacy as noted in the Compassionate Use IND # 56,826 which was granted by the USFDA on September 24, 1998 to Ozel Pharaceuticals, Inc.  Of secondary importance at that time were the historical use of Anvirzel™ by Dr. Kelly in Ireland and the manufacturing of the product by TexTract Labs, Inc. (unrelated to the Company) in San Antonio.  As the Sanitary Registry has been renewed every five years, the most recent being May 2006, the safety established in the Phase 1 clinical study at The Cleveland Clinic, as well as the multitude of anecdotal use by patients through the Salud Integral Clinic has further contributed to acceptance.  In time, manufacturing was also changed from the US-based company to a Honduran Health Ministry inspected and approved facility in Honduras. No specific clinical trials have been required to be performed in Honduras as a part of the initial or renewal process and the efficiency was not tested in clinical trials in connection with obtaining the initial approval and subsequent renewals by the Honduran Health Ministry. The Health Ministry has allowed the Company to rely on the result of the Phase 1 clinical study performed by an unrelated company which was the initial manufacturer of the drug product.  Sanitary Registry was automatic in El Salvador and Guatemala by treaty upon approval in Honduras.
 
Nerium oleander is a highly toxic plant which contains oleandrin, a cardiac glycoside (a naturally occurring drug which can have both beneficial and toxic effects on the heart).   The effects of cardiac glycosides are well known to be toxic to humans. Overdosing of cardiac glycosides can lead to cardiac arrhythmia, cardiac toxicity and death.  Anvirzel™ contains cardiac glycosides in sub-therapeutic amounts. Clinical testing on humans and animals has demonstrated Anvirzel™ and its cardiac glycoside components are below toxic levels and are safe. However, when used in combination with other cardiac glycosides (such as digoxin) for congestive heart failure, Anvirzel™ may have a toxic effect due to the patient exceeding the maximum tolerated dosage for cardiac glycosides.
 
 
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Numerous industry-commissioned studies1 have shown that oleandrin, the principal cytotoxic component of Anvirzel™, inhibits the growth of certain tumors, blocks tumor cell survival and induces autophagy and/or apoptosis (programmed cell death) in certain tumors, without effecting normal cells2.  Specifically, those tumors which contain the “alpha 3” marker3 appear, through laboratory studies, to respond more favorably to treatment by drugs containing oleandrin (such as Anvirzel™).  In those tumors where Anvirzel™ has induced a favorable response, oleandrin has been shown to inhibit the release of bFGF from tumors4. bFGF is known as a tumor growth factor, insofar as it is responsible for the formation of new blood vessels which “feed” the tumor.  Inhibiting the release of bFGF essentially restricts the food supply to the tumor, thereby causing the death of tumor cells.  Oleandrin was also shown to produce oxygen free-radicals in tumor cells as well as block the activation of NF-kB, both of which blocks the tumor cell-survival functions and contributes to cell injury and death. Oleandrin is also able to penetrate through the protective barrier that surrounds the brain and prevents entry to many chemicals (including many traditional chemotherapy agents) and, as such, has been shown to cross the “blood-brain-barrier”5.
 
For those tumors which do not contain the “alpha 3” marker, the response to treatment with oleandrin was limited.
 
It should be noted Anvirzel™ is not a cure for cancer.  Anvirzel™ may or may not have the desired effect of inhibiting the growth of tumors or causing the elimination or reduction of tumors.   Effectiveness not only depends on the stage of cancer progression (with earlier treatment showing more favourable responses), but also whether, as the Company has hypothesized (based on laboratory studies), the solid tumor exhibits the “alpha 3” marker described above.  The Company plans to market Anvirzel™, and currently markets Anvirzel™, as an adjuvant therapy for use in combination with standard chemotherapeutic agents and radiotherapy.   It is an additional “agent” to be used in the fight against cancer (although certain patients have used Anvirzel™ as a stand-alone treatment). The Company also markets Anvirzel™ for use in immune system support.  Most traditional chemotherapeutic agents severely depress the ability of the body to generate white blood cells, which in turn leaves the patient’s immune system weakened and vulnerable.  Clinical evidence garnered from patient case studies suggest that Anvirzel™ may help support the immune system “attack” by traditional chemotherapeutic agents by increasing immune system response and mitigating some of the potential side effects from traditional routes of chemotherapy.  However, such evidence is anecdotal in nature and not yet proven by clinical trials.
 
1 The discussion related to the principal component of Nerium oleander and the mechanisms by which oleandrin have been shown to have an effect on certain tumors is supported through research performed by The University of Texas M. D. Anderson Cancer Center at the Pharmaceutical Development Center of that institution, and led by Dr. Robert A. Newman as Chief Investigator.  Such research has led to the publication of eleven peer-reviewed journal articles that describe Anvirzel™ (oleander extract) and its components (oleandrin).
 
2 Anti-Cancer Drugs, 2000, 11, pp. 455-463 “Anvirzel, an extract of Nerium oleander, induces cell death in human but not murine cancer cells”.

3 Submitted to: Molecular Cancer Therapies in early 2008; Yang, P.; Newman, R.A., et al., Oleandrin mediated Inhibition of Human Tumor Cell Proliferation: Importance of Na, K-ATPase a Subunits as Drug Targets.  Pending  publication.

4 Cancer Letters, 2002, 185, 145-151 “Enhancement of radiotherapy by oleandrin is a caspase-3 dependent process”.

5 Journal of Experimental Therapeutics and Oncology, 2002 “Murine pharmacokinetics and metabolism of oleandrin, a cytotoxic component of Nerium oleander”.
 
 
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Possible Side Effects
 
Possible side effects that may be associated with the administration of a cardiac glycoside, such as Anvirzel™, include the following:
 
 
1.
Cardiac arrhythmia, cardiac toxicity and death if used in combination with other cardiac glycosides;
 
 
2.
Allergic reaction consisting of itching or flaking skin (which can be treated with antihistamines or cortisones);
 
 
3.
Injection site pain;
 
 
4.
Pain in the breast glands; and
 
 
5.
Increased sexual activity.
 
As studies have not been conducted with respect to the safety of Anvirzel™ when administered to children, pregnant women or nursing mothers, pediatric use, as well as use by pregnant women and nursing mothers should be avoided.
 
Phase 1 Clinical Trial and Approval for Sale in the United States
 
A United States Food and Drug Administration (“USFDA”) mandated Phase I Clinical Trial entitled “Phase I Study of Anvirzel™ in Patients with Advanced Solid Tumors” was conducted by The Cleveland Clinic Foundation, Cleveland, OH, with Dr. Ronald Buckowski, Principal Investigator.  The endpoints of this trial were to determine safety and dosage only. The conclusion was presented to the American Society of Clinical Oncology in 2001 and stated: “Anvirzel™ can be safely administered at doses up to 1.2ml/m2/d.  No dose limiting toxicities were found”.
 
For a product to be approved for sale in the United States, a new drug must pass all three FDA-mandated clinical trials.  At this time, the Company has no intention of proceeding past the Phase 1 Clinical Trial as it believes that new product development will allow it to market products with higher concentrations of oleandrin and better routes of administration. It is therefore the intention of the Company to continue with development of new oleandrin-based products and, if such products are shown to be as or more effective than Anvirzel™, commence the FDA approval process (being commencement of the three clinical trial phases) for such new products.  As such, it is not the intention of the Company to ever apply to have Anvirzel™ approved for sale in the United States or Canada and one should not expect any USFDA or Health Canada approval for Anvirzel™.  The Company expects to phase out the sale of Anvirzel™ within a five (5) year time frame as new products are developed.
 
 
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Route of Administration
 
At the present time, Anvirzel™ is administered by intramuscular injection, a potential side effect of which is injection site pain.  The Company is currently transitioning from the marketing of Anvirzel™ as a therapeutic agent administered by intramuscular injection to the development and marketing of oleander-based products that are administered orally.  The Company believes that its anecdotal data gathered from people taking oleander extracts sublingually, together with data being compiled by Phoenix Biotechnology, Inc. in its Phase 1 study currently underway at M.D. Anderson Cancer Center in which an oral route of administration is utilized and a pilot study conducted by the Company in which blood level markers were compared between oral and intramuscular injection routes has demonstrated that an effective oral route of administration for oleander-based therapeutic agents is feasible.
 
HIviral and HEP-viral (intramuscular injection)
 
General
 
In addition to AnvirzelTM, the Company currently has two other marketable products in Honduras, El Salvador and Guatemala; HIviral and HEP-viral. Evidence suggests that oleandrin and oleander extract may have antiviral activity as there were positive immune responses in those patients who participated in the clinical trials in Honduras.
 
In June of 2007, both HIviral and HEP-viral were granted Sanitary Registers by the Health Ministry of the Republic of Honduras: HIviral for use as an adjuvant therapy in the treatment of HIV/AIDS and HEP-viral for use as an adjuvant therapy in the treatment of hepatitis C.   Notwithstanding the granting of the Sanitary Registers, there is no published evidence that oleandrin (the principal medicinal ingredient of both HIViral and HEP-viral) has cured, or has the ability to cure, any viral-related diseases.  Evidence from internal clinical trials has been limited to indicating positive immune response from a vast majority of trial participants through an increase in CD4+ cell counts.   Such evidence suggests that oleandrin and oleander extract may have antiviral activity as there were positive immune responses in those patients who participated in the clinical trials.  It is important to note that a positive immune response does not equal a cure.  The evidence has simply shown that oleandrin may increase immune system support to attacks from such viruses.
 
Possible Side Effects
 
Possible side effects that may be associated with the administration of a cardiac glycoside, such as HIviral or HEP-viral, include the following:
 
 
1.
Cardiac arrhythmia, cardiac toxicity and death if used in combination with other cardiac glycosides;
 
 
2.
Allergic reaction consisting of itching or flaking skin (which can be treated with antihistamines or cortisones);
 
 
3.
Injection site pain;
 
 
4.
Pain in the breast glands; and
 
 
5.
Increased sexual activity.
 
 
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As studies have not been conducted with respect to the safety of HIviral or HEP-viral when administered to children, pregnant women or nursing mothers, pediatric use, as well as use by pregnant women and nursing mothers should be avoided.
 
Route of Administration
 
At the present time, both HIviral and HEP-Viral are administered by intramuscular injection, a potential side effect of which is injection site pain.  The Company is currently refining both HIviral and HEP-viral to, among other things, be administered orally.
 
The Company’s Development Stage Product Line
 
Anvirzel™, HIviral AND HEP-viral (oral route of administration)
 
The Company has been, and continues to focus efforts on refining its existing three products to, among other things, provide for an oral route of administration (an example being a pill which dissolves under the tongue and provides at least the same pharmacological effect as a similar product being administered via intramuscular injection).  The Company expects that all such product refinements will be complete with marketable products available for sale in 2010 (See: “Table 1 – Products and Stages of Development” for product status).  Other refinements to existing products being undertaken by the Company include improved methods to extract higher concentrations of oleandrin from the Nerium oleander plant.
 
Dermal Creams
 
Oleander-based dermal creams for age spots, acne and sun-damaged skin are currently under development.  To date, animal studies and human studies have been completed for the first generation of dermal cream (targeting age spots). (See: “Table 1 – Products and Stages of Development”).  As the first generation of dermal cream will be for the neutraceutical (cosmetic) market, no USFDA approval is required to market and sell the product into the United States (although Federal Trade Commission marketing guidelines must be adhered to) and therefore the Company is not required to conduct any USFDA-mandated clinical trials.   The Company has begun selling the first generation dermal cream (targeting age spots) in the United States and anticipates marketing it in Canada by the end of 2011.
 
In 2011, the Company expects to commence a Phase 1 Clinical Trial in the United States to determine dosage and safety for the new successive generations of dermal creams intended for use in the treatment of a variety of skin ailments, including basal and squamous cell carcinomas (two prevalent forms of skin cancer).  As opposed to the first generation of dermal cream which is intended for the cosmetic market, successive generations may be therapeutic in nature and will therefore require USFDA approval.  While the Company expects the new product to pass the Phase 1 Safety Clinical Trial because the first generation cream has thus far appeared safe in a small animal study and pilot human studies in which no oleandrin was found in the blood samples taken, no assurance can be made that the new dermal cream will pass such trial, or any subsequent trials.  To date, the Company has not submitted an Investigational New Drug Application to the USFDA.
 
 
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Table 1 – Products and Stages of Development
 
Stages of development as defined by Charles Rivers Laboratories International, Inc., include:
 
1.
Basic Research (“Stage 1”) - Stage 1 consists of determining how therapies work in living systems as well as which cellular and genetic targets are associated with a certain disease.
 
2.
Discovery (“Stage 2”) – Stage 2 consists of identifying compounds that show the most promise as safe and effective therapeutics, and screens for unsafe, poorly absorbed products and those which show a lack of pharmacological activity.
 
3.
Safety Assessment (“Stage 3”) – Stage 3 consists of providing evidence of safe biological activity prior to initiating human studies.
 
4.
Early-Phase Clinical Trials (“Stage 4”) – Stage 4 consists of an initial limited scope clinical human study aimed at confirming product efficacy in humans.  Early-Phase Clinical Trials typically contain a high level of clinical oversight to help ensure human safety.
 
5.
Late-Phase Clinical Trials (“Stage 5”) – Stage 5 consists of expanding the scope of the Stage 4 clinical trial in an attempt to further determine product effectiveness and safety.
 
6.
Process Manufacturing Support Stage (“Stage 6”) – Stage 6 consists of confirming a safe, cost effective and reproducible form of product manufacturing.
 
 
Product
  
Stage of Development
  
Funds expended
to date
    
Planned Development
 
                 
 
Anvirzel™ (intramuscular injection)
  
Completed*
   $ 440,040    
No future development to be undertaken.
                   
 
HIviral™ (intramuscular injection)
  
Completed*
   $ 88,005    
No future development to be undertaken.
                   
 
HEP-viral™ (intramuscular injection)
  
Completed*
   $ 55,005    
No future development to be undertaken.
                   
 
Anvirzel™ (oral route of administration)**
  
Stages 1 through 4 are 100% complete. An outside contractor will  complete Stages 5 and 6.*
 
   $ 46,000    
The Company expects that $60,000 of additional funding for 2011 will be required to complete the development (through finalization of Stages 5 and 6) to have a marketable product.
 
Completion Date:  June 30, 2011
 
 
 
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First Generation Dermal Cream
  
All stages are now complete.*
   $ 135,300    
Product has been provided to shareholders
 
 
 
                   
 
Second Generation Dermal Cream
  
Stages 1 through 4 are complete.  Minor Stage 5 (Late Phase Clinical Trial) and Stage 6 (Process Manufacturing Support) work to be completed.*
   $ 149,956    
The basic dermal cream has now been developed. Finalization of the formulation is underway for the second generation (anti-wrinkle)
 
Completion Date: March 31, 2011
                   
 
Cold Sore Serum
  
All stages are now completed.*
   $ 60,057    
Product has been provided to shareholders.
 
 
                   
 
HIviral
(refinement and oral route of administration)**
  
Stages 1, 2, 5 and 6 are complete.  Stage 3 (Early Phase Clinical Trial) and Stage 4 (Late Phase Clinical Trial) studies continue to determine efficacy of refined product.   The intent of both remaining trials is to ascertain whether prior human clinical study observations and conclusions on product efficacy can be proven in clinical trials. A small animal (monkey) study to attempt to reproduce results of prior human study  began in Q4, 2010.*
 
   $ 155,475    
Further development, other than that identified under “Stages of Development”, includes preparation and approval of a product label.  The Company expects that approximately $142,000 in additional funds for 2011 will be required to complete full refinement of the product.
 
Completion Date:  June 30, 2011
 
 
 
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Hep-viral
(refinement and oral route of administration)**
  
Stages 1, 2, 5 and 6 are complete.  Stage 3 (Early Phase Clinical Trial) and Stage 4 (Late Phase Clinical Trial) studies continue to determine efficacy of refined product.   The intent of both remaining trials is to ascertain whether prior human clinical study observations and conclusions on product efficacy can be proven in clinical trials.*
 
  
No funds have been specifically committed nor spent as data from HIviral (refinement and oral route of administration) study has been used to date.
    
Further development, other than that identified under “Stages of Development”, includes preparation and approval of a product label.  The Company does not have any additional funds committed during 2011.
 
Completion Date:  Unknown
 
                   
 
*When used herein, “Completed” means that the product is fully developed and available for sale in those countries for which regulatory approval has been obtained (Honduras, El Salvador, and Guatemala).  “Complete” means that the process step has either been performed or is not required in the regulatory jurisdiction of Honduras.. The Company does not claim to have completed any stages required by the US FDA or Health Canada.

**The Company has already received Sanitary Registers for each of Anvirzel™ (intramuscular injection), HIviral (intramuscular injection) and Hep-viral (intramuscular injection) and currently has marketable products. The Company also has Sanitary Registers allowing for the administration of each of the foregoing through a sublingual (under the tongue) route of administration.  However, the Company is in the process of refining each of Anvirzel™, HIviral and Hep-viral to provide for, among other things, an oral route of administration (as opposed to intramuscular injection).
 
 
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Growth Strategy Target Markets

Cancer

The growth strategy of the Company and its long term projects (for which no funds have yet been specifically allocated) will focus on continuing research to identify new science in the use of oleander extract and its components (oleandrin), including how to manufacture products containing higher concentrations of oleandrin.  This research, as well as other phyto (plant) based research, will include, with respect to the treatment of cancer, identification of tumor lines that Anvirzel™ and its components may have activity against, methods for specific targeting of tumor cells, and alternate routes of administration.  The Company also intends to investigate and develop the data necessary for trials to support the data sets gathered from cancer patients using Anvirzel™ and its components that indicate (solely through patient responses and not through clinical trials) an increase in the quality of life of those patients using Anvirzel™ and its components either as monotherapy or as adjuvant therapy with traditional chemotherapeutic agents and/or radiotherapy.  It is important to note that while patients using Anvirzel™ have reported an increase in their quality of life (through reports of more energy, less nausea, etc.), evidence of any such quality of life improvement is anecdotal in nature.  The Company and its medical advisors have hypothesized that Anvirzel™ has mitigated some of the harmful side effects of traditional chemotherapy treatment by increasing immune system response in patients, although such hypothesis has not yet been proven.

In what the Company believes is a unique strategy, it’s current  marketing plan for Honduras, El Salvador and Guatemala, is to encourage the use of Anvirzel™ and its components as a non-competitive therapy for cell proliferative disease (cancer). Traditional chemotherapeutic agents as well as radiotherapy currently dominate the oncological products market.  The Company believes that it can market Anvirzel™ as a product that does not compete with the traditional chemotherapeutic agents, but as an agent that may enhance the effects of those traditional agents, contribute to cancer treatment (depending on the type of cancer and nature of the tumor involved), as well as potentially reduce the toxic side effects of certain chemotherapeutic agents.  Anvirzel™ is viewed by the Company as an additional “weapon” to be used in the variety of chemotherapeutic protocols prescribed to many cancer patients.  While Anvirzel™ is not a cure for cancer, and while it may or may not have the desired effect of inhibiting the growth of tumors or causing the elimination or reduction of tumors, given its limited toxicity (except when used in conjunction with other cardiac glycosides), the Company believes that there is no reason why Anvirzel™ cannot be used in the fight against cancer.  The Company believes that this strategy, namely marketing Anvirzel™ as an adjuvant therapy, places it in a unique marketing position that will meet with less market entry resistance from those companies that already have a significant share of the oncological products market.
 
Currently, the Company provides all of its services from its base of operations in Tegucigalpa, Honduras, since Anvirzel™ is approved for sale in Honduras, El Salvador, and Guatemala.  The Company currently serves the citizens of Honduras and the citizens of various nations including the United States that permit importation of Anvirzel™ whether by individual use exemptions, compassionate use exemptions, or other regulatory exemptions.  Therefore, the Company’s target market includes the residents of Honduras, El Salvador, Guatemala, and individuals who contact our facility in Honduras to receive treatment for cancer and viral disease.  Currently, through a Latin American treaty known as the Union Aduanera, El Salvador and Guatemala each permit the commercial importation of pharmaceutical products manufactured in Honduras for which a Sanitary Register has been received, including Anvirzel™.  As the Company has no intention of proceeding past the Phase 1 Clinical Trial in the United States for Anvirzel™ (as it believes that new product development will allow it to market products with higher concentrations of oleandrin and better routes of administration.), it is not the intention of the Company to ever apply to have Anvirzel™ approved for sale in the United States or Canada and one should not expect any USFDA or Health Canada approval for Anvirzel™.  The Company expects to phase out the sale of Anvirzel™ within a five (5) year time frame as new products are developed.
 
 
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The Company is currently in the process of refining both Anvirzel™ to provide for, among other things, oral routes of administration
 
Dermal (Skin)

Under the direction of Dr. Robert A. Newman, an oleander-based dermal cream for sun-damaged skin has been developed. (See: “Additional Oleander Based Products” and “Table 1 – Products and Stages of Development”).  The dermal cream market is a large market, both cosmetic and non-cosmetic.  The Company hopes to take advantage of this large market by introducing successive generations of dermal creams commencing with a cosmetic dermal cream in the United States during 2010 (which the Company expects to offer for sale in Canada in 2011).  Pending Health Canada and USFDA approval of impending clinical trials, the Company’s goal is to eventually introduce dermal creams to the Canadian and United States’ markets which are intended to treat a variety of skin ailments and are not simply cosmetic in nature.  That being said, the Company cannot provide any assurance that such Health Canada or USFDA approval, and subsequent sales into Canada and the United States, will ever materialize.

HIV and Hepatitis-C

HIviral and HEP-viral are products that the Company believes can be used as adjuvant therapeutic agents to assist in the treatment of patients suffering from HIV or Hepatitis-C by potentially raising the level of such patient’s CD4+ cell counts and providing immune system support.  It is important to note that an increase in CD4+ cell counts and a positive immune response does not equal a cure.  There is no published evidence that oleandrin has cured, or has the ability to cure, any viral-related diseases.  The evidence has simply shown that oleandrin may increase immune system support to attacks from such viruses.  In June 2007, HIviral and HEP-viral received Sanitary Registers from the Health Ministry of the Republic of Honduras, although the Company is currently in the process of refining both HIviral and HEP-viral to provide for, among other things, oral routes of administration.
 
To date, the Company’s sales have been limited to foreign sales and those using the limited importation of drugs exception. The Company hopes to begin the marketing of its products through third party sales organization(s) beginning in the second calendar quarter of 2011.
 
The Company’s business is not  seasonal.
 

None
 
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE QUARTER ENDED JUNE 30, 2010

General
The following discussion and analysis should be read in conjunction with unaudited interim consolidated financial statements and notes thereto for the nine months and quarter ending September 30, 2010 and the audited annual consolidated financial statements and notes thereto for the fiscal year ending December 31, 2009. The financial statements have been prepared in accordance with Canadian GAAP.  Unless otherwise noted herein, all references to dollar amounts contained in this MD&A are to U.S. dollars.  A majority of Nerium’s operations are carried out by its Latin American subsidiaries in the Honduran Lempira, which is the subsidiaries’ functional currency.
 
Further information regarding Nerium can be found on SEDAR at www.sedar.com.

Cautionary Statement Regarding Forward-Looking Statements
Certain statements contained in this document constitute “forward-looking statements”.  When used in this document, the words “may”, “would”, “could”, “will”, “intend”, “plan”, “propose”, “progressing”, “anticipate”, “believe”, “forecast”, “estimate”, “expect” and similar expressions, as they relate to Nerium or its management, are intended to identify forward-looking statements.  Such statements reflect Nerium’s current views with respect to future events and are subject to certain risks, uncertainties and assumptions.  Many factors could cause Nerium’s actual results, performance or achievements to be materially different from any future results, performance or achievements that may be expressed or implied by such forward-looking statements.  Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.  Nerium does not intend, and does not assume any obligation, to update any such factors or to publicly announce the result of any revisions to any of the forward-looking statements contained herein to reflect future results, events or developments unless so required by applicable securities laws.

Business Overview
Nerium is a biotechnology company involved in the development of oleander-based products for the treatment of certain forms of proliferative diseases, viral infections and skin conditions. In addition, the company is developing a line of oleander–based cosmetic products.  The Company’s existing product line includes Anvirzel™, HIviral, HEP-viral, and the new cosmetic line under the Nerium SkinCare name.

Nerium was incorporated pursuant to the Canada Business Corporations Act on June 1, 2006 to acquire Phoenix Biotech, LTD (Phoenix BVI), a British Virgin Islands corporation, and its five majority-owned Latin American subsidiaries, from Phoenix Biotechnology, Inc., a Texas corporation (Phoenix US).  Nerium currently owns, indirectly, four Latin American corporations, collectively known as “The Salud Integral Group”, located in Honduras and El Salvador, which integrate the manufacturing, marketing, and sales of the Company’s treatment products, while the cosmetic line is produced by a contract manufacturer in Texas.
 
Nerium utilizes a proprietary method to grind the Nerium oleander leaves to process the plants into the biomass used for manufacturing of its products. Nerium’s wholly-owned subsidiary, Drogueria Salud Integral, has a manufacturing facility in Tegucigalpa, Honduras, that operates under Honduran “current Good Manufacturing Practices” (cGMP) standards and is inspected by the Honduran health ministry to confirm compliance with such standards.  Drogueria Salud Integral is located inside the pharmaceutical manufacturing plant of Francelia Laboratories, whose cGMP clean room is fully operational and is currently producing the Company’s existing line of treatment products. Through its Latin American subsidiaries, the Company’s products are available to international patients who import the drug under the individual use exemption rules of their respective countries.
 
 
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Anvirzel™, the Company’s lead product, is intended to treat certain forms of cancer, and has successfully completed a United States Food and Drug Administration Phase I Study which was limited to establishing safety and dosage.  The study was conducted at the Cleveland Clinic in Cleveland, Ohio.

In addition to AnvirzelTM, Nerium currently has two other marketable products, HIviral and HEP-viral.  In June of 2007, both HIviral and HEP-viral were granted Sanitary Registers by the Health Ministry of the Republic of Honduras: HIviral for use as an adjuvant therapy in the treatment of HIV/AIDS and HEP-viral for use as an adjuvant therapy in the treatment of hepatitis C.

In terms of development stage products, oleander-based dermal creams for cosmetic purposes are currently being tested by shareholders.  These include a general skin repair cream and a cold sore serum.  As at the date of this writing, animal studies and first level human studies have been completed.  As these first generation dermal creams will be for the cosmetic market, no USFDA approval is required to market and sell the products into the United States, although Federal Trade Commission marketing guidelines must be adhered to.

Nerium also is transitioning from the marketing of AnvirzelTM, HIviral and HEP-viral as therapeutic agents administered by intramuscular injection to the development and marketing of oleander-based products that are administered orally. Nerium believes that its research has demonstrated that an effective oral route of administration for oleander-based therapeutic agents is feasible.
 
Management Discussion and Analysis of Financial Condition and Results of Operations.

Three months Ended September 30, 2010 compared to three months Ended September 30, 2009.

Revenues for the three months ended September 30, 2010 totaled $93,311, a decrease of $626 or .6% from the $93,937 for the corresponding period of the prior year. The decrease is entirely attributable to a decrease in the price per unit sold of $75, and sometimes more, as the economic downturn continues to adversely affect patients seeking alternative cancer therapy.

Cost of goods sold totaled $49,344 for the three months ended September 30, 2010, an increase of $15,016, or 43.7%, from the $34,328 for the three months ended September 30, 2009. This increase resulted from a increase in the sales of vials, but at a lower price, during the three months ended September 30, 2010. The gross profit margin was 46.5% for the three-months ended September 30, 2010, compared to 63.5% for the three month ended September 30, 2009.
 
 
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General and administrative expenses  totaled $242,174 for the three month ended September 30, 2010, an increase of $2,281, or .9%, from the $244,455 for the corresponding period of the prior year as there were only minor changes in the various items which comprise  general and administrative expenses.

Stock based compensation expenses totaled $508,500 for the three months ended September 30, 2010 compared to $.0 for the corresponding period of the prior year. All of the stock based compensation expenses for the three months ended September 30, 2010 resulted from the grant of 450,000 stock options to certain directors on August 26, 2010, all of which vested immediately. The fair value of these options was $508,500 or $1.13 per share using the Black-Scholes model for pricing options.

Research and development expenses totaled $84,025 for the three-months ended September 30, 2010, a decrease of $131,625, or 61.0%, from the $215,653 for the three-months ended September 30, 2009. This decrease resulted because of a payment of $100,000 for the monkey clinical trial in 2009.   Because clinical trial contracts generally require two payments, one a pre-payment and the second at the conclusion of the clinical trial in an unknown amount, prepayments are expensed as paid because it is impossible to predict either the amount due or the length of the clinical trial. However, normal research expenses are expensed as incurred. Because the Company was unable to determine the length of the clinical trial or the amount owing at its conclusion, the pre-payment for the monkey trial was expensed when paid, accounting for the bulk of the change in research and development expenses between the two periods ending September 30, 2009 and 2010, respectively.

Losses on foreign exchange occur because of changes in the value of the Honduran currency against the U.S. dollar. Foreign currency losses for the three-months ended September 30, 2010 totaled $273,  while foreign exchange losses totaled $409 for the three-months ended September 30, 2009, both amounts being insignificant as a percentage of total expenses.

Amortization for the three months ended September 30, 2010 totaled $9,386, a decrease of $1,391, or 12.9%, from the $10,777 for the three months ended September 30, 2009. This decrease resulted from fewer amortizable assets particularly leasehold improvements which are now fully amortized.

As a result of the foregoing, the Company’s expenses for the three months ended September 30, 2010 totaled $844,358, an increase of $373,064, or 79.2%, from the $471,294 for the three-months ended September 30, 2009.  This produced a loss from operations of $800,391 for the three months ended September 30, 2010, an increase of $388,706, or 94.4%, from the $411,685 loss from operation for the three-months ended September 30, 2009.
 
For the three months ended September 30, 2010 the company had interest and other income of $30,  a decrease of $460, or 93.9% , from the $490 for the three-months period ended September  30, 2009. This decrease resulted from both reduced interest rates and reduced balances on which interest was paid.

Because of the foregoing, the comprehensive loss for the three-months ended September 30, 2010 totaled $800,361, or
$.03 per share, an increase of $389,166, or 94.6%, from the $411,195 for the three-months ended September 30, 2009.
 
 
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Nine months ended September 30, 2010 compared to the nine months ended September 30, 2009.

Revenue for the nine months ended September 30, 2010 totaled $222,718, a decrease of $74,053 or 24.9% from the $296,721 for the nine months ended September 30, 2009. This decrease resulted from a lower sale price per unit sold.

Cost of goods sold for the nine months ended September, 2010 totaled $89,502, a decrease of $17,413, or 16.3%, from the $106,915 for the corresponding period of the prior year. This decrease resulted from reduced sales of unit sales.

The gross profit margin for the nine months ended September 30, 2010 was 59.8 % compared with 64.0% for the nine months ended September 30, 2009.

General and administrative expenses for the nine months ended September 30, 2010 totaled $698,127, an increase of $225, or virtually unchanged from the corresponding period of the prior year.

Stock based compensation for the nine months ended September 30, 2010 totaled $508,500 compared to $0 for the corresponding period of the prior year. All of the stock based compensation expense for the nine months ended September 30, 2010 resulted from the grant of 450,000 stock options to certain directors on August 26, 2010, all of which vested immediately. The fair value of these options was $508,500, or $1.13 per share, using the Black -Scholes model for pricing options.

Research  and development expenses for the nine months ended September 30, 2010 totaled $313,638, a decrease of $84,628 or 21.3% ,from the $397,816 for the corresponding period of the prior year. This decrease resulted because of a payment of $100,000 for the monkey clinical trial in 2009. Because clinical trial contracts generally require two payments, one a prepayment and the second at the conclusion of the clinical trial and in an unknown amount, prepayments are expensed when paid because it is impossible to predict either the length of the clinical trial or the amount payable at the conclusion of the clinical trial. However, normal research and development expenses are expensed as incurred. Because the Company was unable to determine the length of the clinical trial, or the amount owing at its conclusion, the prepayment was expensed when paid, accounting for the bulk of the change in research and development expenses between the two nine month periods ending September 30, 2009 and 2010, respectively.
 
Losses on foreign exchange occur because of changes in the value of the Honduran currency against the U.S. dollar. Foreign currency losses for the nine-months ended September 30, 2010 totaled $811 compared with $781 for the nine-months ended September 30, 2009, both amounts virtually identical and insignificant as a percentage of total expenses.

Amortization for the nine-months ended September 30, 2010 totaled $28,043,  a decrease of $2,591,  or 8.5%, from the $30,634 for the nine-months ended September 30, 2009. The decrease resulted from fewer amortizable assets, particularly  leasehold improvements which are now fully amortized.
 
 
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As a result of the foregoing, the Company’s expenses for the nine-months ended September 30, 2010 totaled $1,549,119, an increase of $421,876, or 34.7%, from the $1,127,143 for the nine-months ended September 30, 2009.  This produced a loss from operations of $1,415,903, an increase of $478,616, or 51.1%, from the $937,287 loss from operation for the nine-months ended September 30, 2009.

For the nine-months ended September 30, 2010, the company also had interest and other Income of $309, a decrease of $1,416, or 82.1%, from the $1,725 for the nine-months ended September 30, 2009. This decrease resulted from both reduced interest rates and reduced balances on which interest was paid.
 
Because of the foregoing, the comprehensive loss for the nine-months ended September 30, 2010 totaled $1,415,594, or $.05 per share an increase of 480,032, or 51.3%, from the $935,562, or $.03 per share of comprehensive loss for the nine months ended September 30, 2009.

Liquidity and Capital Resources

As of September 30, 2010, the Company had unrestricted cash of $278,841 and working capital of $412,252. This compares with unrestricted cash of $380,800 and working capital of $492,607 as of September 30, 2009.

Cash used in operation activities totaled $840,655 for the nine months ended September 30, 2010, an increase of $11,483, or 1.4%, from the $829,172 used in operation for the nine months ended September 30, 2010. This modest increase resulted from a larger net operating loss, lower amortization and a smaller charge for shares issued in satisfaction of corporate obligations which were partially offset by a charge for stock based compensation and smaller charges in non-cash working capital balances.

Cash used in investing activities for the nine month ended September 30, 2010 totaled $27,175, all from the purchase of equipment. This was an increase of $22,397, or 468.7%, from the $4778 of cash used in investing activities for the nine months ended September 30, 2009.  For  the nine months ended September 30, 2009,  the Company purchased $8267  of equipment which was partially offset by proceeds from the sale of equipment of $3489.

Cash provided from financing activities for the nine months ended September 30, 2010 totaled $765,871, an increase of $273,752, or 55.6%, from the $492,119 of cash provided by financing activities for the nine months ended September 30, 2009. For the nine months ended September 30, 2010, $750,871 of cash came from the sale of common stock and $15,000 of cash from the exercise of stock options. For the nine months ended September 30, 2009, $490,925 of cash came from the sale of common stock and $1,194 of cash from shares to be issued.
 
As a result of the foregoing, the Company’s unrestricted cash decreased by $101,959 from $380,800 to $278,841.
 
Although the Company had cash of $278,841 and working capital of $412,252, the Company has insufficient funds to carry out its business plan for the next twelve (12) months. Traditionally, the Company has funded its operation through the sale of its shares. Therefore, unless the Company is able to continue to sell its shares in amounts sufficient to cover its cash flow, losses, and capital expenditure requirements, it will be unable to continue as a going concern.
 
 
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Results of Operations for the Year-Ended December 31, 2009 Compared to the Year-Ended December 31, 2008.
 
Revenue for the year-ended December 31, 2009 totaled $359,582, a decrease of $35,644 or 9.0% from the $395,226 for the year-ended December 31, 2008.  This decrease resulted from a 25% decrease during the year in the price of Anvirzel™ and a small decrease in unit sales.
 
Cost of sales for the year-ended December 31, 2009 totaled $128,159, an increase of $17,882 or 16.2% from the $110,277 for the year-ended December 31, 2008.  This increase resulted from higher raw material costs, principally oleander.  The gross profit margin was 64.4% for the year-ended December 31, 2009, compared to 72.1% for the year-ended December 31, 2008.
 
General and administrative expenses totaled $974,589 for the year-ended December 31, 2009 an increase of $7718 or 0.8% or substantially the same as the $966,871 for the year-ended December 31, 2008.
 
Research and development expenses for the year-ended December 31, 2009 totaled $516,282, an increase of $31,381 or 6.5% from the $484,901 for the year-ended December 31, 2008.  The increase in research and development expenses resulted principally from having more clinical trials and test being conducted.
 
There was no stock based compensation for the year-ended December 31, 2009.  During the year-ended December 31, 2008, the Company incurred $232,761 of stock based compensation expenses as the Company granted 3,060,000 options to various consultants and directors.
 
For the year-ended December 31, 2009, the Company incurred a loss on foreign currency exchange of $1215.  This compares with a foreign currency loss of $4,728 for the year-ended December 31, 2008.  All losses from foreign currency exchange occurred because of changes in the Honduran currency against the U.S. dollar.
 
Amortization expenses for the year-ended December 31, 2009 totaled $41,606, a decrease of $2,513 or 5.7% from the $44,119 for the year-ended December 31, 2008.  This decrease resulted from fewer amortizable assets, particularly leasehold improvements which are now fully amortized.
 
As a result of the foregoing, the Company’s expenses for the year-ended December 31, 2009 totaled $1,533,692, a decrease of $199,688 or 11.5% from the $1,733,380 for the year-ended December 31, 2008.  This produced a loss from operations of $1,302,269 for the year-ended December 31, 2009, a decrease of $146,162 or 10.1% for the loss from operations of $1,448,431 for the year-ended December 31, 2008.
 
For the year-ended December 31, 2009 the Company had interest income of $1,086 a decrease of $17,478 or 94.2% from the $18,564 for the year-ended December 31, 2008.  This decrease resulted from both reduced interest rates and reduced balances on which interest was paid.  For the year-ended December 31, 2008, the Company had a gain on the sale of equipment of $1,129. There were no sales of equipment during the year-ended December 31, 2009.
 
 
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Because of the foregoing, the comprehensive loss for the year-ended December 31, 2009 totaled $1,301,183, or $0.04 per share, a decrease of $127,555 or 8.9% from the $1,428,738 or $0.05 per share for the year-ended December 31, 2008.
 
Liquidity
The Company as at December 31, 2009 had current assets of $556,778, which included cash of $380,800; inventory of $157,118; accounts receivable of $7,892 and prepaid expenses of $10,968.  The Company had liabilities of $64,171 in accounts payable and accruals resulting in net working capital of $492,607.  The primary reasons for the $608,184 net decrease in liquid assets compared to year-end 2008 ($1,164,962) is due to the lesser private placement issuance of common shares, the decrease in sales revenue and the payoff of accrued liabilities during 2009.  Most cash equivalents are held in a money market fund, earning a variable rate of market interest, at Texas Capital Bank.  The balance of cash equivalents are held in various operating accounts at Texas Capital Bank, Banco Ficohsa (located in Honduras) and Banco Credomatic (located in Honduras).
 
Historically, the Company has been able to generate the cash required for operations, as well as its research projects, through the private placement issuances of common shares. While the Company continues to generate considerable interest with investors, given the uncertain state of the capital markets, the Company understands that, during this period of uncertainty, it may have to scale back certain research and development activities in the event that it is unable to fund its operations and research projects through the sale of equity.  Should the Company be unable to supplement funding of its operations through private placement issuances of common shares, the Company would be able to temporarily scale back non-committed research on its HIviral and HEP-viral products.  The above contingency plan would have minimal effect on the Company’s near term goals as the Company would still be in a position to meet its significant milestones for 2010, being having the first generation of dermal cream selling in the United States, completion of the large animal HIV research and the expansion of oleander plants growing in the field.
 
The Company has no long-term debt and long-term obligations are minimal with less than 5% of the budget earmarked in 2010 and beyond for long term obligations (including office rent and a certain farm lease).
 
Operating leases
 
At December 31, 2009, the Company is committed to operating lease payments for its various premises in the following amounts:
         
2010
  
$
84,987
  
2011
    
59,201
  
         
   
$
144,188
  
 
Research and Development
 
As at December 31, 2009, the Company was committed to outsource certain research and development activities to third parties.  Estimated payments for future expenditures in accordance with the terms of certain agreements, which are due upon delivery of research data, are approximately $67,294.
 
 
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Related Party Transactions, Balances and Commitments
During 2009, Nerium or its subsidiaries, entered into (or continue to be a party to) the following related party transactions:
 
●
The Company paid Phoenix US a total of $53,024 for access to its leased premises to harvest raw materials during the year.  This amount was recorded as a direct cost of raw materials inventory. (2008; $51,480)
 
●
The Company incurred consulting fees of $40,000 (2008; $15,000) for services, (shareholder relations), provided by a director (J. Peter Nettelfield) of the Company.  This amount is included in general and administrative expenses.
 
●
Two separate agreements with a minority shareholder of the Company, (Dr. Ulloa).  The first agreement, a production and purchasing agreement effective June 2004, entitles the shareholder to receive $3.25 per vial of Anvirzel sold to third parties in exchange for the use of facilities and production supervision.  The second agreement, a consulting agreement effective January 2007, entitles the shareholder to receive an additional $3.25 per vial of Anvirzel™ sold to third parties in exchange for consulting services in relation to the production of Anvirzel™.  Both agreements remain in effect for as long as Anvirzel™ is produced in Honduras.  The Company paid amounts totaling $9,402 in 2009 ($9,667 in 2008) to Dr. Ulloa in accordance with these long-term agreements.
 
●
A consulting agreement with one of the Company’s minority shareholders, Dr. Villatoro.  The agreement entitles Dr. Villatoro to receive $1.00 per vial of Anvirzel™ sold to third parties in Central America and $2.00 per vial for patients coming from countries other than Central America, and expires 2018.  The Company paid amounts totaling $2,893 in 2009 ($2,967 in 2008) to Dr. Villatoro in accordance with the agreement.
 
The above transactions with the related parties are in the normal course of business and are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties.  Other than as specifically noted above, there are no ongoing contractual or other commitments resulting from the above noted related party transactions.
 
Capital Resources
The Company has no long-term debt financing arrangements and does not anticipate incurring any such debt in 2010.  Since incorporation, a majority of cash has been raised through private placement issuances of common shares.  It is expected that further cash will be raised through issuances of common shares on a private placement, which, along with cash received through continuing product sales, will be sufficient to meet capital requirements for 2010.  However, given the uncertain state of the capital markets, the Company has developed a contingency plan in the event that it is unable to generate cash through the sale of equity, which plan includes the scaling back of certain research and development projects.
 
 
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Future commitments for capital expenditures are as follows:
        Q4
2010		   All Year
2011		    
All Year
2012
    
All Year
2013
  
Farm Lease
       $ 18,000     $ 72,000     $ 72,000     $ 48,000  
Midway Plaza
       $ 8,082     $ 5,388                  
Honduran Office
       $ 9,365     $ 12,486                  
MDACC HIV Study
  
Note (a)
           $ 144,000                  
GRAS Report-ST&T
  
Note (b)
   $ 45,000                          
        $ 80,447     $ 233,874     $ 72,000     $ 48,000  
 
If this research contract is cancelled before 12/31/2010, no additional payments will be due.       
Note (a)
Specific dates for future payments are not shown, but dependent on future events.
Note (b)
The date of final payment has not been specifically identified, but is expected to be in Q4, 2010.
 
Results of Operations for the Year Ended December 31, 2008
 
For the year ending December 31, 2008, revenues of $395,226 were 56% higher than the comparable period of 2007, posting well above the 25% annual growth projected by the Company at the commencement of 2008.
 
The net loss and comprehensive loss for the year ending December 31, 2008, was $1,428,738 or $0.05 per common share. The net loss and comprehensive loss for the comparable period of 2007 was $1,074,508 or $0.04 per common share.
 
During 2008, cash and cash equivalents increased by $154,658 to $900,143 from the YE 2007 balance of $745,485 due to the sale of $1,305,110 of common shares at $1.00 per share. Inventory increased by $108,554 between 2008 ($242,683) and 2007 ($134,129) as “raw material and consumables” increased from $8,033 at year-end 2007 to $103,132 at year-end 2008, due primarily to the purchase of additional oleander biomass during 2008.  Prepaid expenses increased by $10,780 in the year ending December 31, 2008 ($16,816) compared to year-end 2007 ($6,036) due to additional research initiatives undertaken by Nerium.
 
Equipment and leaseholds decreased by $4,438 in 2008 ($229,403) vs 2007 ($233,841) due to amortization expense of $44,119 being almost offset by additions attributable to the relocation of the US office in Q1 2008.
 
Total liabilities, all of which were in accounts payable and accrued liabilities, increased by $110,493 during 2008 as compared to 2007, from $62,685 to $173,178, primarily due to an increase in accrued fees related to the prospectus filing and dermal cream research.
 
On a year-ending December 31, 2008 comparative basis, share capital increased by $1,360,471 (2008: $4,100,157; year-end 2007: $2,739,686) primarily due to the private placement issuances of common shares for net proceeds of $1,305,110.  Contributed surplus increased by $230,407 (2008: $718,407; year-end 2007: $488,000) due, for the most part, to the addition of stock-based compensation of $232,761 and the reclassification of $2,354 from contributed surplus to share capital due to the exercise of 30,000 stock options by an officer of the Company.  The deficit increased $1,428,738 (2008: $3,597,377; year-end 2007: $2,168,639) due to the net loss and comprehensive loss of the same amount.
 
 
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Liquidity
 
The Company as at December 31, 2008 had current assets of $1,164,962, which included cash and cash equivalents of $900,143; inventory of $242,683; accounts receivable of $5,320 and prepaid expenses of $16,816.  The Company had liabilities of $173,178 in accounts payable and accruals resulting in net working capital of $991,784.  The primary reasons for the $277,071 increase in liquid assets compared to year-end 2007 ($887,891) is due to the private placement issuance of common shares in the net amount of $1,305,110 and product sales of $395,051.  Most cash equivalents are held in a money market fund, earning a variable rate of market interest, at Texas Capital Bank.  The balance of cash equivalents are held in various operating accounts at Texas Capital Bank, Banco Ficohsa (located in Honduras) and Banco Credomatic (located in Honduras).
 
Given the Company’s current cash position, coupled with revenue generated from ongoing sales of the Company’s products, the Company is in a position to operate its business, with a majority of its research projects for all of 2009.
 
The Company has no long-term debt and long-term obligations are minimal with less than 5% of the budget earmarked in 2009 and beyond for long term obligations (including office rent and a certain farm lease).
 
Related Party Transactions and Commitments
 
During 2008, Nerium, or any of its subsidiaries, entered into (or continue to be a party to) the following related party transactions:
 
●
The Company paid Phoenix US a total of $63,480 for access to its leased premises to harvest raw materials during the year.  This amount was recorded as a direct cost of raw materials inventory.
 
●
The Company incurred consulting fees of $85,957 (2007 - $50,000) during the year for services provided by a company controlled by a director (John F. O’Donnell) of the Company in connection with the Company’s prospectus filing.  This amount is included in general and administrative expenses.  In addition, as at December 31, 2008 the amount of $85,957 is included in accounts payable and accrued liabilities.
 
●
The Company incurred consulting fees of $15,000 (2007 - $NIL) during the year for services, (shareholder relations), provided by a director (J. Peter Nettelfield) of the Company.  This amount is included in general and administrative expenses.  In addition, as at December 31, 2008 an amount of $5,000 is included in accounts payable and accrued liabilities in relation to this service.
 
 
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●
Two separate agreements with a minority shareholder of the Company, (Dr. Ulloa).  The first agreement, a production and purchasing agreement effective June 2004, entitles the shareholder to receive $3.25 per vial of Anvirzel sold to third parties in exchange for the use of facilities and production supervision.  The second agreement, a consulting agreement effective January 2007, entitles the shareholder to receive an additional $3.25 per vial of Anvirzel™ sold to third parties in exchange for consulting services in relation to the production of Anvirzel™.  Both agreements remain in effect for as long as Anvirzel™ is produced in Honduras.  The Company paid amounts totaling $9,667 in 2008 ($5,680 in 2007) to Dr. Ulloa in accordance with these long-term agreements.
 
●
A consulting agreement with one of the Company’s minority shareholders, Dr. Villatoro.  The agreement entitles Dr. Villatoro to receive $1.00 per vial of Anvirzel™ sold to third parties in Central America and $2.00 per vial for patients coming from countries other than Central America, and expires 2018.  The Company paid amounts totaling $2,967 in 2008 ($1,740 in 2007) to Dr. Villatoro in accordance with the agreement.
 
The above transactions with the related parties are in the normal course of business and are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties.  Other than as specifically noted above, there are no ongoing contractual or other commitments resulting from the above noted related party transactions.
 
Capital Resources
 
The Company has no long-term debt financing arrangements and does not anticipate incurring any such debt in 2009.  Since incorporation, a majority of cash has been raised through private placement issuances of common shares.  It is expected that further cash will be raised through issuances of common shares on a private placement basis, which, along with cash received through continuing product sales, will be sufficient to meet capital requirements for future periods.
 
 
Results of Operations for the Year Ending December 31, 2007
 
Nerium experienced its first full year of consolidated operations during 2007 after effectively acquiring the Latin American subsidiaries on December 31, 2006.  As a result, events happened in 2007 that significantly impacted the assets, liabilities and shareholder equity accounts.  The financial information contained in the Nerium Biotechnology, Inc. Consolidated and Combined Financial Statements Dated December 31, 2008, 2007 and 2006 show a balance sheet, income statement and cash flows for the year 2006 that is essentially only of the Latin American operations which were acquired by Nerium on December 31, 2006.  Separate Nerium assets, liabilities, income and expenses prior to January 17, 2007 are immaterial.
 
Cash increased primarily due to the sale and issuance of common shares in the net amount of $1,257,691.  Of the $745,485 in cash and cash equivalents at December 31, 2007, $704,745 is held in a Money Market Account at a Texas-based bank where it earns a variable market rate of interest.  The Money Market Account is an interest earning deposit account that is federally insured by the FDIC up to the maximum allowed by U.S. law.  This account is tied to a checking account which is also insured by the FDIC, and funds are transferred to the checking account, which does not earn interest, from the Money Market Account, as needed.  This transfer can function either automatically or manually at the account holder’s discretion.
 
 
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All other current asset accounts were virtually unchanged between year-end 2007 and year-end 2006.
 
Equipment and leaseholds decreased $24,890 during the year, (2007: $233,841 vs 2006: $258,731) as the $46,685 amortization was partially offset by capital purchases primarily related to the furnishing of the San Antonio office.
 
Current Liabilities of $62,685 at December 31, 2007 increased from $22,741 at December 31, 2006 due to accrued professional fees, most of which related to the auditing of the financial statements for the year then ended and the financial statement preparation for the second and third quarters of 2007.
 
Share Capital increased due to the private placement issuance of common shares of the Company.  In 2006, the Company initiated a private placement of up to 3,500,000 common shares.  3,300,000 common shares were sold in 2006 at CDN$0.001 per share and the remaining 200,000 were sold in 2007.  Current management sold and issued an additional 3,000,000 common shares at CDN$0.50 during the first half of 2007 which netted the Company USD$1,257,691 after share issuance costs of USD$43,762.
 
Contributed Surplus increased from $nil to $488,000 during the 2007 year as the Company received a $20,000 contribution from Phoenix Biotechnology, Inc. (“Phoenix”) for startup of the U.S. office during the first quarter of 2007.  Phoenix and the Company have many common shareholders, so a successful launch of the Company was mutually beneficial.   The remainder of $468,000 is due to the stock-based compensation granted to officers, directors and advisors.  The fair value of 1,950,000 stock options granted on January 17, 2007, which vested immediately, was determined to be $153,000 at $0.08 per option, using the Black-Scholes model for pricing options that includes stock volatility of 105%.  The fair value of 800,000 stock options granted on July 9, 2007, which vested immediately, was determined to be $315,000 at $0.39 per option, using the Black-Scholes model for pricing options that includes stock volatility of 105%.
 
The Deficit increased from $1,094,131 as at December 31, 2006 to $2,168,639 as at December 31, 2007 due to net losses incurred during the year.  Non cash expenses included in the 2007 loss are $468,000 in stock-based compensation related to the granting of options and $46,685 of amortization.
 
During 2007, sales increased due to an increase in customer base as the Latin American operations re-energized after the acquisition by Nerium.  Annual sales had declined over the past five years as the previous owner/management shifted focus from the marketing of Anvirzel™ to research of a new route of administration during 2002. The Company now ships its products to patients located in over 20 countries.
 
Income from medical services declined in 2007 to $499 from $9,279 in 2006. Under the previous owner, a one-time administrative fee was collected up-front.  This fee is no longer collected.
 
 
37
 
In 2007, general and administrative expenses (G&A) increased $510,239 over 2006 due to the initiation of corporate activities of Nerium.  G&A of only the Latin American operations in 2006 were $262,213.  Corporate activities were negligible for Nerium during FY 2006.  However, with the opening of a corporate office in San Antonio during January 2007, a full year of additional administrative expenses was realized. This is primarily centered in new payroll expenses of $172,455, audit and accounting fees of $100,563, legal and consulting fees of $71,934 and management service fees of $30,804.
 
Research and development expenses increased from nil in 2006 to $13,461 in 2007 due to the implementation of research projects that include the oleander plant, the biomass used in production and the freeze-dried oleander extract.
 
Stock-based compensation expense of $468,000 resulted from the granting of stock options to certain officers, directors and advisors during 2007.  There were no stock options previously granted.  At the end of 2007, Nerium had 2,750,000 stock options granted and outstanding with a weighted-average exercise price of CDN$0.22.  The 2,750,000 stock options are in two groups.  One group consists of 1,950,000 share options with an exercise price of CDN$0.10 and the second group consists of 800,000 share options with an exercise price of CDN$0.50.
 
Interest income was earned on the Company’s cash position and amounted to $29,657 in 2007.  There were no such earnings in 2006.
 
Cash flow in 2007 was negatively impacted by the net operating loss of $1,104,165, $514,685 of which consisted of non-cash charges due to stock-based compensation and amortization.  Positive impact was felt from net cash generation through the private placement issuance of common shares in the amount of $1,257,691 and contribution of $20,000 for the startup of the San Antonio office from Phoenix Biotechnology, Inc. The cumulative effect was that the cash position of the consolidated entities went from an opening balance of $20,646 to an ending balance of $745,485.
 
Liquidity
 
Net working capital at year-end 2007 of $825,206 is centered in cash and cash equivalent deposits of $745,485, inventory of $134,129 prepaid expenses of $6,036 and accounts receivable of $2,241.  Current liabilities are $62,685 and are all in accounts payable and accruals.  $825,206 represents an increase over the $129,133 as at December 31, 2006, primarily due to sale of common shares during the year and an increase in product sales.
 
The Company has no long-term debt and long term obligations are minimal with less than 4% of the budget earmarked in 2008 and beyond for long term obligations.
 
 
38
 
Related Party Transactions
 
During 2007, Nerium, or any of its subsidiaries, entered into the following related party transactions:
 
 
●
Raw material, consisting of air-ground oleander plant powder (biomass), was purchased from Phoenix Biotechnology, Inc. in the amount of $488.
 
 
●
A cash contribution was received from Phoenix Biotechnology, Inc. in the amount of $20,000 that is reflected in contributed surplus.
 
 
●
Dr. Ulloa, a minority shareholder of Nerium, was paid $5,680 (2006 - $2,085) in accordance with an indefinite term agreement related to production and sale of certain vials of Anvirzel™ and the amount is included in general and administrative expense.  The agreement, which remains in full force and effect while Anvirzel™ is being manufactured and/or produced in Honduras, provides Dr. Ulloa with a certain sum for each vial of Anvirzel™ sold.
 
 
●
Dr. Villatoro, a minority shareholder of Nerium, was paid $1,740 (2006 - $1,276) in accordance with a long-term agreement (to expire in 2018) related to sale of certain vials of Anvirzel™ and the amount is included in general and administrative expense.  The agreement, which contains an 18 year term, provides Dr. Villatoro with a certain sum for each vial of Anvirzel™ sold.
 
 
●
A company controlled by John F. O’Donnell, a director of Nerium, was paid $50,000 (2006–nil) for consulting services related to the organization, reorganization and financing of Nerium.
 
The above transactions with the related parties are in the normal course of business and are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties.  Other than as specifically noted above, there are no ongoing contractual or other commitments resulting from the above noted related party transactions.
 
Capital Resources
 
The Company has no long-term debt financing arrangements and does not anticipate incurring any such debt.  Since incorporation, a majority of cash has been raised through private placement issuances of common shares.  It is expected that further cash will be raised through issuances of common shares on a private placement basis, which, along with cash received through continuing product sales, should be sufficient to meet capital requirements.
 
 
39
 
 
Directors and Executive Officers
 
The following table sets forth the name, age and the office (if any) held with the Company for each of the officers and directors of the Company.
 
Name
  
Age
  
Position
Dennis R. Knocke
  
58
  
Chairman of the Board,  President & Chief Executive Officer
Joseph B. Nester
  
53
  
Chief Financial Officer, VP of Operations, Secretary & Treasurer
J. Peter Nettelfield
  
76
  
Director
John F. O’Donnell
  
62
  
Director
Gustovo A. Ulloa, Jr.
  
41
  
Director
John C. C. Wansbrough
  
78
  
Director
Peter A. Leininger, MD
  
67
  
Director
 
The term of office of each director expires following the next annual meeting or until their successor is elected or appointed.
 
Further information on the management and board of the Company follows:
 
 Dennis R. Knocke.  Mr. Knocke has served as the President, Chief Executive Officer and as Chairman of the Board of Directors of the Company since January 2007.  Mr. Knocke performs all of the executive management functions commensurate with his position, and also coordinates product research and product development.  From January 2000 to December 2006, Mr. Knocke served in an executive management position with Phoenix Biotechnology, Inc. (“Phoenix USA”), and in such capacity was responsible for, among other things, creation of Phoenix USA’s Latin American operations.  Mr. Knocke attended Sam Houston State University in Huntsville, TX.  From 1998 to 1999, Mr. Knocke was President of Bexar Credentials Verification, Inc., a startup software technology company whose principals included the Bexar County Medical Society, the Texas Medical Liability Trust, and Florida Physicians Insurance Company.  Mr. Knocke has also successfully founded and operated several startup health care companies that were acquired by national and international business entities listed on the New York and London stock exchanges.  Such companies were involved in the sale of health care equipment to hospitals and home care patients.  Mr. Knocke dedicates approximately 100% of his time to the Company.  Mr. Knocke is not a party to any non-competition agreement or non-disclosure agreement with the Company.
 
 Joseph B. Nester.  Mr. Nester has served as Chief Financial Officer, VP Operations, Secretary and Treasurer of the Company since February 2007.  In this role with the Company, Mr. Nester is responsible for all financial and accounting activities.  In addition, Mr. Nester is actively involved in the coordination of plant growing, harvesting and biomass production, as well as related distribution and testing.  From July 2003 to January, 2007, Mr. Nester served in a regulatory compliance capacity at World Savings Bank FSB.  Mr. Nester’s additional experience includes eight years (1977 to 1985) with the United States Treasury Department, Office of the Comptroller of the Currency as a National Bank Examiner and twelve years (1985 to 1997) with Frost National Bank in lending. Mr. Nester also has four years experience with a startup pharmaceutical company, where he was initially the Secretary Treasurer and later became its President, and was involved in dealing and liaising with both researchers and regulatory agencies.  During this time, Mr. Nester led the company in a successful Phase One clinical study and implementation of a Compassionate Use Investigational New Drug (CUIND) program and had direct involvement with the US FDA, among other regulatory agencies.  Mr. Nester has also successfully completed the first level of instruction in brain development at the Institutes for the Achievement of Human Potential in Philadelphia, PA.  As a result, for the past twelve years he has been a facilitator of an independent study program on brain development conducted through the University of Texas at San Antonio.  Mr. Nester graduated from the University of Texas at Austin with a BBA in General Business.  Mr. Nester dedicates approximately 100% of his time to the Company and has not entered into any non-competition or non-discharge agreement with the Company.
 
 
40
 
J. Peter Nettelfield.  Mr. Nettelfield has been a director of the Company since January 2007.  Mr. Nettelfield had been a partner in and was active in B.P. Enterprises in San Antonio, Texas, an entity which owns and manages office and warehouse properties. Prior thereto, Mr. Nettelfield was an investment banker for 20 years, serving in various management positions with three separate firms in Toronto, Ontario,  Canada.
 
John F. O’Donnell.  Mr. O’Donnell has been a director of the Company since June 2006 and is a practicing attorney in Toronto, Ontario, Canada where he is associated with the law firm of Strikeman, Keely, Speigel, Pasternack, LLP.  From September, 2003 to December 2007 he was a sole practioner in Toronto and from September 1997 to September 2003 he was affiliated with the firm of Shibley Righton, LLP in Toronto. Mr. O’Donnell holds a degree from the University of Windsor.  Mr. O’Donnell also serves as a director of several Canadian listed companies.
 
Gustavo A. Ulloa, Jr.  Mr. Ulloa has served as a director of the company since January 2007.   Mr. Ulloa is currently the General Manager and Director for Laboratories Francelia, a pharmaceutical laboratory and manufactory facility in Tequciqalpa, Honduras where he has been employed since 1993.  Mr. Ulloa has a MS degree in Industrial Engineering from University of Miami (Miami, FL).
 
John C.C. Wansbrough. Mr. Wansbrough was elected to the Board of Directors in June, 2010.  Mr. Wansbrough is and has been the Chairman of Rogers Telecommunications Limited, Canada’s largest cable provider, since 1997.  For over forty years, he has served in an executive capacity with various trust companies and corporations, has served on numerous boards of directors as well as serving as an adviser to the Minister of State Finance.  Mr. Wansbrough holds a B.D. degree from the University of Toronto and is a Chartered Financial Analyst.
 
Peter A. Leininger, M.D. Mr. Leininger was elected to the Board of Directors in June, 2010.  He received his MD from the University of Indiana in 1968 and practiced medicine for ten years.  In 1978 he joined Kinetic Concepts, Inc., a medical products company where he was its medical director for twenty-one years directing its medical research product engineering and manufacturing.  He is currently self employed and has extensive investments in real estate and the hospitality industry.  Dr. Leininger has been awarded numerous patents and has presented numerous medical research papers.
 
 
41
 
B. Officer Compensation and Director’s Compensation.:
 
         
Name
  
Compensation
  
         
Dennis R. Knocke
  
$
120,000
  
Joseph B. Nester
    
80,000
  
 
Directors of the Company receive no cash compensation for their services. Each director, upon joining the Board is granted 150,000 stock options. Directors are also reimbursed for their travel expenses. For 2009, J. Peter Nettelfield, a director, also received $45,000 in consulting fees. The Company has no pension or profit sharing plan.  For the most recent calendar year (2009) the Company did not issue any options to any director.
 
All directors serve for a term of one-year from the Company’s annual meeting, or until their successor is elected or appointed. There are no contracts with any director. There is presently only one committee of the Board, an audit committee. The following directors are members of the audit committee and each are independent: J. Peter Nettelfield, John C.C. Wansbrough and Peter A. Leininger, M. D.
 
For the past three years, the Company has had twelve (12) employees.
 
 
A.  Major Shareholders.
 
PRINCIPAL HOLDERS OF SECURITIES
 
There are a total of 31,340,033 Common Shares of the Company issued and outstanding as of September 30, 2010.  The following table shows, as at the date of this prospectus, each person who is known to the Company, its directors and officers to own, beneficially or of record, directly or indirectly, or to exercise control or direction over, more than 5% of the outstanding Common Shares and the shares held by offices and directors;
 
NAME OF
SHAREHOLDER
  
NATURE OF
OWNERSHIP
    
NUMBER OF SHARES
HELD
    
PERCENTAGE
OF CLASS
  
Phoenix Biotechnology Trust
  
Direct
       22,610,045       72.14  
Dennis Knocke
  
Indirect
       190,073       .61  
Joseph B. Nester
  
Direct
       101,000       .32  
   
Indirect
       77,972       .25  
J. Peter Nettelfield
  
Indirect
       202,301       .65  
   
Direct
       150,000       .48  
John F. O’Donnell
  
Direct
       550,000       1.76  
Gustovo A. Ulloa
   —       —       0.0  
John C.C. Wansbrough
  
Direct
       140,000       .45  
   
Indirect
       115,000       .37  
Dr. Peter A. Leininger
  
Direct
       —       0.0  
All Officers and Directors as a Group (7 persons)
             1,526,346       4.89 %
 
 
42
 
As at the date of this prospectus, the directors and senior officers of the Company, as a group, beneficially own, directly or indirectly, or exercise control or direction over an aggregate of 1,526,346 Common Shares, representing approximately 4.97% of the currently outstanding Common Shares.
 
Each share of Common Stock is entitled to one vote on all corporate matters. The Company has only one class of stock outstanding, Common Stock. The majority of the shareholders are believed to be Canadian.
 
The Company has no relationship with the Phoenix Biotechnology Trust except that its U.S. legal counsel serves as the trustee for the Trust. The Trust was established for the benefit of the Phoenix Biotechnology, Inc. (Phoenix) shareholders because Phoenix was unable to distribute the shares without the shares being registered in both the United States and Canada.
 
The Company is not directly or indirectly owned by another corporation or political unit. Neither is the Company aware of any arrangements which might result in a change of control.
 
As of December 31, 2010, 3,383,001 shares or 10.74% of the issued and outstanding shares and 38.75% of the non-Phoenix Biotechnology Trust shares are owned of record by 28 Canadian persons or entities.  Canadian, Honduran and Kuwait persons also indirectly own shares through the Phoenix Biotechnology Trust (“Trust”).  Following distribution from the Trust, the Company will continue to be a foreign private issuer.
 
 
43
 
B.  Related Party Transactions and Commitments - See Item 5. Operating and Financial Review and Prospects.
 
SEE ITEM 17. FINANCIAL STATEMENTS
 
 
The Common Stock, no par value, of the Company has been registered under the laws of the Province of Ontario, Canada, but has not traded. The shares are now being registered in the United States because many of the shareholders of the Company are United States persons.  Because the shares have never traded, there is no price history for the shares, nor is there any guaranty that a market will ever develop for the shares unless the Company makes application for the trading of the shares, something about which the Company is undecided at this time. Accordingly, each shareholder should assume that their investment in the shares will be completely illiquid.  The securities being registered are common shares, no par value. The Company has no other class of shares outstanding.  In total, the Company is registering 30,724,033 shares or the total which may be outstanding as of the effective date of the registration, which represent all of the Company’s issued and outstanding shares.  There are no pre-emptive rights.
 
The Company’s transfer agent is Equity Transfer and Trust Company of Toronto, Ontario, Canada.  There will be no restriction on the transfer of shares, once the Registration has been completed.  The 22,610,045 shares now held by the Phoenix Biotechnology Trust will be distributed to the beneficiaries following the Registration.
 
Because the Company is not seeking to raise any funds through this Registration, only the issued and outstanding shares are being registered.  Likewise, no shareholder is selling any of their shares through this Registration.  Because there are no additional shares being offered, there is no dilution to any of the existing shareholders.  All expenses of the Registration are being borne by the Company.
 
 
A.           Share Capital
The Company is authorized to issue an unlimited number of common and preferred, no par value.  As of March 31, 2010, 30,724,033 shares of common stock were issued fully paid and outstanding.  There are no other classes of equity issued or outstanding.  As of March 31, 2010 there were 2,880,000 options outstanding, all issued pursuant to the company’s Stock option Plan.  These options are exercisable as follows:
 
 
  
Number of Options
    
Exercise Price
  
Last Date for Exe
  
 
     1,770,000     $ .10  
Jan 17, 2012
  
 
     800,000     $ .50  
July 9, 2012
  
 
     150,000     $ 1.22  
Feb 8, 2013
  
      160,000     $ 1.22   Dec 6, 2013  
                     
      2,880,000              
 
 
44
 
The following table illustrates the history of the Company’s share capital for the last three and one/quarter years beginning on January 1, 2007 and ending on March 31, 2010.
               
     
Shares
    
Amount
  
 
As at December 31, 2006
     25,910,046       1,481,995  
 
Private placements (i) and (ii)
     3,200,000       1,301,453  
 
Share issue costs (ii)
     —       (43,762 )
                   
 
As at December 31, 2007
     29,110,046       2,739,686  
 
Private placement (iii)
     1,325,110       1,325,110  
 
Share issue costs (iii)
     —       (20,000 )
 
Stock options exercised
     30,000       3,007  
 
Value of stock options exercised
     —       2,354  
 
Shares issued in accordance with agreement (iv)
     50,000       50,000  
 
As at December 31, 2008
     30,515,156     $ 4,100,157  
 
Private placement (iii)
     545,925     $ 545,925  
 
Cancellation of certain founding Shareholders shares, net (vi)
     (840,000 )     (761 )
 
Shares issued in accordance with certain agreements (vii)
     148,487       148,487  
 
As of December 31, 2009
     30,369,568     $ 4,793,808  
 
Private placement (viii)
     204,465       204,465  
 
Stock options exercised (ix)
     150,000       15,000  
 
Fair value of stock options exercised
    —       11,769  
 
As at March 31, 2010
     30,724,033     $ 5,025,042  
 
 
 (i)
In October 2006, the Company’s Board of Directors approved a private placement of up to 3,500,000 common shares at a subscription price of CDN$0.001 per common share.  The private placement was completed in 2007.
 
 
(ii)
In April 2007, the Company’s Board of Directors approved a private placement of up to 3,000,000 common shares at a subscription price of CDN$0.50 per common share.  During 2007, the private placement was completed for gross proceeds of $1,301,272.  Share issue costs of $43,762 were incurred relating to the private placement.
 
 
(iii)
In December 2007, the Company’s Board of Directors approved a private placement of up to 2,000,000 common shares of the Company at a subscription price of $1.00 per common share.  During the year ended December 31, 2008, the Company issued 1,325,110 shares for gross proceeds of $1,325,110.  Share issue costs of $20,000 were incurred relating to the private placement.  During the year ended December 31, 2009, the Company issued 545,925 shares for gross proceeds of $545,925.
 
 
(iv)
In November 2008, the Company issued 50,000 common shares in accordance with a research and development agreement.  This transaction was recorded at the fair value of the common shares of $50,000 resulting in an increase to share capital and a corresponding expense to research and development.
 
 
(v)
In November 2008, in connection with the Company’s filing of a final non-offering prospectus, the 22,610,045 shares issued pursuant to the share agreement were agreed to be deposited into escrow to be released over a range of up to 36 months in 6 month traunches from the date of initial public offering.
 
 
45
 
 
(vi)
In February 2009, certain founding shareholders of the Company agreed to surrender a total of 840,000 common shares for cancellation.
 
 
(vii)
In August 2009, the Company issued 118,487 common shares in accordance with a research and development agreement. This transaction was recorded at the fair value of the common shares of $118,487 resulting in an increase to share capital and a corresponding expense to research and development. In addition, the Company also issued 30,000 common shares in accordance with a consulting agreement. This transaction was recorded at the fair value of the common shares of $30,000 resulting in an increase to share capital and a corresponding expense to general and administrative.
 
 
(viii)
In December 2007, the Company’s Board of Directors approved a private placement of up to 2,000,000 common shares of the Company at a subscription price of $1.00 per common share.  The private placement was amended in March 2010 to 2,075,500 common shares under the same terms and conditions in order to accommodate an oversubscription of 75,500 common shares for gross proceeds of $204,465 of which $2,194 was received in advance and included in shares to be issued as of December 31, 2009.
 
 
(ix)
During 2009, the Company received consulting services in exchange for 35,400 shares to be issued subsequent to year end, with an estimated fair value of $35,400.  During the three month period ended March 31, 2010 the Company continued to receive consulting services in exchange for an additional 12,500 shares to be issued at a later date, with an estimated fair value of $12,500.  This amount is included in general and administrative expenses for the three month period ended March 31, 2010.  The total amount of shares to be issues as at March 31, 2010 was 47,900 with a total estimated fair value of $47,900.
 
B.            Articles of Incorporation
The Company is a Canadian Corporation and is qualified to do business in the State of Texas.  The Company is authorized to issue an unlimited number of both common and preferred shares, each class having no par value.  The Board of Directors has the right to set out the designation rights privileges restrictions and conditions of each series of preferred shares.  The common shares are junior to the preferred shares with respect to payment of dividends and the distribution of assets in the event of liquidation or the winding up of the affairs of the company.  Any preferred shares will be non-voting shares.  The Company must have at least one director, but cannot have more than ten.
 
C.            Material Contracts – The Company has a Sponsored Laboratory Study Agreement with M. D. Anderson dated March 13, 2008, for the study of Antiviral Activity of Oleander Extract. The total contract price is $244,163, of which $100,000 has been paid.
 
D.            Exchange Contracts.  There are no exchange contracts between the United States & Canada
 
 
46
 
E.            Taxation
1.           Canada – The Company is taxed only on income earned in Canada.  Since the Company currently has no income in Canada, the Company pays no tax in Canada.  In the event that the Company ever pays dividends, they will be deemed to be paid from Canada.   Accordingly, for U.S. persons, any dividend would be subject to a 15% withholding tax.
2.           United States –Since the Company’s business operations are conducted in San Antonio, Texas, the Company is subject to U.S. Corporate Income Tax (34%) and the Texas Margin Tax.  However, since the Company has incurred net operating losses since inception, it has paid no federal income tax and has net operations loss carryovers.  It does pay a nominal amount of the Texas Franchise Tax.
 
F.           Dividends & Paying Agents.
The Company currently does not pay a dividend and does not anticipate doing so for the foreseeable future.  If and when dividends are paid, they will be paid by the Company’s Transfer Agent.
 
G.           Statements by Experts
None
 
H.          Documents on Display
All documents pertaining to the Company are on display at the Company’s offices, 11467 Huebner Road, Suite 175, San Antonio, Texas 78230.
 
I.     Subsidiaries
  
Ownership
  
1. Dragueria Salud Integral S. de R.L.
     (100.00 %)
2. Salud Integral S.A. de C.V.
     (99.94 %)
3. Farmacia Salud Integral S. de R.L.
     (99.99 %)
4. Salud Integral de EL Salvador LTDR de C.V.
     (91.00 %)
 
 
Not Applicable
 
 
None
 
 
None
 
 
There have been no modifications to the rights of security holders by the Company. Because the Company is not raising any funds by means of this offering, accordingly, there are no use of proceeds.
 
 
47
 
 
The Company’s Board of Directors has determined that all of its audit committee members, Mr. J. Peter Nettelfield, Mr. John C.C. Wansbrough and Dr. Peter A. Leininger  are financial experts and all are independent.
 
 
The Company’s Board of Directors has adapted a Code of Ethics.  This Code of Ethics applies to the Companies principal executive officers, principal financial officer and principal accounting officer.  The Code of Ethics is attached as Exhibit 14.1.
 
 
   
Year Ended December 31,
  
   
2009
    
2008
    
2007
  
Audit Fees
     45,000       47,500       37,500  
Audit Related Fees
     47,500       8,350       10,702  
Tax Fees
     6,850       6,850       5,650  
All Other Fees
     11,300       93,750       17,500  
Total
     110,650       156,450       71,352  
 
All of the services for the above-referenced fees were approved by the audit committee
 
 
Not Applicable
 
 
Not Applicable
 
 
There has been no change in the Registrant’s Certifying Accountant.  MSCM LLP, Chartered Accountants, of Toronto, Ontario, Canada have been the Registrant’s Certifying Accountant since inception.
 
 
Not Applicable
 
 
48
 
PART III
 
 
The financial statements are attached immediately following the signature page.
 
 
See Item 17
 
 
3.1
Articles of Incorporation*
   
3.2
Bylaws*
   
10.1
Sponsored Laboratory Study Agreement*
   
14.1
Code of Ethics*.
   
21.1
Subsidiaries of the registrant*
   
Consent of MSCM, LLP
   
31.1
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002
   
31.2
Certification of the Chief Financial Officer  pursuant to Section  302 of the Sarbanes Oxley Act of 2002
   
32.1
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350
   
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350
* Previously filed
 
 
49
 
 
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this registration statement on its behalf.
 
 
Nerium Biotechnology, Inc.
   
 
/s/ Dennis R. Knocke
   
 
Dennis R. Knocke, President, Chief Executive Officer
   
 
/s/Joseph B. Nester
   
 
Joseph B. Nester, Chief Financial Officer
   
Date: February 3, 2011
 
 
50
 
 
Nerium Biotechnology, Inc.
 
Unaudited Interim Consolidated Financial Statements
 
September 30, 2010
 
(Expressed in U.S. dollars)
 
NOTICE OF NO AUDITOR REVIEW OF INTERIM FINANCIAL STATEMENTS
 
Under National Instrument 51-102, part 4, subsection 4.3(3)(a), if an auditor has not performed a review of the interim financial statements, they must be accompanied by a notice indicating that the financial statements have not been reviewed by an auditor.
 
The accompanying unaudited interim consolidated financial statements of Nerium Biotechnology, Inc. (the “Company”) have been prepared by and are the responsibility of the Company’s management.
 
The Company’s independent auditor has not performed a review of these financial statements in accordance with standards established by the Canadian Institute of Chartered Accountants for a review of interim financial statements by an entity’s auditor.
 
 
Nerium Biotechnology, Inc. 
 
September 30, 2010 
 
 

Nerium Biotechnology, Inc.- Financial Statements 
 
(Unaudited - expressed in U.S. dollars) 
             
   
September 30,
2010
    
December 31,
2009
  
             
Assets
            
Current assets
            
Cash and cash equivalents
   $ 278,841     $ 380,800  
Accounts receivable
     2,022       7,892  
Inventory (notes 2 and 3(i))
     155,582       157,118  
Prepaid expenses (note 5(b)(iv))
     22,148       10,968  
                 
      458,593       556,778  
Equipment and leaseholds (note 4)
     191,375       192,243  
                 
    $ 649,968     $ 749,021  
                 
Liabilities
                
Current liabilities
                
Accounts payable and accrued liabilities
   $ 46,341     $ 64,171  
                 
Shareholders’ Equity
                
Share capital (note 5)
     5,507,566       4,793,808  
Shares to be issued (notes 5(b)(i) and (iii))
     —       37,594  
Contributed surplus (note 6)
     1,410,215       752,008  
Deficit
     (6,314,154 )     (4,898,560 )
                 
      603,627       684,850  
                 
    $ 649,968     $ 749,021  

Going Concern (note 1)
 
The accompanying notes are an integral part of these interim consolidated financial statements.
 
Nerium Biotechnology, Inc. 
 
for the year ended December 31, 2009 and the nine month period ended September 30, 2010 (Unaudited)
(expressed in U.S. dollars)
                               
   
Shares
Outstanding
    
Share
Capital
    
Shares to
be issued
    
Contributed
Surplus
    
Deficit
  
                               
Balance, December 31, 2008
     30,515,156     $ 4,100,157     $ —     $ 718,407     $ (3,597,377 )
Issued on private placement
     545,925       545,925       —       —       —  
Cancellation of certain founding shareholders’ shares, net
     (840,000 )     (761 )     —       761       —  
Shares issued in accordance with agreements
     148,487       148,487       —       —       —  
Shares to be issued
     —       —       37,594       —       —  
Founding shareholder settlement
     —       —       —       32,840       —  
Net loss for the year
     —       —       —       —       (1,301,183 )
                                         
Balance, December 31, 2009
     30,369,568     $ 4,793,808     $ 37,594     $ 752,008     $ (4,898,560 )
Issued on private placement (note 5(b)(i))
     204,465       204,465       (2,194 )     —       —  
Options exercised (note 7)
     150,000       15,000       —       —       —  
Fair value of options exercised
     —       11,769       —       (11,769 )     —  
Issued on private placement (note 5(b)(ii))
     500,000       500,000       —       —       —  
Fair value of warrants (note 5(c))
     —       (161,476 )     —       161,476       —  
Shares issued in accordance with agreements (note 5(b)(iii) and (iv))
     60,000       60,000       (35,400 )     —       —  
Issued on private placement (note 5(v))
     56,000       84,000       —       —       —  
Fair value of options granted (note 7)
     —       —       —       508,500       —  
Net loss for the period
     —       —       —       —       (1,415,594 )
                                         
Balance, September 30, 2010
     31,340,033     $ 5,507,566     $ —     $ 1,410,215     $ (6,314,154 )
 
The accompanying notes are an integral part of these interim consolidated financial statements.
 

Nerium Biotechnology, Inc. 
 
for the three and nine month periods ended September 30 (Unaudited)
(expressed in U.S. dollars) 
                         
   
Three months ended September 30
    
Nine months ended September 30
  
   
2010
    
2009
    
2010
    
2009
  
                         
Revenue
                        
Sales
   $ 93,103     $ 93,937     $ 221,550     $ 296,771  
Medical services
     208       —       1,168       —  
                                 
      93,311       93,937       222,718       296,771  
Cost of sales (note 3)
     49,344       34,328       89,502       106,915  
                                 
Gross profit
     43,967       59,609       133,216       189,856  
                                 
Expenses
                                
General and administrative (notes 3, 5(b)(iii))
     242,174       244,455       698,127       697,912  
Stock-based compensation (note 7)
     508,500       —       508,500       —  
Research and development
     84,025       215,653       313,638       397,816  
Loss on foreign exchange
     273       409       811       781  
Amortization
     9,386       10,777       28,043       30,634  
                                 
      844,358       471,294       1,549,119       1,127,143  
                                 
Loss from operations
     (800,391 )     (411,685 )     (1,415,903 )     (937,287 )
Interest and other income
     30       490       309       1,725  
                                 
Net loss and comprehensive loss for the period
   $ (800,361 )   $ (411,195 )   $ (1,415,594 )   $ (935,562 )
                                 
Basic and diluted loss per share (note 8)
   $ (0.03 )   $ (0.01 )   $ (0.05 )   $ (0.03 )
 
The accompanying notes are an integral part of these interim consolidated financial statements.
 
 
Nerium Biotechnology, Inc. 

for the three and nine month periods ended September 30 (Unaudited)
(expressed in U.S. dollars)
 
 
Three months ended September 30
    
Nine months ended September 30
  
   
2010
    
2009
    
2010
    
2009
  
                         
Cash flow from operating activities
                        
Net loss for the period
   $ (800,361 )   $ (411,195 )   $ (1,415,594 )   $ (935,562 )
Items not affecting cash:
                                
Amortization
     9,386       10,777       28,043       30,634  
Stock-based compensation
     508,500       —       508,500       —  
Common shares issued in accordance with certain agreements
(note 5(b)(iii) and (iv))
     —       148,487       60,000       148,487  
                                 
      (282,475 )     (251,931 )     (819,051 )     (756,441 )
Changes in non-cash working capital balances:
                                
Accounts receivable
     (1,251 )     241       5,870       (1,327 )
Inventory
     15,984       21,918       1,536       28,629  
Prepaid expenses
     1,719       11,400       (11,180 )     3,694  
Accounts payable and accrued liabilities
     7,017       1,902       (17,830 )     (103,727 )
                                 
      (259,006 )     (216,470 )     (840,655 )     (829,172 )
                                 
Cash flow from investing activities
                                
Proceeds from sale of equipment
     —       —       —       3,489  
Purchase of equipment and leaseholds
     —       —       (27,175 )     (8,267 )
                                 
      —       —       (27,175 )     (4,778 )
                                 
Cash flow from financing activities
                                
Issuance of common shares, net of share issue costs
     84,000       202,000       750,871       490,925  
Proceeds from exercise of stock options
     —       —       15,000       —  
Shares to be issued
     —       1,000       —       1,194  
                                 
      84,000       203,000       765,871       492,119  
Decrease in cash and cash equivalents
     (175,006 )     (13,470 )     (101,959 )     (341,831 )
Cash and cash equivalents, beginning of period
     453,847       571,782       380,800       900,143  
Cash and cash equivalents, end of period
   $ 278,841     $ 558,312     $ 278,841     $ 558,312  
                                 
Included in cash and cash equivalents is:
                                
Cash
   $ 92,404     $ 96,731     $ 92,404     $ 96,731  
Money market investments
     186,437       461,581       186,437       461,581  
                                 
    $ 278,841     $ 558,312     $ 278,841     $ 558,312  
 
The accompanying notes are an integral part of these interim consolidated financial statements.
 

Nerium Biotechnology, Inc. 

Interim Consolidated Statements of Cash Flows
for the three and nine month periods ended September 30 (Unaudited)
(expressed in U.S. dollars) 
 
1.       Basis of Presentation, Business of the Company and Going Concern
 
The Company was incorporated in Canada on June 1, 2006.  Effective December 31, 2006, the Company entered into a Share Exchange Agreement (the “Share Agreement”) with Phoenix Biotechnology Inc. (“Phoenix US”), whereby the Company acquired a 100% ownership in Phoenix Biotech Ltd. (“Phoenix BVI”), which was incorporated in the British Virgin Islands on June 23, 2006, in exchange for the issuance of 22,610,045 common shares of the Company to Phoenix US shareholders.
 
Phoenix BVI holds a majority ownership in four Latin American subsidiaries (collectively, the “Latin American Subsidiaries”) as follows: 100% ownership of Drogueria Salud Integral S. de R.L. (“DSI”), 99.94% ownership of Salud Integral S.A. de C.V. (“SI”),  99.99% ownership of Farmacia Salud Integral, S. de R.L. (“FSI”) and 91% ownership of Salud Integral de El Salvador LTDA. de C.V. (“SIES”).
 
Prior to the Share Agreement, Phoenix BVI and the Latin American Subsidiaries were majority owned by Phoenix US.  Phoenix US and the Company are ultimately controlled by the same shareholders.
 
A minority interest in respect of the Latin American Subsidiaries has not been recorded as the losses applicable to the non-controlling interests in the Latin American Subsidiaries exceed the non-controlling interests in the capital of the Latin American Subsidiaries.
 
The Latin American Subsidiaries were incorporated in Honduras and El Salvador and own the rights in these jurisdictions where they are permitted to market Anvirzel as a therapeutic agent with activity against cancer and as a non-toxic adjuvant agent when used with traditional chemotherapy and radiotherapy.  Phoenix BVI is in the process of transitioning from the marketing of Anvirzel as an intramuscular injection to the development and marketing of oleander-based products which are delivered orally.
 
On September 29, 2010, the Company incorporated a wholly-owned subsidiary Nerium SkinCare, Inc., a Texas Corporation.
 
In order to meet future expenditures and cover administrative costs,  the Company will need to raise additional financing.  Although the Company has been successful in raising funds to date, there can be no assurance that adequate funding will be available in the future, or available under terms favourable to the Company.  These unaudited interim consolidated financial statements have been prepared on a going concern basis that assumes the Company will be able to realize its assets and discharge its liabilities in the normal course of business.  These unaudited interim consolidated financial statements do not reflect any adjustments to the carrying values of assets and liabilities that would be necessary if the Company were unable to achieve profitable operations or obtain adequate financing.
 
The unaudited interim consolidated financial statements of the Company have been prepared in accordance with Canadian generally accepted accounting principles (“GAAP”) for interim financial statements.  Accordingly, they do not contain all of the disclosures required by Canadian GAAP for annual financial statements.  These unaudited interim consolidated financial statements should be read in conjunction with the Company’s audited consolidated annual financial statements for the year ended December 31, 2009, as they follow the same accounting policies and methods of their application as the consolidated annual financial statements for the year ended December 31, 2009.
 

Nerium Biotechnology, Inc.

Interim Consolidated Statements of Cash Flows
for the three and nine month periods ended September 30 (Unaudited)
(expressed in U.S. dollars) 
 
2.       Inventory 
               
     
September 30,
    
December 31,
  
     
2010
    
2009
  
               
 
Raw materials and consumables
   $ 59,022     $ 80,896  
 
Supplies
     23,903       24,706  
 
Medicine (finished goods)
     72,657       51,516  
                   
      $ 155,582     $ 157,118  
 
3.       Related Party Transactions, Balances and Commitments 
 
During the nine month period ended September 30, 2010, the Company entered into the following related party transactions: 
     
September 30,
    
September 30,
  
     
2010
    
2009
  
               
 
Land lease payments to Phoenix US (i)
   $ —     $ 39,768  
                   
 
Consulting services (ii)
   $ 25,000     $ 40,000  
 
 
(i)
The Company paid Phoenix US a total of $Nil (2009 - $39,768) during the nine month period ended September 30, 2010 and $Nil (2009 - $13,256) for the three month period ended September 30, 2010 for access to its leased premises to harvest raw materials.  This amount was recorded in raw materials inventory.
 
 
(ii)
The Company incurred consulting fees of $25,000 (2009 - $40,000) during the nine month period ended September 30, 2010 and $5,000 (2009 - $10,000) for the three month period ended September 30, 2010 for services provided by a director of the Company.  This amount is included in general and administrative expenses.
 
 
In addition, during the three and nine month periods ended September 30, 2010,  the Company entered into related party transactions with certain shareholders in accordance with long-term commitments as follows:
 
 
(a)
The Company has entered into two separate agreements with one of its minority shareholders.  The first agreement, a production and purchasing agreement effective June 2004, entitles the minority shareholder to receive $3.25 per vial of Anvirzel sold to third parties in exchange for the use of facilities and production supervision.  The second agreement, a consulting agreement effective January 2007, entitles the minority shareholder to receive $3.25 per vial of Anvirzel sold to third parties in exchange for consulting services in relation to the production of Anvirzel.  Both agreements remain in effect for as long as Anvirzel is produced in Honduras.
 
 
 
The Company paid amounts totaling $4,861 (2009 - $7,734) for the nine month period ended September 30, 2010 and $1,665 (2009 - $2,617) for the three month period ended September 30, 2010 to this minority shareholder in accordance with these long-term agreements.  These amounts are included in cost of sales.
 
 
Nerium Biotechnology, Inc. 

Interim Consolidated Statements of Cash Flows
for the three and nine month periods ended September 30 (Unaudited)
(expressed in U.S. dollars)
 
3.       Related Party Transactions, Balances and Commitments - continued 
 
 
(b)
Prior to 2004, the Company entered into a consulting agreement with one of its minority shareholders.  The agreement entitles the minority shareholder to receive $1.00 per vial of Anvirzel sold to third parties in Central America and $2.00 per vial for patients coming from countries other than Central America, to a maximum of $20,000 per month, expiring in 2018.
 
 
 
The Company paid amounts totaling $1,483 (2009 - $2,403) for the nine month period ended September 30, 2010 and $510 (2009 - $830) for the three month period ended September 30, 2010 to this minority shareholder in accordance with the long-term agreement.  These amounts are included in cost of sales.
 
The transactions with the related parties are in the normal course of business and are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties.  Amounts due to the related parties are non-interest bearing with no specified maturity date.
 
4.       Equipment and Leaseholds 
                     
                 
September 30,
2010
  
     
Cost
    
Accumulated
Amortization
    
Net Book
Value
  
                     
 
Laboratory furniture and equipment
   $ 295,644     $ 149,657     $ 145,987  
 
Vehicles
     32,439       32,426       13  
 
Clinic and office furniture and equipment
     196,053       175,391       20,662  
 
Computer equipment
     48,228       23,515       24,713  
 
Leasehold improvements
     122,480       122,480       —  
                           
      $ 694,844     $ 503,469     $ 191,375  
                           
                       
December 31,
2009
  
                           
     
Cost
    
Accumulated
Amortization
    
Net Book
Value
  
                           
 
Laboratory furniture and equipment
   $ 268,469     $ 130,371     $ 138,098  
 
Vehicles
     32,439       32,398       41  
 
Clinic and office furniture and equipment
     196,053       167,562       28,491  
 
Computer equipment
     48,228       22,739       25,489  
 
Leasehold improvements
     122,480       122,356       124  
                           
      $ 667,669     $ 475,426     $ 192,243  


Nerium Biotechnology, Inc. 

Interim Consolidated Statements of Cash Flows
for the three and nine month periods ended September 30 (Unaudited)
(expressed in U.S. dollars) 
 
5.       Share Capital 
 
(a) Authorized
      Unlimited          Common shares
 
(b) Issued
 
 
  
 
        
     
Shares
    
Amount
  
                   
 
As at December 31, 2009
     30,369,568     $ 4,793,808  
 
Private placement (i)
     204,465       204,465  
 
Stock options exercised (note 7)
     150,000       15,000  
 
Fair value of stock options exercised
     —       11,769  
 
Private placement (ii)
     500,000       500,000  
 
Fair value of warrants (note 5(c))
     —       (161,476 )
 
Shares issued in accordance with agreement (iii)
     50,000       50,000  
 
Shares issued in accordance with agreement (iv)
     10,000       10,000  
 
Private placement (v)
     56,000       84,000  
                   
 
As at September 30, 2010
     31,340,033     $ 5,507,566  
 
 
(i)
In December 2007, the Company’s Board of Directors approved a private placement of up to 2,000,000 common shares of the Company at a subscription price of $1.00 per common share.  The private placement was amended in March 2010 to 2,075,500 common shares under the same terms and conditions in order to accommodate an oversubscription of 75,500 common shares.  During the nine month period ended September 30, 2010, the Company issued 204,465 shares for gross proceeds of $204,465 of which $2,194 was received in advance and included in shares to be issued as at December 31, 2009.
 
 
(ii)
In April 2010, the Company’s Board of Directors approved a non-brokered private placement of units of the Company at a subscription price of $1.00 per unit.  During the nine month period ended September 30, 2010, the Company issued 500,000 units for gross proceeds of $500,000.  Each unit consisted of one common share and one common share purchase warrant.  One warrant entitles the holder to purchase one additional common share of the Company at a price of $1.25 per share expiring May 5, 2011.
 
 
(iii)
During 2009, the Company received consulting services in exchange for 35,400 shares to be issued subsequent to year-end, with an estimated fair value of $35,400.  The Company continued to receive consulting services up to the end of the consulting term in April 2010. Upon completion of the consulting term the Company issued 50,000 common shares for the consulting services rendered. These amounts are included in general and administrative expenses for the nine month period ended September 30, 2010.
 
 
(iv)
In May 2010, the Company issued 10,000 common shares in accordance with a consulting agreement.  This transaction was recorded at the fair value of the common shares of $10,000 resulting in an increase to share capital and a corresponding increase to prepaid expenses for the nine month period ended September 30, 2010.
 
 
Nerium Biotechnology, Inc. 

Interim Consolidated Statements of Cash Flows
for the three and nine month periods ended September 30 (Unaudited)
(expressed in U.S. dollars) 
 
5.       Share Capital - continued
 
 
(b) Issued - continued
 
 
(v)
In April 2010, the Company’s Board of Directors approved a non-brokered private placement of common shares of the Company at a subscription price of $1.50 per share. During the nine month period ended September 30, 2010, the Company issued 56,000 common shares for gross proceeds of $84,000.
 
 
(c) Warrants
 
A summary of the Company’s warrant activity is as follows:
 
     
Number of Warrants
    
Exercise Price
  
     
2010
    
2009
    
2010
    
2009
  
                           
 
Outstanding, beginning of period
     —       —     $ —     $ —  
 
Issued (note 5(b)(ii))
     500,000       —       1.25       —  
                                   
 
Outstanding, end of period
     500,000       —     $ 1.25     $ —  
 
The fair value of the 500,000 warrants issued in May 2010 is $161,476.  The fair value of the warrants was estimated using the Black-Scholes pricing model based on the following assumptions: risk-free interest of 1.89%; volatility of 143%; expected dividend yield of 0% and expected life of one year.  The warrants expire on May 5, 2011.
 
6.       Contributed Surplus 
         
     
September 30,
  
     
2010
  
         
 
Balance, beginning of period
   $ 752,008  
 
Fair value of stock options exercised
     (11,769 )
 
Stock-based compensation (note 7(i))
     508,500  
 
Fair value of warrants (note 5(b)(ii))
     161,476  
           
 
Balance, end of period
   $ 1,410,215  
 
 
Nerium Biotechnology, Inc. 
 
Interim Consolidated Statements of Cash Flows
for the three and nine month periods ended September 30 (Unaudited)
(expressed in U.S. dollars)
 
7.        Stock-Based Compensation 
 
The Company has reserved and set aside up to 6,256,000 common shares for the granting of options to directors, officers, employees and consultants.  The terms of the awards under the Plan are determined by the Board of Directors.
 
A summary of the status of the Company’s outstanding stock options as of September 30, 2010 and 2009 and changes during the nine month periods ending on those dates is presented in the following table. 
 
   
2010
    
2009
  
         
 
              
   
Stock options
    
Weighted-average exercise price
    
Stock options
    
Weighted-average exercise price
  
                         
    #    
CDN$
    
#
     CDN$  
                           
Outstanding, beginning
     3,030,000     $ 0.32       3,030,000     $ 0.32  
Granted (i)
     450,000       1.22       —       —  
Exercised
     (150,000 )     0.10       —       —  
Expired
     (150,000 )     0.10       —       —  
                                 
Outstanding, ending
     3,180,000     $ 0.47       3,030,000     $ 0.32  
 
The weighted-average remaining contractual life and weighted-average exercise price of options outstanding and of options exercisable as at September 30, 2010 are as follows:
 
 
 
    
Options Outstanding
     Options Exercisable  
                                   
                   
Weighted-
              
 
 
          
Weighted-
    
Average
    
 
    
Weighted-
  
 
 
    
 
    
Average
    
Remaining
          
Average
  
 
Exercise
    
 
    
Exercise
    
Contractual
          
Exercise
  
 
Prices
    
Outstanding
    
Price
    
Life
    
Exercisable
    
Price
  
                                   
 
CDN$
    
#
     CDN$    
Years
     #    
CDN$
  
                                     
$
0.10
       1,620,000     $ 0.10       1.30       1,620,000     $ 0.10  
$
0.50
       800,000     $ 0.50       1.78       800,000     $ 0.50  
$
1.22
       310,000     $ 1.22       2.79       310,000     $ 1.22  
$
1.22
       450,000     $ 1.22       4.91       450,000     $ 1.22  
                                             
 
 
      
3,180,000
     $ 0.47       2.07       3,180,000     $ 0.47  
 
 
(i)
The fair value of 450,000 stock options granted to certain directors on August 26, 2010, which vested immediately, was determined to be $508,500 at $1.13 per option, using the Black Scholes model for pricing options. This amount was recorded as an increase to stock-based compensation expense and an increase to contributed surplus.  The following assumptions were used: risk free interest rate of return of 2.06%, expected volatility of 156%, dividend yield of 0% and expected life of 5 years.
 
 
Nerium Biotechnology, Inc. 
 
Interim Consolidated Statements of Cash Flows
for the three and nine month periods ended September 30 (Unaudited)
(expressed in U.S. dollars)
 
8.        Loss Per Share 
 
   
Three months ended September 30
     Nine months ended September 30  
   
2010
    
2009
    
2010
    
2009
  
                         
Numerator:
                        
Net loss attributable to common shareholders - basic and diluted
   $ (800,361 )   $ (411,195 )   $ (1,415,594 )   $ (935,562 )
                                 
Denominator:
                                
Weighted-average common shares outstanding - basic and diluted
     31,288,903       29,821,566       30,970,930       29,988,312  
                                 
Basic and diluted loss per common share
   $ (0.03 )   $ (0.01 )   $ (0.05 )   $ (0.03 )
 
As a result of the net losses for the three and nine month periods ended September 30, 2010 and 2009, the potential effect of the exercise of stock options was anti-dilutive.  Therefore, 3,180,000 (September 30, 2009 - 3,030,000) options were excluded from the computation of weighted-average number of diluted common shares outstanding because their impact would be anti-dilutive.
 
9.        Commitments 
 
At September 30, 2010, the Company was committed to operating lease payments for its various premises in the following amounts:
         
2010
   $ 35,447  
2011
     89,874  
2012
     72,000  
2013
     48,000  
         
 
   $
245,321
  
 
Research and Development
 
As at September 30, 2010, the Company was committed to outsource certain research and development activities to third parties.  Payments for future expenditures in accordance with the terms of certain agreements is estimated to be $45,000.
 
 
Nerium Biotechnology, Inc. 
 
Interim Consolidated Statements of Cash Flows
for the three and nine month periods ended September 30 (Unaudited)
(expressed in U.S. dollars) 
 
10.      Financial Instruments 
 
The Company’s financial instruments include cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities.  The carrying value of the financial instruments approximates their fair value because of the short-term maturities of these items.
 
The Company’s risk exposure and the impact on its financial instruments is summarized below:
 
Credit risk
 
Credit risk is the risk of loss associated with a counterparty’s inability to fulfill its contractual obligations.  The Company is exposed to credit risk on its cash and cash equivalents and accounts receivable.
 
The Company has deposited the cash and cash equivalents with reputable financial institutions, from which management believes the risk of loss is minimal.  The Company’s cash and cash equivalents are not subject to any external restrictions.
 
Management believes that credit risk concentration with respect to the financial instruments included in accounts receivable is remote.
 
Interest rate risk
 
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate due to changes in market interest rates.
 
The Company is exposed to interest rate risk arising from fluctuations in interest rates received on its cash and cash equivalents.  Fluctuations in market interest rates do not have a significant impact on the Company’s results of operations due to the short-term nature of interest bearing cash and cash equivalents.
 
Accounts payable and accrued liabilities bear no interest.
 
Currency risk
 
The Company is exposed to currency fluctuations as a significant amount of its accounts payable and accrued liabilities are denominated in Canadian dollars and Honduran Lempira.  The Company does not use derivative instruments to reduce its exposure to foreign currency risk.
 
As at September 30, 2010, a change in the Canadian dollar of +/- 10% against the U.S. dollar with all other variables held constant would have an impact on net loss for the period of $1,749.
 
As at September 30, 2010, a change in the Honduran Lempira of +/- 10% against the U.S. dollar with all other variables held constant, would have an impact on net loss for the period of $1,983.
 

Nerium Biotechnology, Inc. 
 
Interim Consolidated Statements of Cash Flows
for the three and nine month periods ended September 30 (Unaudited)
(expressed in U.S. dollars) 
 
11.      Capital Disclosure 
 
The Company’s primary objective with respect to its capital management is to ensure that it has sufficient cash resources to maintain its ongoing operations.  The Company includes shareholders’ equity in the definition of capital.
 
Management reviews its capital management approach on an ongoing basis and believes that this approach, given the relative size of the Company, is reasonable.
 
There were no changes to the Company’s approach to capital management during the nine month period ended September 30, 2010.  The Company is not subject to externally imposed capital requirements.
 
12.      Segmented Information 
 
The Company has one operating segment, being the production and sale of Anvirzel.  The Company’s sales and equipment and leaseholds by geographical area are as follows:
 
Sales
 
All Company sales originate in Honduras where Anvirzel is produced and shipments originate.  It is not practicable to provide geographical information by customer location.
 
Equipment and leaseholds
 
   
September 30,
    
December 31,
  
   
2010
    
2009
  
             
United States
   $ 23,065     $ 29,185  
Honduras
     168,310       163,058  
                 
    $ 191,375     $ 192,243  
 
 
13.      Subsequent Event 
 
The Company entered into the following transaction subsequent to September 30, 2010:
 
 
(a)
184,500 common shares at a subscription price of $1.50 per share were issued for gross proceeds of $276,750 in connection with a non-brokered private placement.
 
14.      Comparative Figures
 
Certain amounts from prior years have been reclassified to conform to the current year’s presentation.
 
 
Nerium Biotechnology, Inc. 
 
Interim Consolidated Statements of Cash Flows
for the three and nine month periods ended September 30 (Unaudited)
(expressed in U.S. dollars) 
 
15.      Differences Between Canadian and United States Accounting Principles 
 
These unaudited interim consolidated financial statements of the Company for the period ended September 30, 2010 have been prepared in accordance with generally accepted accounting principles as applied in Canada (“Canadian GAAP”).  In the following respects, generally accepted accounting principles as applied in the United States (“US GAAP”) and practices prescribed by the United States Securities and Exchange Commission differ from those applied in Canada.
 
There would be no adjustments needed to arrive at net loss for the period ended September 30, 2010 if US GAAP were employed.  Similarly, there would be no adjustments required to the balance sheet, other than the presentation difference noted below regarding accounts payable and accrued liabilities, including shareholders’ equity as at September 30, 2010 if US GAAP were employed.
 
There is no difference in the cash flows presented under US GAAP.
 
Accounts payable and accrued liabilities
 
Under Canadian GAAP, accounts payable and accrued liabilities are presented in the unaudited interim consolidated financial statements on an aggregate basis.  US GAAP requires that the accounts payable and accrued liabilities be presented in the unaudited interim consolidated financial statements as follows: 
 
   
September 30,
    
December 31,
  
   
2010
    
2009
  
             
Trade accounts payable
   $ 6,575     $ 9,028  
Employee related accruals
     13,948       3,826  
Other accrued liabilities
     25,818       51,317  
                 
    $ 46,341     $ 64,171  
 
Income taxes
 
Under US GAAP, the Financial Accounting Standards Board (“FASB”) issued interpretation No. 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109 (“FIN 48”), as codified in ASC 740, Income taxes.  FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  This interpretation also provides guidance as to derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.  Under Canadian GAAP, there is no such interpretation; however, there were no significant differences for the reserve related to income tax contingencies for the data presented.
 
In addition, under Canadian GAAP, income taxes are measured using enacted or substantively enacted tax rates, while under US GAAP; measurement is based on enacted tax rates.  There were no significant differences between enacted and substantively enacted rates for the data presented.
 
 
Nerium Biotechnology, Inc. 
 
Interim Consolidated Statements of Cash Flows
for the three and nine month periods ended September 30 (Unaudited)
(expressed in U.S. dollars) 
 
15.      Differences Between Canadian and United States Accounting Principles - continued 
 
Stock-based compensation
 
For US GAAP purposes, the Company accounts for stock-based compensation associated with stock options as codified in ASC 718, Stock Compensation (“ASC 718”).  Consistent with Canadian GAAP, ASC 718 requires that all share based payments to employees, including grants of employee stock options, be recognized based on the fair values of the options as they vest.  However, in calculating compensation to be recognized, ASC 718 requires the Company to estimate forfeitures.  Under Canadian GAAP the Company accounts for forfeitures as they occur.  The effects of forfeitures are immaterial and no adjustments for any periods presented in these unaudited interim consolidated financial statements are required.
 
Recent accounting pronouncements
 
Recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force) and the United States Securities and Exchange Commission did not or are not believed to have a material impact on the Company’s present or future consolidated financial position.
 
 
Nerium Biotechnology, Inc.
 
Consolidated Financial Statements
 
December 31, 2009, 2008 and 2007
 
(in U.S. dollars)
 
 
 
(MSCM LOGO)
 
Auditors’ Report
 
To the Shareholders of
Nerium Biotechnology, Inc.
 
We have audited the consolidated balance sheets of Nerium Biotechnology, Inc. as at December 31, 2009, 2008 and 2007 and the consolidated statements of changes in shareholders’ equity, operations and comprehensive loss, and cash flows for each of the years in the three year period ended December 31, 2009.  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 Canadian generally accepted auditing standards and with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform an audit to obtain reasonable assurance 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 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 provide a reasonable basis for our opinion.
 
In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2009, 2008 and 2007 and the results of its operations and its cash flows for each of the years in the three year period ended December 31, 2009 in accordance with Canadian generally accepted accounting principles, which differ in certain respects from United States generally accepted accounting principles.  Information relating to the nature and effect of such differences is presented in Note 18 to the consolidated financial statements.
 
  Signed:  “MSCM LLP”
   
 
Chartered Accountants
Licensed Public Accountants
  
Toronto, Canada
April 28, 2010
 

(MSCM LOGO)
 
Comments by Auditors for U.S. Readers on Canada-U.S. Reporting Differences
 
In the United States, reporting standards for auditors require the addition of an explanatory paragraph (following the opinion paragraph) where there are events that cast substantial doubt on the Company’s ability to continue as a going concern, such as those described in Note 1 to the consolidated financial statements.  Our report to the shareholders dated April 28, 2010, is expressed in accordance with Canadian reporting standards which do not permit a reference to such events and conditions in the auditors’ report when they are properly accounted for and adequately disclosed in the consolidated financial statements.
 
  Signed:  “MSCM LLP”
   
 
Chartered Accountants
Licensed Public Accountants
 
Toronto, Canada
April 28, 2010
 

Nerium Biotechnology, Inc. 
 
Consolidated Balance Sheets
December 31, 2009, 2008 and 2007
(in U.S. dollars) 
   
2009
    
2008
    
2007
  
                   
Assets
                  
Current assets
                  
Cash and cash equivalents
   $ 380,800     $ 900,143     $ 745,485  
Accounts receivable
     7,892       5,320       2,241  
Inventory (note 5 and 8(ii))
     157,118       242,683       134,129  
Prepaid expenses
     10,968       16,816       6,036  
      556,778       1,164,962       887,891  
Equipment and leaseholds (note 6)
     192,243       229,403       233,841  
    $ 749,021     $ 1,394,365     $ 1,121,732  
                         
Liabilities
                        
Current liabilities
                        
Accounts payable and accrued liabilities (note 8)
   $ 64,171     $ 173,178     $ 62,685  
                         
Shareholders’ Equity
                        
Share capital (note 7)
     4,793,808       4,100,157       2,739,686  
Shares to be issued (note7(viii))
     37,594       —       —  
Contributed surplus (note 9)
     752,008       718,407       488,000  
Deficit
     (4,898,560 )     (3,597,377 )     (2,168,639 )
      684,850       1,221,187       1,059,047  
    $ 749,021     $ 1,394,365     $ 1,121,732  
 
Going Concern (note 1)
 
The accompanying notes are an integral part of these consolidated financial statements.
 

Nerium Biotechnology, Inc. 
 
Consolidated Statements of Changes in Shareholders’ Equity
for the years ended December 31, 2009, 2008 and 2007
(in U.S. dollars) 
   
Shares
    
Share
    
Shares to
    
Contributed
        
   
Outstanding
    
Capital
    
be issued
    
Surplus
    
Deficit
  
                               
Balance, December 31, 2006
     25,910,046     $ 1,481,995     $ —     $ —     $ (1,094,131 )
Issued on private placement, net of share issue costs
(notes 7(i) and (ii))
     3,200,000       1,257,691       —       —       —  
Contribution received from Phoenix US (note 8(i))
     —       —       —       20,000       —  
Fair value of options granted (notes 10(iii) and (iv))
     —       —       —       468,000       —  
Net loss for the year
     —       —       —       —       (1,074,508 )
                                         
Balance, December 31, 2007
     29,110,046     $ 2,739,686     $ —     $ 488,000     $ (2,168,639 )
Issued on private placement, net of share issue costs (note 7(iii))
     1,325,110       1,305,110       —       —       —  
Shares issued in accordance with agreement (note 7(iv))
     50,000       50,000       —       —       —  
Options exercised (note 10)
     30,000       3,007       —       —       —  
Fair value of options exercised
     —       2,354       —       (2,354 )     —  
Fair value of options granted (notes 10(i) and (ii))
     —       —       —       232,761       —  
Net loss for the year
     —       —       —       —       (1,428,738 )
                                         
Balance, December 31, 2008
     30,515,156     $ 4,100,157     $ —     $ 718,407     $ (3,597,377 )
Issued on private placement, net of share issue costs
(note 7(iii))
     545,925       545,925       —       —       —  
Cancellation of certain founding shareholders’ shares, net (note 7(vi))
     (840,000 )     (761 )     —       761       —  
Shares issued in accordance with agreements (note 7(vii))
     148,487       148,487       —       —       —  
Shares to be issued (note 7(viii))
     —       —       37,594       —       —  
Founding shareholder settlement (note 9(i))
     —       —       —       32,840       —  
Net loss for the year
     —       —       —       —       (1,301,183 )
Balance, December 31, 2009
     30,369,568     $ 4,793,808     $ 37,594     $ 752,008     $ (4,898,560 )
 
The accompanying notes are an integral part of these consolidated financial statements.
 

Nerium Biotechnology, Inc. 
 
Consolidated Statements of Operations and Comprehensive Loss
for the years ended December 31, 2009, 2008 and 2007
(in U.S. dollars) 
   
2009
    
2008
    
2007
  
                   
Revenue
                  
Sales
   $ 358,748     $ 395,051     $ 252,670  
Other income
     834       175       499  
      359,582       395,226       253,169  
Cost of sales (note 8)
     128,159       110,277       58,739  
                         
Gross profit
     231,423       284,949       194,430  
                         
Expenses
                        
General and administrative (notes 7(vii), (viii) and 8(iv))
     974,589       966,871       765,032  
Research and development (note 7(iv) and (v))
     516,282       484,901       13,461  
Stock-based compensation (note 10)
     —       232,761       468,000  
Loss on foreign exchange
     1,215       4,728       5,417  
Amortization
     41,606       44,119       46,685  
      1,533,692       1,733,380       1,298,595  
                         
Loss from operations
     (1,302,269 )     (1,448,431 )     (1,104,165 )
Interest
     1,086       18,564       29,657  
Gain on sale of equipment
     —       1,129       —  
                         
Net loss and comprehensive loss for the year
   $ (1,301,183 )   $ (1,428,738 )   $ (1,074,508 )
                         
Basic and diluted loss per share (note 11)
   $ (0.04 )   $ (0.05 )   $ (0.04 )
 
The accompanying notes are an integral part of these consolidated financial statements.
 

Nerium Biotechnology, Inc. 
 
Consolidated Statements of Cash Flows
for the years ended December 31, 2009, 2008 and 2007
(in U.S. dollars) 
   
2009
    
2008
    
2007
  
                   
Cash flow from operating activities
                  
Net loss for the year
   $ (1,301,183 )   $ (1,428,738 )   $ (1,074,508 )
Items not affecting cash:
                        
Amortization
     41,606       44,119       46,685  
Stock-based compensation
     —       232,761       468,000  
Common shares issued in accordance with a research and development agreements
     148,487       50,000       —  
Common shares to be issued in accordance with a consulting agreement
     35,400       —       —  
Gain on sale of equipment
     —       (1,129 )     —  
Changes in non-cash working capital balances:
                        
Accounts receivable
     (2,572 )     (3,079 )     1,332  
Inventory
     85,565       (108,554 )     (9,812 )
Prepaid expenses
     5,848       (10,780 )     (2,698 )
Accounts payable and accrued liabilities (note 9(i))
     (76,167 )     110,493       39,944  
      (1,063,016 )     (1,114,907 )     (531,057 )
Cash flow from investing activities
                        
Proceeds from sale of equipment
     —       8,655       —  
Purchase of equipment and leaseholds
     (4,446 )     (47,207 )     (21,795 )
      (4,446 )     (38,552 )     (21,795 )
Cash flow from financing activities
                        
Issuance of common shares, net of financing costs
     545,925       1,305,110       1,257,691  
Shares to be issued
     2,194       —       —  
Proceeds from exercise of stock options
     —       3,007       —  
Contribution from related party
     —       —       20,000  
      548,119       1,308,117       1,277,691  
(Decrease) increase in cash and cash equivalents
     (519,343 )     154,658       724,839  
Cash and cash equivalents, beginning of year
     900,143       745,485       20,646  
Cash and cash equivalents, end of year
   $ 380,800     $ 900,143     $ 745,485  
                         
Included in cash and cash equivalents is:
                        
Cash
   $ 64,042     $ 139,128     $ 40,740  
Money market instruments
     316,758       761,015       704,745  
    $ 380,800     $ 900,143     $ 745,485  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
Nerium Biotechnology, Inc. 
 
December 31, 2009, 2008 and 2007
(in U.S. dollars)
 
1.     Basis of Presentation, Business of the Company and Going Concern
 
Nerium Biotechnology, Inc. (the “Company”) was incorporated in Canada on June 1, 2006.  Effective December 31, 2006, the Company entered into a Share Exchange Agreement (the “Share Agreement”) with Phoenix Biotechnology Inc. (“Phoenix US”), whereby the Company acquired a 100% ownership in Phoenix Biotech Ltd. (“Phoenix BVI”), which was incorporated in the British Virgin Islands on June 23, 2006, in exchange for the issuance of 22,610,045 common shares of the Company to Phoenix US shareholders.
 
Phoenix BVI holds a majority ownership in five Latin American subsidiaries (collectively, “the Subsidiaries”) as follows: 99% ownership of Drogueria Salud Integral S. de R.L. (“DSI”), 99.94% ownership of Salud Integral S.A. de C.V. (“SI”),  99.99% ownership of Farmacia Salud Integral, S. de R.L. (“FSI”), 91% ownership of Salud Integral de El Salvador LTDA. de. C.V. (“SIES”), and 96.26% ownership of Drogueria Commercial Suprema S. de R.L. (“DCS”).  During 2009, DCS was dissolved.
 
Prior to the Share Agreement, Phoenix BVI and the Subsidiaries were majority owned by Phoenix US.  Phoenix US and the Company are ultimately controlled by the same shareholders.
 
A minority interest in respect of the Subsidiaries has not been recorded as the losses applicable to the non-controlling interests in the Subsidiaries exceed the non-controlling interests in the capital of the Subsidiaries.
 
The Subsidiaries were incorporated in Honduras and El Salvador and own the rights in these jurisdictions where they are permitted to market Anvirzel as a therapeutic agent with activity against cancer and as a non-toxic adjuvant agent when used with traditional chemotherapy and radiotherapy.  Phoenix BVI is in the process of transitioning from the marketing of Anvirzel as an intramuscular injection to the development and marketing of oleander-based products which are delivered orally.
 
In order to meet future expenditures and cover administrative costs,  the Company will need to raise additional financing.  Although the Company has been successful in raising funds to date, there can be no assurance that adequate funding will be available in the future, or available under terms favourable to the Company.  These consolidated financial statements have been prepared on a going concern basis that assumes the Company will be able to realize its assets and discharge its liabilities in the normal course of business.  These consolidated financial statements do not reflect any adjustments to the carrying values of assets and liabilities that would be necessary if the Company were unable to achieve profitable operations or obtain adequate financing.
 
 
Nerium Biotechnology, Inc. 
 
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(in U.S. dollars)
 
2.     Significant Accounting Policies
 
Cash equivalents
 
The Company considers cash equivalents to include all highly liquid financial instruments with a maturity of 90 days or less when purchased.  As at December 31, 2009, 2008 and 2007, cash equivalents consisted of money market instruments.
 
Inventory
 
Inventory is valued at the lower of cost and net realizable value.  The cost of finished goods comprises direct materials and, where applicable, direct labour costs and overhead costs.  Cost is determined using the first-in, first-out method.  Net realizable value represents the anticipated selling price less all further costs necessary to complete the sale.
 
Equipment and leaseholds
 
Equipment and leasehold improvements are recorded at cost less accumulated amortization.  Amortization is provided over the assets’ estimated useful lives using the following methods and annual rates:
 
Laboratory furniture and equipment
     -       20  
years straight-line
Vehicles
     -       5  
years straight-line
Clinic and office furniture and equipment
     -       5  
years straight-line
Computer equipment
     -       5  
years straight-line
Leasehold improvements
     -       5  
years straight-line
 
Income taxes
 
The Company uses the liability method of accounting for income taxes.  Under this method, income tax assets and liabilities are recognized for the future income tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  Income tax assets and liabilities are measured using enacted or substantively enacted tax rates expected to apply to income in the years in which those temporary differences are expected to be recovered or settled.  The effect of a change in tax rates on income tax assets and liabilities is reflected in operations in the period in which the change occurs.  Valuation allowances are established when it is not considered more likely than not that the value of future income tax assets will be realized.
 
Financing costs
 
Costs directly incurred in the course of raising equity financing are netted against the proceeds of the equity raised.  Prior to the completion of a corporate transaction, any equity financing costs incurred for which the Company has not realized proceeds are capitalized and charged against the equity financing raised at the time the proceeds are received.
 
 
Nerium Biotechnology, Inc. 
 
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(in U.S. dollars)
 
2.     Significant Accounting Policies - continued
 
Revenue recognition
 
Revenue from sales of Anvirzel is recognized when the product is shipped to or picked up by the customer or patient, all risks and rewards have been transferred to the customer or patient, and when collection of revenue is reasonably assured.
 
Reporting currency and foreign exchange
 
The Company has adopted the U.S. dollar, its functional currency, as its reporting currency.  A majority of the Company’s operations are conducted by its Subsidiaries in the Honduran Lempira, which is the Subsidiaries’ functional currency.  The Company has determined that all of its Subsidiaries’ operations are integrated, as such, the Company translates foreign currencies into U.S. dollars using the temporal method.  Under this method, monetary items are translated at the exchange rate in effect at the balance sheet date and non-monetary items are translated at historical exchange rates.  Revenues and expenses are translated into U.S. dollars at the rate of exchange prevailing at the time of the transaction.  Exchange gains and losses from foreign currency translations are recorded in net loss for the year.
 
Stock-based compensation
 
The Company has in effect a Stock Option Plan (“the Plan”), which is described in Note 10.  Stock options awarded to employees, directors and officers are accounted for using the fair value-based method over the vesting period.  Stock options issued to consultants are accounted for using the fair-value-based method over the period of services provided.  Fair value is calculated using the Black-Scholes option valuation model.  Any consideration received from the Plan participants upon exercise of stock options is credited to share capital.
 
Research and development costs
 
Research and development costs are expensed as incurred, except that development costs meeting specified criteria under Canadian generally accepted accounting principles (“GAAP”) are deferred and amortized over the estimated useful life of the associated product once commercialization is complete.  The Company has not deferred any such development costs to date.
 
Loss per share
 
Basic loss per share is calculated using the weighted-average number of common shares outstanding during the period.  Diluted loss per share is computed using the treasury stock method.  Stock options outstanding are not included in the computation of diluted loss per share if their inclusion would be anti-dilutive.
 

Nerium Biotechnology, Inc. 
 
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(in U.S. dollars)
 
2.     Significant Accounting Policies - continued
 
Measurement uncertainty
 
The preparation of financial statements in conformity with Canadian GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates. Significant estimates include the valuation of stock-based compensation using the Black-Scholes option valuation model, the estimated fair value of shares issued in accordance with certain agreements in exchange for services, and the valuation of future income tax assets.
 
The Black-Scholes option valuation model used by the Company to determine fair values was developed for use in estimating the fair value of freely traded options.  This model requires the input of highly subjective assumptions including future stock price volatility and expected time until exercise.  Changes in the subjective input assumptions can materially affect the fair value estimate, and therefore the existing model does not necessarily provide a reliable single measure of the fair value of the Company’s stock options granted or vested during the year.
 
Financial instruments
 
The Company classifies all financial instruments into one of the following five categories: held-for-trading, held-to-maturity, loans and receivables, available-for-sale financial assets or other financial liabilities.  All financial instruments are initially included on the balance sheet at fair value and are subsequently measured at fair value except for loans and receivables, held-to-maturity investments and other financial liabilities which are subsequently measured at amortized cost.  Held-for-trading financial instruments are subsequently measured at fair value and all gains and losses are included in net loss in the year which they arise.  Available-for-sale financial instruments are subsequently measured at fair value with unrealized gains and losses included in other comprehensive income (loss) until the instrument is derecognized or impaired.
 
The Company has classified its cash and cash equivalents as held-for-trading, accounts receivable as loans and receivables, and accounts payable and accrued liabilities as other financial liabilities.
 
Reclassifications
 
Certain amounts from prior years have been reclassified to conform to the current year’s presentation.
 
3.     Changes in Accounting Policies
 
Goodwill and Intangible Assets
 
Effective January 1, 2009, the Company adopted the new recommendations of CICA Handbook Section 3064, “Goodwill and Intangible Assets”.  This section replaces 3062, “Goodwill and Other Intangible Assets” and 3450, “Research and Development Costs” and establishes revised standards for recognition, measurement, presentation and disclosure of goodwill and intangible assets, including those developed internally.  The adoption of this standard has had no material impact on these consolidated financial statements.
 

Nerium Biotechnology, Inc. 
 
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(in U.S. dollars)
 
3.     Changes in Accounting Policies - continued
 
Financial Instruments – Disclosure and Presentation
 
In December 2008, the Canadian Institute of Chartered Accountants (“CICA”) issued amendments to financial instruments sections 3855 and 3862 permitting reclassification of a financial asset or liability out of the held-for-trading or available-for-sale category to other financial instruments categories in specified circumstances effective on or after July 1, 2008.  The adoption of these amendments had no impact on the financial results of the Company.
 
In June 2009, the CICA amended Section 3862, Financial Instruments - Disclosures (“Section 3862”), to include additional disclosure requirements about fair value measurement for financial instruments and liquidity risk disclosures.  These amendments require a three-level hierarchy that reflects the significance of the inputs used in making the fair value measurements.  The amendments to Section 3862 apply for annual financial statements relating to fiscal years ending after September 30, 2009.  The three levels of fair value hierarchy under Section 3862 are:
 
• Level 1     -     Unadjusted quoted prices in active markets for identical assets or liabilities;
 
• Level 2     -     Inputs other than quoted prices that are observable for assets or liabilities, either directly or indirectly; and
 
• Level 3     -     Inputs for assets or liabilities that are not based on observable market data.
 
The Company estimates that the fair value of its financial instruments approximates the carrying values at December 31, 2009, 2008 and 2007, respectively.  Cash and cash equivalents are measured at fair value and are classified within Level 1 of the fair value hierarchy.
 
4.     Future Changes in Accounting Policies 
 
International Financial Reporting Standards (“IFRS”)
 
In February 2008, the CICA announced that Canadian GAAP for profit oriented enterprises will be replaced by International Financial Reporting Standards (“IFRS”) for fiscal years beginning on or after January 1, 2011.  Companies will be required to provide IFRS comparative information for the previous fiscal year.  Accordingly, the conversion from Canadian GAAP to IFRS will be applicable to the Company’s reporting for the first quarter of 2011 for which the current and comparative information will be prepared under IFRS.  The Company is required to apply all of those IFRS standards which are effective for fiscal year ending December 31, 2011 and apply them to its opening January 1, 2010 balance sheet.
 
The Company is currently in the process of completing the diagnostic phase and will continue to update its Management Discussion & Analysis disclosures throughout 2010 to reflect specific actions taken to facilitate changeover to IFRS effective January 1, 2011.
 
 
Nerium Biotechnology, Inc. 
 
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(in U.S. dollars)
 
4.     Future Changes in Accounting Policies - continued 
 
Business Combinations
 
In January 2009, the CICA issued Handbook Section 1582, “Business Combinations”.  Section 1582 replaces CICA Handbook Section 1581, “Business Combinations”, and establishes standards for the accounting for business combinations that is equivalent to the business combination accounting standard under IFRS. Section 1582 is applicable prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after January 1, 2011, with early adoption permitted.
 
In the event of an acquisition after mandatory adoption of this standard, management expects some negative impact on results of operations from the adoption of this standard as it requires all costs related to an acquisition to be expensed as incurred.
 
Non-controlling Interests
 
In January 2009, the CICA issued Handbook Sections 1601, “Consolidated Financial Statements”, and Section 1602, “Non-controlling Interests”.  Sections 1601 and 1602 are applicable for interim and annual consolidated financial statements relating to fiscal years beginning on or after January 1, 2011, with early adoption permitted. An entity must adopt Sections 1582, 1601 and 1602 at the same time.
 
Section 1601 together with Section 1602 replaces CICA Handbook Section 1600, “Consolidated Financial Statements”. Section 1601 establishes standards for the preparation of consolidated financial statements. Section 1602 establishes standards for accounting for a non-controlling interest in a subsidiary in consolidated financial statements subsequent to a business combination.  The Company is evaluating the impact of this standard on its consolidated financial statements.
 
5.     Inventory
   
2009
    
2008
    
2007
  
                   
Raw materials and consumables
   $ 80,896     $ 103,132     $ 8,033  
Supplies
     24,706       28,633       28,633  
Medicine (finished goods)
     51,516       110,918       97,463  
                         
    $ 157,118     $ 242,683     $ 134,129  
 
Recognized in cost of sales is a write-down of inventory of $29,230 (2008 - $Nil).
 
 
Nerium Biotechnology, Inc. 
 
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(in U.S. dollars)
 
6.     Equipment and Leaseholds
 
               
2009
  
         
Accumulated
    
Net Book
  
   
Cost
    
Amortization
    
Value
  
                   
Laboratory furniture and equipment
   $ 268,469     $ 130,371     $ 138,098  
Vehicles
     32,439       32,398       41  
Clinic and office furniture and equipment
     196,053       167,562       28,491  
Computer equipment
     48,228       22,739       25,489  
Leasehold improvements
     122,480       122,356       124  
                         
    $ 667,669     $ 475,426     $ 192,243  
                         
                         
                    2008  
           
Accumulated
    
Net Book
  
   
Cost
    
Amortization
    
Value
  
                         
Laboratory furniture and equipment
   $ 266,912     $ 111,001     $ 155,911  
Vehicles
     32,439       32,314       125  
Clinic and office furniture and equipment
     192,883       153,839       39,044  
Computer equipment
     48,228       21,704       26,524  
Leasehold improvements
     122,480       114,681       7,799  
                         
    $ 662,942     $ 433,539     $ 229,403  
                         
                         
                      2007  
           
Accumulated
    
Net Book
  
   
Cost
    
Amortization
    
Value
  
                         
Laboratory furniture and equipment
   $ 258,241     $ 90,296     $ 167,945  
Vehicles
     32,439       32,230       209  
Clinic and office furniture and equipment
     182,550       144,488       38,062  
Computer equipment
     28,678       19,708       8,970  
Leasehold improvements
     122,480       103,825       18,655  
                         
    $ 624,388     $ 390,547     $ 233,841  
 
 
Nerium Biotechnology, Inc. 
 
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(in U.S. dollars)
 
7.     Share Capital 
 
Authorized
 
Unlimited            Common shares
 
Issued 
             
 
  
Shares
    
Amount
  
As at December 31, 2006
     25,910,046     $ 1,481,995  
Private placements (i) and (ii)
     3,200,000       1,301,453  
Share issue costs (ii)
     —       (43,762 )
As at December 31, 2007
     29,110,046       2,739,686  
Private placement (iii)
     1,325,110       1,325,110  
Share issue costs (iii)
     —       (20,000 )
Stock options exercised (note 10)
     30,000       3,007  
Value of stock options exercised
     —       2,354  
Shares issued in accordance with agreement (iv)
     50,000       50,000  
As at December 31, 2008
     30,515,156       4,100,157  
Private placement (iii)
     545,925       545,925  
Cancellation of certain founding shareholders’ shares, net (vi)
     (840,000 )     (761 )
Shares issued in accordance with certain agreements (vii)
     148,487       148,487  
As at December 31, 2009
     30,369,568     $ 4,793,808  
 
 
(i)
In October 2006, the Company’s Board of Directors approved a private placement of up to 3,500,000 common shares at a subscription price of CDN$0.001 per common share.  The private placement was completed in 2007 with 200,000 common shares being issued for gross proceeds of $181.
 
 
(ii)
In April 2007, the Company’s Board of Directors approved a private placement of up to 3,000,000 common shares at a subscription price of CDN$0.50 per common share.  During 2007, the private placement was completed for gross proceeds of $1,301,272.  Share issue costs of $43,762 were incurred relating to the private placement.
 
 
(iii)
In December 2007, the Company’s Board of Directors approved a private placement of up to 2,000,000 common shares of the Company at a subscription price of $1.00 per common share.
 
 
 
During the year ended December 31, 2008, the Company issued 1,325,110 shares for gross proceeds of $1,325,110.  Share issue costs of $20,000 were incurred relating to the private placement. During the year ended December 31, 2009, the Company issued 545,925 shares for gross proceeds of $545,925.
 
 
(iv)
In November 2008, the Company issued 50,000 common shares in accordance with a research and development agreement.  This transaction was recorded at the fair value of the common shares of $50,000 resulting in an increase to share capital and a corresponding expense to research and development.
 
 
Nerium Biotechnology, Inc. 
 
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(in U.S. dollars)
 
7.     Share Capital - continued
 
 
(v)
In November 2008, in connection with the Company’s anticipated filing of a final non offering prospectus, the 22,610,045 shares issued pursuant to the share agreement (see note 1) were agreed to be deposited into escrow to be released over a range of up to 36 months in 6 month tranches from the date of initial public offering.  As at December 31, 2009, the Company has not yet completed its final non offering prospectus.
 
 
(vi)
In February 2009, certain founding shareholders of the Company agreed to surrender a total of 840,000 common shares for cancellation.
 
 
(vii)
In August 2009, the Company issued 118,487 common shares in accordance with a research and development agreement. This transaction was recorded at the fair value of the common shares of $118,487 resulting in an increase to share capital and a corresponding expense to research and development. In addition, the Company issued 30,000 common shares in accordance with a consulting agreement. This transaction was recorded at the fair value of the common shares of $30,000 resulting in an increase to share capital and general and administrative expense.
 
 
(viii)
As at December 31, 2009, the Company had received $2,194 for 2,194 shares to be issued subsequent to year end.  In addition, during the year the Company received consulting services in exchange for 35,400 shares to be issued subsequent to year end, with an estimated fair value of $35,400.  This amount is included in general and administrative expenses.
 
8.     Related Party Transactions, Balances and Commitments
 
During the years ended December 31, the Company entered into the following related party transactions:
   
2009
    
2008
    
2007
  
Raw materials purchased from Phoenix US
   $ —     $ —     $ 488  
Contribution received from Phoenix US (i)
   $ —     $ —     $ 20,000  
Land lease payments to Phoenix US (ii)
   $ 53,024     $ 51,480     $ —  
Consulting services (iii) and (iv)
   $ 40,000     $ 100,957     $ 50,000  
 
 
(i)
As explained in note 1, Phoenix US and the Company are ultimately controlled by the same shareholders.  In February 2007, the Company received a $20,000 contribution from Phoenix US.   This amount was recorded in contributed surplus.
 
 
(ii)
The Company paid Phoenix US a total of $53,024 (2008 - $51,480; 2007 - $Nil) for access to its leased premises to harvest raw materials during the year.  This amount was recorded as a direct cost of raw materials inventory.
 
 
(iii)
The Company incurred consulting fees of $Nil (2008 - $85,957; 2007 - $50,000) during the year for services provided by a company controlled by a director of the Company in connection with the Company’s prospectus filing.  This amount is included in general and administrative expenses.  In addition, as at December 31, 2009 the amount of $Nil (2008 - $85,957; 2007 - $Nil) is included in accounts payable and accrued liabilities in relation to these services.
 
 
Nerium Biotechnology, Inc. 
 
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(in U.S. dollars)
 
8.     Related Party Transactions, Balances and Commitments - continued
 
 
(iv)
The Company incurred consulting fees of $40,000 (2008 - $15,000; 2007 - $Nil) during the year for services provided by a director of the Company.  This amount is included in general and administrative expenses.  As at December 31, 2009, the amount of $Nil (2008 - $5,000; 2007 - $Nil) is included in accounts payable and accrued liabilities in relation to these services.
 
In addition, the Company entered into related party transactions with certain shareholders in accordance with long-term commitments as follows:
 
 
(a)
The Company has entered into two separate agreements with one of its minority shareholders.  The first agreement, a production and purchasing agreement effective June 2004, entitles the minority shareholder to receive $3.25 per vial of Anvirzel sold to third parties in exchange for the use of facilities and production supervision. The second agreement, a consulting agreement effective January 2007, entitles the minority shareholder to receive an additional $3.25 per vial of Anvirzel sold to third parties in exchange for consulting services in relation to the production of Anvirzel.  Both agreements remain in effect for as long as Anvirzel is produced in Honduras.
 
 
 
During the year, the Company paid amounts totaling $9,402 (2008 - $9,667; 2007 - $5,680) to this minority shareholder in accordance with these long-term agreements.  These amounts are included in cost of sales.
 
 
(b)
Prior to 2004, the Company entered into a consulting agreement with one of its minority shareholders.  The agreement entitles the minority shareholder to receive $1.00 per vial of Anvirzel sold to third parties in Central America and $2.00 per vial for patients coming from countries other than Central America, to a maximum of $20,000 per month, expiring in 2018.
 
 
 
During the year, the Company paid amounts totaling $2,893 (2008 - $2,967; 2007 - $1,740) to this minority shareholder in accordance with the long-term agreement. These amounts are included in cost of sales.
 
The transactions with the related parties are in the normal course of business and are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties.  Amounts due to the related parties are non-interest bearing with no specified maturity date.
 
 
Nerium Biotechnology, Inc.
 
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(in U.S. dollars)
 
9.        Contributed Surplus 
     
2009
    
2008
    
2007
  
                     
 
Balance, beginning of year
   $ 718,407     $ 488,000     $ —  
 
Founding shareholder settlement (i)
     32,840       —       —  
 
Cancellation of certain founding shareholders’ shares, net (note 7(vi))
     761       —       —  
 
Stock-based compensation (note 10(i))
     —       113,000       —  
 
Value of stock options exercised
     —       (2,354 )     —  
 
Stock-based compensation (note 10(ii))
     —       119,761       —  
 
Contribution received from Phoenix US (note 8 (i))
     —       —       20,000  
 
Stock-based compensation (note 10(iii))
     —       —       153,000  
 
Stock-based compensation (note 10(iv))
     —       —       315,000  
 
Balance, end of year
   $ 752,008     $ 718,407     $ 488,000  
 
 
(i)
A certain founding shareholder agreed to settle an account payable to him of $32,840 in exchange for not participating in the founding shareholder share cancellation (see note 7(vi)).
 
10.      Stock-Based Compensation
 
The Company has reserved and set aside up to 10% of the issued and outstanding common shares for the granting of options to directors, officers, employees and consultants.  The terms of the awards under the Plan are determined by the Board of Directors.
 
A summary of the status of the Company’s outstanding stock options as of December 31, 2009, 2008 and 2007, and changes during the years is presented in the following table. 
   
2009
     2008     2007  
         
Weighted-
          
Weighted-
          
Weighted-
  
         
average
          
average
          
average
  
   
Stock
    
exercise
    
Stock
    
exercise
    
Stock
    
exercise
  
   
options
    
price
    
options
    
price
    
options
    
price
  
      #    
CDN$
    
#
    
CDN$
     #     CDN$  
                                       
Outstanding, beginning
     3,030,000     $ 0.32       2,750,000     $ 0.22       —     $ —  
Granted (i) and (ii)
     —       —       310,000       1.22       —       —  
Granted (iii) and (iv)
     —       —       —       —       2,750,000       0.22  
Exercised (iii)
     —       —       (30,000 )     0.10       —       —  
                                                 
Outstanding, ending
     3,030,000     $ 0.32       3,030,000     $ 0.32       2,750,000     $ 0.22  
 

Nerium Biotechnology, Inc.
 
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(in U.S. dollars)
 
10.      Stock-Based Compensation - continued
 
The weighted-average remaining contractual life and weighted-average exercise price of options outstanding and of options exercisable as at December 31, 2009 are as follows: 
Options Outstanding    
Options Exercisable
  
                 
Weighted-
              
           
Weighted-
    
Average
          
Weighted-
  
           
Average
    
Remaining
          
Average
  
Exercise
          
Exercise
    
Contractual
          
Exercise
  
Prices
    
Outstanding
    
Price
    
Life
    
Exercisable
    
Price
  
CDN$
       #    
CDN$
    
Years
       #    
CDN$
  
$ 0.10       1,920,000     $ 0.10       2.05       1,920,000     $ 0.10  
$ 0.50       800,000     $ 0.50       2.52       800,000     $ 0.50  
$ 1.22       310,000     $ 1.22       3.54       310,000     $ 1.22  
          3,030,000     $ 0.32       2.32       3,030,000     $ 0.32  
 
 
(i)
The fair value of 150,000 stock options granted to a consultant on February 8, 2008, which vested immediately, was determined to be $113,000 at $0.75 per option, using the Black-Scholes model for pricing options.  This amount was recorded as stock-based compensation expense and an increase to contributed surplus.  The following assumptions were used: risk free interest rate of return of 3.39%, expected volatility of 105%, dividend yield of 0% and expected life of 5 years.
 
 
(ii)
The fair value of 160,000 stock options granted to employees on December 5, 2008, which vested immediately, was determined to be $119,761 at $0.75 per option, using the Black-Scholes model for pricing options.  This amount was recorded as stock-based compensation expense and an increase to contributed surplus.   The following assumptions were used: risk free interest rate of return of 2.21%, expected volatility of 105%, dividend yield of 0% and expected life of 5 years.
 
 
(iii)
The fair value of 1,950,000 stock options granted to various directors, employees and consultants on January 17, 2007, which vested immediately, was determined to be $153,000 at $0.08 per option, using the Black-Scholes model for pricing options.  This amount was recorded as stock-based compensation expense and an increase to contributed surplus.  The following assumptions were used: risk free interest rate of return of 4.3%, expected stock volatility of 105%, dividend yield of 0% and expected life of 5 years.  30,000 of these options were exercised in 2008.
 
 
(iv)
The fair value of 800,000 stock options granted to a consultant on July 9, 2007, which vested immediately, was determined to be $315,000 at $0.39 per option, using the Black-Scholes model for pricing options.  This amount was recorded as stock-based compensation expense and an increase to contributed surplus.  The following assumptions were used: risk free interest rate of return of 4.69%, expected stock volatility of 105%, dividend yield of 0% and expected life of 5 years.
 

Nerium Biotechnology, Inc.
 
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(in U.S. dollars)
 
11.
Loss Per Share
 
The following table sets forth the computation of basic and diluted loss per share for the years ended December 31:
     
2009
    
2008
    
2007
  
 
Numerator:
                  
 
Net loss attributable to common shareholders - basic and diluted
   $ (1,301,183 )   $ (1,428,738 )   $ (1,074,508 )
 
Denominator:
                        
 
Weighted-average common shares outstanding - basic and diluted
     30,154,956       29,937,079       28,266,108  
 
Basic loss per common share
   $ (0.04 )   $ (0.05 )   $ (0.04 )
 
Diluted loss per common share
   $ (0.04 )   $ (0.05 )   $ (0.04 )
 
As a result of the net losses for the years ended December 31, 2009, 2008 and 2007, the potential effect of the exercise of stock options was anti-dilutive.  Therefore, 3,030,000 (2008 - 3,030,000; 2007 - 2,750,000) options were excluded from the computation of weighted-average number of diluted common shares outstanding because their impact would be anti-dilutive.
 
12.
Income Taxes
 
Major items causing the Company’s income tax rate to vary from the Canadian combined statutory rate of approximately 33% (2008 - 33.5%; 2007 - 36%) are as follows: 
     
2009
    
2008
    
2007
  
 
Loss for the year
   $ 1,301,183     $ 1,428,738     $ 1,074,508  
 
Expected income tax recovery based on statutory rate
   $ 429,390     $ 478,627     $ 386,823  
 
Adjustments arising from:
                        
 
Non-deductible stock-based compensation or shares issued for services
     (60,683 )     (77,975 )     (168,480 )
 
Non-deductible foreign operating losses
     (32,718 )     (8,942 )     (42,369 )
 
Other non-taxable or non-deductible items
     (3,242 )     (2,887 )     (1,439 )
 
Future income tax expense resulting from reduction in Canadian future tax rates
     (48,653 )     (4,035 )     (7,245 )
 
Future income tax benefit from U.S. tax rate adjustment
     5,256       5,355       1,800  
 
Increase in valuation allowance as a result of current year loss
     (289,350 )     (390,143 )     (169,090 )
 
Provision for income taxes
   $ —     $ —     $ —  
 
 
Nerium Biotechnology, Inc. 
 
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(in U.S. dollars)
 
12.      Income Taxes - continued 
 
The approximate tax effect of each type of temporary difference that gives rise to the Company’s future income tax assets is as follows: 
     
2009
    
2008
    
2007
  
 
Non-capital losses carried forward
   $ 848,583     $ 559,233     $ 169,090  
 
Valuation allowance
     (848,583 )     (559,233 )     (169,090 )
                           
      $ —     $ —     $ —  
 
The Company has approximately CDN$2,911,000 Federally and Provincially for Canadian purposes and US$2,320,000 for U.S. purposes in non-capital losses carried forward and available to reduce future taxable income.  However, non-capital losses carried forward in Canada, under the Company’s current structure, can only be utilized in excess of losses carried forward in the U.S.
 
To the extent they are not utilized, the non-capital losses carried forward expire as follows: 
               
 
 
  
Canada
    
United States
  
     
CDN$
     US$  
 
 
            
 
2027
   $ 521,000     $ 360,000  
 
2028
   $ 1,238,500     $ 1,071,000  
 
2029
   $ 1,151,500     $ 889,000  
 
13.      Commitments
 
Operating leases
 
At December 31, 2009, the Company is committed to operating lease payments for its various premises in the following amounts:

 
2010
   $ 84,987  
 
2011
     59,201  
           
 
 
  
$
 144,188  
 
Research and Development
 
As at December 31, 2009, the Company was committed to outsource certain research and development activities to third parties.  Estimated payments for future expenditures in accordance with the terms of certain agreements, which are due upon delivery of research data, are approximately $67,294.
 
 
Nerium Biotechnology, Inc.
 
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(in U.S. dollars)
 
14.      Financial Instruments
 
The Company’s financial instruments include cash and cash equivalents, accounts receivable and accounts payable and accrued liabilities.  The carrying value of the financial instruments approximates their fair value because of the short-term maturities of these items.
 
The Company’s risk exposure and the impact on its financial instruments is summarized below:
 
Credit risk
 
Credit risk is the risk of loss associated with a counterparty’s inability to fulfill its contractual obligations.  The Company is exposed to credit risk on its cash and cash equivalents and accounts receivable.
 
The Company has deposited the cash and cash equivalents with reputable financial institutions, from which management believes the risk of loss is minimal.  The Company’s cash and cash equivalents are not subject to any external restrictions.
 
Management believes that credit risk concentration with respect to the financial instruments included in accounts receivable is not significant.
 
Liquidity risk
 
The Company’s approach to managing liquidity risk is to ensure that it will have sufficient liquidity to meet liabilities when due.  The Company does not have any debt other than accounts payable and accrued liabilities.  The Company also has commitments discussed in Notes 8 and 13.
 
Since inception, the Company has financed its liquidity needs through private placements of common shares.  To secure additional capital, the Company may attempt to raise additional funds through the issuance of common shares.
 
Interest rate risk
 
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate due to changes in market interest rates.
 
The Company is exposed to interest rate risk arising from fluctuations in interest rates received on its cash and cash equivalents.  Fluctuations in market interest rates do not have a significant impact on the Company’s results of operations due to the short-term nature of interest bearing cash and cash equivalents.
 
Accounts payable and accrued liabilities bear no interest.
 
Currency risk
 
The Company is exposed to currency fluctuations as a significant amount of its accounts payable and accrued liabilities are denominated in Canadian dollars and Honduran Lempira.  The Company does not use derivative instruments to reduce its exposure to foreign currency risk.
 
As at December 31, 2009, a change in the Canadian dollar of +/- 10% against the U.S. dollar with all other variables held constant, would have an impact on net loss for the year of $4,300.
 
As at December 31, 2009, a change in the Honduran Lempira of +/- 10% against the U.S. dollar with all other variables held constant, would have an impact on net loss for the year of $1,450.
 
 
Nerium Biotechnology, Inc. 
 
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(in U.S. dollars) 
 
15.      Capital Disclosure 
 
The Company’s primary objective with respect to its capital management is to ensure that it has sufficient cash resources to maintain its ongoing operations.  The Company includes shareholders’ equity in the definition of capital.
 
Management reviews its capital management approach on an ongoing basis and believes that this approach, given the relative size of the Company, is reasonable.
 
There were no changes to the Company’s approach to capital management during the year ended December 31, 2009.  The Company is not subject to externally imposed capital requirements.
 
16.      Segmented Information
 
The Company has one operating segment, being the production and sale of Anvirzel.  The Company’s sales and equipment and leaseholds by geographical area are as follows:
 
Sales
 
All Company sales originate in Honduras where Anvirzel is produced and shipments originate.  It is not practical to provide geographical information by customer location.
 
Equipment and leaseholds
     
2009
    
2008
    
2007
  
                     
 
United States
   $ 29,185     $ 37,345     $ 14,112  
 
Honduras
     163,058       192,058       219,729  
                           
      $ 192,243     $ 229,403     $ 233,841  
 
17.      Subsequent Events
 
Subsequent to year end, the Company closed its ongoing private placement (see note 7(iii)) by issuing 128,965 shares for gross proceeds of $128,965.  In addition, as resolved by the Board of Directors, the Company issued an additional 75,500 shares for gross proceeds of $75,500.
 
 
Nerium Biotechnology, Inc. 
 
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(in U.S. dollars) 
 
18.
Differences Between Canadian and United States Accounting Principles
 
These consolidated financial statements of the Company for the years ended December 31, 2009, 2008 and 2007 have been prepared in accordance with generally accepted accounting principles as applied in Canada (“Canadian GAAP”).  In the following respects, generally accepted accounting principles as applied in the United States (“US GAAP”) and practices prescribed by the United States Securities and Exchange Commission differ from those applied in Canada.
 
There would be no adjustments needed to arrive at net loss for the years ended December 31, 2009, 2008 and 2007 if US GAAP were employed.  Similarly, there would be no adjustments required to the balance sheet, other than the presentation difference noted below regarding accounts payable and accrued liabilities, including shareholders’ equity as at December 31, 2009, 2008 and 2007 if US GAAP were employed.
 
There is no difference in the cash flows presented under US GAAP.
 
Accounts payable and accrued liabilities
 
Under Canadian GAAP, accounts payable and accrued liabilities are presented in the consolidated financial statements on an aggregate basis. US GAAP requires that the accounts payable and accrued liabilities be presented in the consolidated financial statements as follows:
     
2009
    
2008
    
2007
  
                     
 
Trade accounts payable
   $ 9,028     $ 99,737     $ 10,379  
 
Employee related accruals
     3,826       13,622       10,811  
 
Other accrued liabilities
     51,317       59,819       41,495  
                           
      $ 64,171     $ 173,178     $ 62,685  
           
Income taxes
 
Under US GAAP, the Financial Accounting Standards Board (“FASB”) issued interpretation No. 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109 (“FIN 48”), as codified in ASC 740, Income taxes.  FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  This interpretation also provides guidance as to derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.  Under Canadian GAAP, there is no such interpretation; however, there were no significant differences for the reserve related to income tax contingencies for the data presented.
 
In addition, under Canadian GAAP, income taxes are measured using enacted or substantively enacted tax rates, while under US GAAP; measurement is based on enacted tax rates.  There were no significant differences between enacted and substantively enacted rates for the data presented.
 
 
Nerium Biotechnology, Inc. 
 
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(in U.S. dollars) 
 
18.
Differences Between Canadian and United States Accounting Principles - continued
 
Stock-based compensation
 
For US GAAP purposes, the Company accounts for stock-based compensation associated with stock options as codified in ASC 718, Stock Compensation (“ASC 718”).  Consistent with Canadian GAAP, ASC 718 requires that all share based payments to employees, including grants of employee stock options, be recognized based on the fair values of the options as they vest.  However, in calculating compensation to be recognized, ASC 718 requires the Company to estimate forfeitures.  Under Canadian GAAP the Company accounts for forfeitures as they occur.  The effects of forfeitures are immaterial and no adjustments for any years are required.
 
Adoption of new accounting pronouncements
 
In April 2009, the FASB issued a pronouncement on what is now codified as ASC Topic 805, Business Combinations.  This pronouncement issued authoritative guidance on accounting for assets acquired and liabilities  assumed  in  a  business  combination  that  arise  from  contingencies,  which amends the provisions related to the initial recognition and measurement, subsequent measurement and disclosure of assets and liabilities arising from contingencies in a business combination  under  previously  issued guidance.  The authoritative guidance requires that such contingencies be recognized at fair value on the acquisition date if fair value can be reasonably estimated during the allocation period.  The new guidance is effective as of the beginning of an entity’s fiscal year that begins after December 15, 2008, and was adopted by the Company on January 1, 2009.   The adoption of this new guidance had no material impact on the Company’s consolidated financial position, results of operations or cash flows.
 
On January 1, 2009, the Company adopted the provisions of FASB FAS No. 157, Fair Value Measurements, as codified as Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures (“ASC 820”), for non-financial assets and non-financial liabilities.  The adoption of ASC 820 for non-financial assets and non-financial liabilities did not have a material impact on the Company’s consolidated results of operations, financial position or cash flows.
 
In May 2009, the FASB issued FAS 165, Subsequent Events (“FAS 165”).  This Statement, which was codified as ASC 855, Subsequent Events, incorporates this guidance into accounting literature that was previously addressed only in auditing standards.  The Statement refers to subsequent events that provide additional evidence about conditions that existed at the balance sheet date as “recognized subsequent events”.  Subsequent events which provide evidence about conditions that arose after the balance sheet date but prior to the issuance of the financial statements are referred to as “non-recognized subsequent events”.  This guidance is effective for interim or annual periods ending after June 15, 2009 and was applied prospectively by the Company.  The adoption of ASC 855 did not have a material impact on the Company’s consolidated results of operations, financial position or cash flows.
 
 
Nerium Biotechnology, Inc. 
 
Notes to Consolidated Financial Statements
December 31, 2009, 2008 and 2007
(in U.S. dollars)
 
18.
Differences Between Canadian and United States Accounting Principles - continued
 
Adoption of new accounting pronouncements - continued
 
In June 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-01, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles - a replacement of FASB Statement No. 162 (“ASU 2009-01”).  The FASB Accounting Standards Codification (the “Codification”) is intended to be the source of authoritative US GAAP and reporting standards as issued by the FASB.  Its primary purpose is to improve clarity and use of existing standards by grouping authoritative literature under common topics.  This Statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009.  The Codification does not change or alter existing US GAAP for public companies and its adoption had no impact on the Company’s consolidated results of operations, financial position or cash flows.  The Company conformed its consolidated financial statement footnote disclosures to the Codification for the year ended December 31, 2009.
 
Recent accounting pronouncements
 
In October 2009, the FASB issued ASU No. 2009-13, Multiple-Deliverable Revenue Arrangements (“ASU 2009-13”).  ASU 2009-13 amends existing revenue recognition accounting pronouncements that are currently within the scope of ASC Subtopic 605-25.  This statement provides principles for allocation of consideration among its multiple-elements, allowing more flexibility in identifying and accounting for separate deliverables under an arrangement.  ASU 2009-013 introduces an estimated selling price method for valuing the elements of a bundled arrangement if vendor-specific objective evidence or third-party evidence of selling price is not available, and significantly expands related disclosure requirements.  This standard is effective on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010.  Alternatively, adoption may be on a retrospective basis, and early application is permitted.  As the Company does not currently enter into multiple-deliverable revenue arrangements the adoption of this pronouncement is not expected to have a material impact on the future consolidated results of operations, financial position or cash flows.
 
In January 2010, the FASB issued ASU No. 2010-06, Improving Disclosures about Fair Value Measurements, which amends FASB ASC Topic 820, Fair Value Measurements and Disclosures.  ASU 2010-06 requires new disclosures regarding significant transfers between Level 1 and Level 2 fair value measurements, and disclosures regarding purchases, sales, issuances and settlements, on a gross basis, for Level 3 fair value measurements.  ASU 2010-06 also calls for further disaggregation of all assets and liabilities based on line items shown in the consolidated balance sheet.  This amendment is effective for fiscal years beginning after December 15, 2010 and interim periods within those fiscal years.  The Company is currently evaluating the impact of adopting this pronouncement.
 
Other recent accounting pronouncements
 
Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force) and the United States Securities and Exchange Commission did not or are not believed to have a material impact on the Company’s present or future consolidated financial position.
 
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