e10ksb

10KSB 1 v06067e10ksb.htm FORM 10-KSB e10ksb

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-KSB


þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the fiscal year ended December 31, 2004

OR

o		TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 33-20897-D

HELIX BIOMEDIX, INC.


Delaware		91-2099117
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

22122-20th Avenue Southeast, Suite 148, Bothell, Washington 98021

(Address of principal executive offices)

(425) 402-8400

(Registrant’s telephone number, including area code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

Not Applicable

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

NONE

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for 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 þ No o

Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. þ

As of March 4, 2005, there were 15,198,538 shares of common stock, $0.001 par value, of Helix BioMedix, Inc. issued, and the aggregate market value of the common stock held by non-affiliates as of that date was $27,357,368.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Proxy Statement relating to the registrant’s 2005 Annual Meeting of Stockholders to be held on May 11, 2005 are incorporated by reference into Part III of this Report.

HELIX BIOMEDIX, INC.

FORM 10-KSB

TABLE OF CONTENTS


PART I
Item 1.	Business	1
Item 2.	Properties	16
Item 3.	Legal Proceedings	16
Item 4.	Submission of Matters to a Vote of Security Holders	16
PART II
Item 5.	Market for Common Equity and Related Stockholder Matters	16
Item 6.	Management’s Discussion and Analysis or Plan of Operation	17
Item 6a.	Quantitative and Qualitative Disclosures about Market Risk	21
Item 7.	Financial Statements	22
Item 8.	Changes In and Disagreements With Accountants on Accounting and Financial Disclosure	43
Item 8a.	Controls and Procedures	43
PART III
Item 9.	Directors and Executive Officers of the Registrant	43
Item 10.	Executive Compensation	43
Item 11.	Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters	43
Item 12.	Certain Relationships and Related Transactions	43
Item 13.	Exhibits	45
Item 14.	Principal Accountant Fees and Services	47
EXHIBIT 10.21
EXHIBIT 10.22
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

PART I

Forward-Looking Statements

Our disclosure and analysis in this Annual Report and in the documents incorporated by reference contain forward-looking statements, which provide our current expectations or forecasts of future events. Forward-looking statements include, without limitation:


	•	statements concerning possible or assumed future results of operations, trends in financial results and business plans, including those relating to earnings growth and revenue growth;

	•	statements about our product development schedule;

	•	statements about our future capital requirements and the sufficiency of our cash, cash equivalents, investments and any other sources to meet these requirements;

	•	statements about our plans, objectives, expectations and intentions; and

	•	other statements that are not historical facts.

Words such as “believes”, “anticipates”, “expects” and “intends” and similar expressions may identify forward-looking statements, but the absence of these words does not necessarily mean that a statement is not forward-looking. Forward-looking statements are subject to known and unknown risks and uncertainties and are based on potentially inaccurate assumptions that could cause actual results to differ materially from those expected or implied by the forward-looking statements. Our actual results could differ materially from those anticipated in the forward-looking statements for many reasons, including the factors described in the section entitled “Certain Factors That May Affect Our Business and Future Results” in this Annual Report. Other factors besides those described in this Annual Report could also affect actual results. You should carefully consider the factors in the section entitled “Certain Factors That May Affect Our Business and Future Results” in evaluating our forward-looking statements.

You should not unduly rely on these forward-looking statements, which speak only as of the date of this Annual Report. We undertake no obligation to publicly revise any forward-looking statement to reflect circumstances or events after the date of this Annual Report or to reflect the occurrence of unanticipated events. You should, however, review the factors and risks we describe in the reports we file from time to time with the Securities and Exchange Commission, or SEC, after the date of this Annual Report.


ITEM 1.	*BUSINESS*


	*Overview*

We were incorporated in Colorado on February 2, 1988, and then on November 1, 2000 we merged into a newly formed Delaware corporation. Our headquarters and our research and development operations are located in Bothell, Washington. Our mission is to become an industry leader in developing and commercializing small proteins known as bioactive peptides. Our primary commercial objective is to out-license the rights to use our specific proprietary peptides in distinct fields of application.

We define a peptide as a chain of molecules known as amino acids, one of the basic building blocks of all living things. Chains of 2 – 50 amino acids are generally referred to as “peptides”, while much longer amino acid chains are traditionally referred to as “proteins”.

Naturally occurring bioactive peptides with anti-microbial characteristics play an important role in humans and other vertebrates to defend against the invasion of potentially harmful microbes. These bioactive and anti-microbial peptides are found in a vast array of living organisms, including fish, plants, insects, and mammals. In humans, the expression of these peptides on mucosal surfaces of the respiratory and gastrointestinal tracks as well as by the glands of the skin cause the death of numerous disease causing viruses, bacteria, protozoa, yeasts, and fungi. In addition, these peptides modulate aspects of inflammation, wound healing and tissue growth.

Our expertise and technology allow us to design cost effective synthetic bioactive peptides to be more powerful than those occurring in nature while having low levels of toxicity. We have created an extensive library of bioactive peptides protected by patents covering potentially hundreds of thousands of these peptides.

We specifically modify naturally-occurring bioactive peptides by rearranging the order and combination of their amino acids and by substituting and deleting additional amino acids to produce synthetic peptides having a broader spectrum of therapeutic activity with improved potency, specificity and toxicity profiles. While our patented synthetic bioactive peptides exhibit the same two fundamental mechanisms of action that characterize their naturally-occurring counter parts: (1) defense against infection; and, (2) stimulation of the healing process, they are carefully engineered to be safely delivered in larger quantities and with more powerful configurations than those provided by nature.

We believe that our bioactive peptides have important clinical applications as potential topical anti-infective and wound healing agents. We also believe that our peptides have potential for extensive use in non-clinical products in the areas of biocides, animal health, and skin care.

We are actively pursuing skin care and pharmaceutical out-licensing opportunities for two of our leading synthetic bioactive peptide candidates and are in the early stages of evaluating the suitability of several of our other peptide candidates for additional product applications.


	Acne skin care:

Our lead peptide, known as HB64, has shown promise for use as a cosmetic ingredient in re-formulating over-the-counter acne products. In two human panel tests conducted by DermDx Centers for Dermatology during 2003, HB64 was evaluated for and demonstrated an ability to improve the complexion of panelists with mild to moderate acne.

The tests comprised of both patient and physician assessments. At commercially-viable peptide concentrations, more than 40% of the patients evidenced an improvement in complexion as determined by physician assessment. Seventy-eight percent (78%) of the study participants indicated that our HB64 peptide gel improved their complexion, and 96% of the study participants indicated that the test formulation was equal or superior to other acne products they had previously used.

Independent third party human panel tests conducted by skin care product companies during 2004 confirmed the beneficial activities observed by us in our own tests. In third party tests aimed at defining product profiles, which included rapid response time, the majority of participants observed favorable results within the first week of use. In addition, another third party trial demonstrated that inclusion of HB64 in an anti-acne formulation provided additional skin care benefits and was complementary to the anti-acne ingredient’s activity, enhancing overall product performance.

We are actively pursuing out-licensing opportunities with respect to HB64 in the area of acne. It is estimated that nearly 45 million people in the United States have acne, which is the most common skin disorder of adolescence and early adulthood (ages 15-24 years) with a prevalence of approximately 85%. The U.S. market for acne medications represents approximately $2.0 billion in annual sales.


	Anti-aging/anti-wrinkle skin care:

Peptides of the innate immune system have been specifically designed by nature to aid wound healing through the stimulation and proliferation of regenerative cells and are, therefore, ideally suited to producing the esthetically beneficial effects associated with traditional, artificial cosmetic ingredients. The success of skin-care products such as Olay’s Regenerist^tm and L’Oreal’s Plenitude^tm illustrate the use of peptide-based formulations in skin-care/regeneration products.

Our second lead peptide known as HB168pal, a six-residue peptide engineered for increased dermal penetration, has proven particularly active in industry-standard assays for anti-wrinkle actives. During Q2 2004 HB168pal was compared to Renova^tm, a currently marketed product approved by the U.S. Food and

Drug Administration, or FDA, for reducing fine lines and wrinkles, in a 12-week consumer product test. HB168pal demonstrated equivalence to RenovaTM without the irritation associated with Renova^tm.

HB168pal reduced the appearance of fine lines and wrinkles around the eyes in 69 percent of the subjects, with a marked or moderate improvement in 35 percent of the subjects. These results compare favorably with the results experienced by those using RenovaTM: 69 percent showed improvement and 27 percent showed marked or moderate improvement. Of significance is that HB168pal produced these results without causing irritation. Irritation is a major issue in the skin care industry. For example, RenovaTM, a well-respected industry leader states on its label that it has been shown to cause such adverse reactions as peeling, redness and dry skin. Over 25 percent of study participants commented on irritation caused by the use of RenovaTM; yet, no subjects reported any of these effects while using HB168pal peptide. The subjects of the trial ranged in age from 40 to 78 (mean age 56).

We are actively pursuing out-licensing opportunities with respect to HB168pal in the area of anti-aging/anti-wrinkle skin care. Age driven purchases of skin care products have reached $2.8 billion per year in the U.S., with $1.5 billion of that total focused on facial skin care.

We have earlier stage out-licensing candidates in product categories including biocides and wound healing applications.

The ability of small bioactive peptides to kill a wide range of microorganisms makes them applicable to a number of biocide-based products. These include their attachment to, inclusion in or deposition onto medical devices or high-risk-of-contamination products such as hospital equipment, poultry cutting boards and certain waste containers. In collaboration with other companies, we have initiated a number of early-stage programs directed at the development of products in this area.

The use of traditional antimicrobial agents either impregnated or applied to polymer surfaces has not progressed for three reasons: (i) concerns regarding the development of drug-resistant bacteria; (ii) the fact that these antibiotics do not tend to kill target bacteria very rapidly; and (iii) the technical challenges presented by attaching small molecule antibiotics to polymers. None of these issues appear to apply to our peptides.

HB50 is our lead topical anti-infective peptide. Its attributes include broad spectrum activity, lack of resistance induction, cost effective synthesis, stability and activity against multiply-antibiotic-resistant pathogens. In preclinical testing HB50, a gel formulation has shown to significantly reduce the number of Staphylococcus aureus in an abraded skin infection model and in the majority of cases eradicated the organism. This in vivo activity is maintained against methicillin and mupirocin (Bactroban^tm) resistant isolates in situations where mupirocin is ineffective. Due to potent activity against multiply-resistant S. aureus HB50 appears to hold great potential for the prevention of wound infections. In addition, with activity against other gram-positive bacteria and gram-negative bacteria such as Pseudomonas aeruginosa the peptide also has application in the areas of burn wounds and dermatology.

The worldwide market for topical anti-infectives used in chronic wounds, burn wounds and surgical and trauma wounds is currently estimated at $1.4 billion per year. A novel product with broad spectrum activity and lack of resistance induction could expand that market.

There is increasing evidence that peptides associated with innate immunity and mucosal defense provide both protective and modulatory functions. Our aim is to isolate and adapt the modulatory functions from such peptides to provide stimulatory benefit to the wound healing process. From this work a lead candidate peptide, HB107, has been identified to exhibit many of the attributes required within a wound healing therapeutic product profile. The peptide has demonstrated efficacy in both surgical and full-thickness-burn wound models. In addition, the peptide has been shown to be safe, with no observable dermal or systemic toxicity, as determined by a wide range of blood factor endpoints. Pre-clinical and mechanistic studies are currently underway.

In a pilot test conducted by Charles River Laboratories during Q2 2003, HB107 appeared to accelerate the regeneration of new cells (re-epithelialization) in the process of healing burn wounds. Animals treated

with relatively low concentrations of HB107 appeared to regenerate new cells faster than those treated with a placebo gel. This four-week study was conducted on full thickness burn wounds. Although only a small-scale study, regression analysis demonstrated that HB107 might be capable of reducing the time to achieve 50% re-epithelialization by nearly 40%. HB107 showed no signs of toxicity as determined by histology and extensive blood analysis.

During Q3 2003, we actively initiated our out-licensing efforts with respect to our lead peptides and in 2004, a substantial amount of resources were dedicated to interacting with companies that are considering the inclusion of our peptides in either existing or prospective products. We identify and develop our licensing opportunities selectively, by “pre-qualifying” potential partners through the following two-stage process:


	•	Stage 1 — Preliminary Marketing Package: Initially, our scientific team generates only the minimum in vitro/in vivo data sufficient to provoke further evaluation of our peptides for a specific application or therapy. We disseminate these application-specific, preliminary data packages to relevant pharmaceutical and consumer product companies with potential interest. The objective of distributing these semi-customized, proof-of-concept data packages is to identify partners interested in either: (i) licensing the subject peptide based upon their own further research; or (ii) entering a co-development process with us to further advance our peptide for its targeted product or therapy.

The quantity, quality, and detail of the data required to attract preliminary licensing interest will differ for each industry and application. For example, a commercial partner facing the evaluation process mandated by the FDA for pharmaceutical applications may have preliminary data requirements that differ significantly in form and emphasis from the data required by a potential partner exploring an agricultural application or the enhancement of a cosmetic product.


	•	Stage 2 — Collaborative License Development: Once a prospective licensing partner demonstrates serious interest in evaluating our peptides for use in their products or therapies, we essentially become co-developers in advancing the opportunity to licensure.

Our participation in the co-development process will vary materially in each case, depending upon the nature of the product opportunity, the test and formulation data needed to reach an affirmative commercial commitment, and our in-house ability to produce the incremental tests and data required. In some cases, we merely screen and supply peptides for testing and analysis by our prospective partner. In other cases, we may perform reimbursed testing in-house, contract for third-party analysis, or develop a joint evaluation program in collaboration with our partner.

Ultimately, we must judge in each case whether the cost of dedicating our limited resources to further product development justifies the expected value of capturing the relatively larger future income stream that should result from hedging our partner’s risk through active co-development.

In November, 2004, we entered into a joint marketing agreement with Body Blue, Inc., a cosmetic and over-the-counter drug formulator and manufacturer. Under this agreement Body Blue has the exclusive right to market our peptides to specified third parties and, in exchange, we agreed to name Body Blue as a preferred provider of formulation services with respect to our peptides.

The cosmetic, biotechnology, and pharmaceutical industries are characterized by rapidly advancing technologies, intense competition, and a strong emphasis on proprietary products. Many participants in these industries, as well as academic institutions, and other research organizations, are actively engaged in the discovery, research and development of products that could compete with our products under development. They may also compete with us in recruiting and retaining skilled scientific talent.

We believe that we face two broad classes of competitors:


	•	other companies developing therapies based upon peptide technology; and

	•	companies using other technologies to address the same disease conditions that we are targeting.

We are currently aware of several companies that are utilizing peptide-based technologies for antimicrobial applications including: Adaptive Therapeutics, Inc., Agennix, Inc., AM Pharma Holdings, B.V., Cubist

Pharmaceuticals, Inc., Demegen, Inc., Entomed SA, Genarea Corporation, Inimex Pharmaceuticals, IntraBiotics Pharmaceuticals, Inc., Migenix, Inc., and Xoma Corporation.

Even if our peptide technology proves successful, we might not be able to be competitive in this rapidly advancing area of technology. Some of our potential competitors have more financial and other resources, larger research and development staffs, and more experience than us in researching, developing, and testing products. Some of these companies also have more experience than us in conducting clinical trials, obtaining FDA and other regulatory approvals and manufacturing, marketing and distributing medical and consumer products. Smaller companies may successfully compete with us by establishing collaborative relationships with larger companies or academic institutions. Our competitors may succeed in developing, obtaining patent protection for or commercializing their products more rapidly than us. A competing company developing, or acquiring rights to, a more effective therapeutic product for the same diseases targeted by us, or one that offers significantly lower costs of treatment, could render our product noncompetitive or obsolete.

We believe that there are several readily available sources of raw materials necessary for our peptides. We do not plan to manufacture peptides on a commercial scale. However, in support of the development process required to advance our licensing strategy, we have produced and maintain a small, inexpensive peptide inventory. In planning for commercial-scale production, we have sought collaborations with several credible, experienced manufacturers specializing in the production of peptides. With their assistance, we have developed production plans and costs that will support the inclusion of our peptides in a wide range of both consumer and clinical products. Several of these contract manufacturers are capable of scaling peptide synthesis to support all of our projected volume and configuration requirements.

We have developed a proprietary library containing a broad and diverse array of synthetic bioactive peptides. Our peptide library is protected by an extensive intellectual property estate composed of both composition-of-matter and use patents. We believe that the broad claims and early priority dates of our patent estate represent important competitive advantages, and that no other competitor controls such an extensive and diverse peptide library.

We currently hold 8 patents issued in the United States and have applications pending in the United States for an additional 5 patents. We also have 9 issued foreign patents and have applications pending for 5 additional foreign patents. These patents cover six distinct classes of peptides, comprising more than 100,000 unique peptide sequences. The control of a patent-protected molecule library comprising several structural classes of peptides distinguishes us from our competitors, many of whom are attempting to develop only a single class of peptide for multiple applications. The breadth of this library offers our scientists an exceptionally wide range of options in matching optimal peptides with individual product or therapeutic requirements.

We rely on a combination of patent, trademark, copyright, and trade secret laws to protect our proprietary technologies and products. We aggressively seek U.S. and international patent protection applicable to our peptide technologies. We also rely on trade secret protection for our confidential and proprietary information and in-license technologies we view as necessary to our business plan. In general, we seek patent protection for composition of matter and broad areas of use for our membrane-disruptive peptides. We believe that our patent estate provides unusually broad and early patent coverage.

With respect to proprietary know-how that is not patentable, we have chosen to rely on trade secret protection and confidentiality agreements to protect our interests. We have taken security measures to protect our proprietary know-how, technologies, and confidential data and continue to explore further methods of protection. We require all employees, consultants, and collaborators to enter into confidentiality agreements, and all employees and most consultants enter into invention assignment agreements with us. The confidentiality agreements generally provide that all confidential information developed or made known to the individual during the course of such relationship will be kept confidential and not disclosed to third parties, except in specified circumstances. The invention agreements generally provide that all inventions conceived by the individual in the course of rendering services to us will be our exclusive property. We cannot assure you, however, that these agreements will provide meaningful protection or adequate remedies for any breach or that our trade secrets will not otherwise become known or be independently discovered by our competitors.

In the case of a strategic partnership or other collaborative arrangement which requires the sharing of data, our policy is to disclose to our partner, under controlled circumstances, only data that is relevant to the partnership or arrangement during the contractual term of the strategic partnership or collaborative arrangement, subject to a duty of confidentiality on the part of our partner or collaborator. Disputes may arise as to the ownership and corresponding rights to know-how and inventions resulting from research by us and our corporate partners, licensors, scientific collaborators, and consultants. We cannot assure you that we will be able to maintain our proprietary position or that third parties will not circumvent any proprietary protection we have. Our failure to maintain exclusive or other rights to these technologies could harm our competitive position.

To continue developing and commercializing our current and future products, we may license intellectual property from commercial or academic entities to obtain the rights to technology that is required for our discovery, research, development, and commercialization activities.

Governmental authorities in the United States and other countries extensively regulate the preclinical and clinical testing, approval, manufacturing, labeling, storage, record-keeping, reporting, advertising, promotion, import, export, marketing, and distribution, among other things, of drugs and biological products. In the United States, the FDA, under the Federal Food, Drug, and Cosmetic Act, the Public Health Service Act and other federal statutes and regulations, subjects pharmaceutical products to rigorous review and regulation. If we do not comply with applicable requirements, we may be fined, our products may be recalled or seized, our clinical trials may be suspended or terminated, our production may be partially or totally suspended, the government may refuse to approve our marketing applications or allow us to distribute our products, and we may be subject to an injunction and/or criminally prosecuted. The FDA also has the authority to revoke previously granted marketing authorizations.

In order to obtain approval of a new product from the FDA, our collaborators must, among other requirements, submit proof of safety and efficacy as well as detailed information on the manufacture, quality, composition, and labeling of the product in a new drug application or a biologics license application. In most cases, this proof entails extensive laboratory tests and preclinical and clinical trials. This testing, the preparation of necessary applications, the processing of those applications by the FDA and review of the applications by an FDA advisory panel of outside experts are expensive and typically take many years to complete. The FDA may not act quickly or favorably in reviewing these applications, or may deny approval altogether, and we may encounter significant difficulties or costs in our efforts to obtain FDA approval, which could delay or preclude us from marketing any products we may develop. The FDA may also require post-marketing testing and surveillance to monitor the effects of approved products or place conditions on any approval that could restrict the commercial applications of these products. The FDA may withdraw product approval if we fail to comply with regulatory standards, if we encounter problems following initial marketing or if new safety or other issues are discovered regarding our products after approval. With respect to patented products or technologies, delays imposed by the governmental approval process may materially reduce or eliminate the period during which we will have the exclusive right to exploit the products or technologies.

In order to conduct research to obtain regulatory approval for marketing, we or our collaborators must submit information to the FDA on the planned research in the form of an investigational new drug application. The investigational new drug application must contain, among other things, an investigational plan for the therapy, a study protocol, information on the study investigators, preclinical data, such as toxicology data, and other known information about the investigational compound. An investigational new drug application generally must be submitted by a commercial sponsor who intends to collect data on the safety and efficacy of a new drug or biological product prior to conducting human trials and submitting an application for marketing approval. In certain circumstances, an investigational new drug application may also be submitted which allows physicians to gain an initial understanding of the compound through an expanded access program. Data from expanded access trials can generally be used to support the safety, but not the efficacy, of a product.

After an investigational new drug application becomes effective, a sponsor may commence human clinical trials. The sponsor typically conducts human clinical trials in three sequential phases, but the phases

may overlap. In Phase I clinical trials, the product is generally tested in a small number of patients or healthy volunteers primarily for safety at one or more doses. In Phase II, in addition to safety, the sponsor typically evaluates the efficacy of the product in a patient population somewhat larger than Phase I clinical trials. It is customary in cancer clinical trials for the FDA to allow companies to combine Phase I and Phase II clinical trials into a Phase I/ II clinical trial. Phase III clinical trials typically involve additional testing for safety and clinical efficacy in an expanded population at geographically dispersed test sites and are intended to generate the pivotal data on which a marketing application will be based. The studies must be adequate and well-controlled and otherwise conform to appropriate scientific and legal standards.

Prior to the commencement of each clinical trial, the sponsor must submit to the FDA a clinical plan, or protocol, accompanied by the approval of an institutional review board responsible for protecting the welfare of study subjects for a site participating in the trials. The sponsor must also ensure that investigators obtain informed consent from all study subjects prior to commencement of each study, and the sponsor must comply with monitoring, reporting and so-called good clinical practice requirements throughout the conduct of the study, among other legal requirements. The FDA may prevent an investigational new drug application from taking effect, or may order the temporary or permanent discontinuation of a clinical trial, at any time. An institutional review board may also prevent a study from going forward, or may temporarily or permanently discontinue a clinical trial, at any time. If a study is not conducted in accordance with applicable legal requirements and sound scientific standards, the data from the study may be deemed invalid and unusable.

The sponsor must submit to the FDA the results of the preclinical and clinical trials, together with, among other things, detailed information on the manufacture, quality and composition of the product, in the form of a new drug application or, in the case of a biologic, a biologics license application. The application must also contain proposed labeling for the product setting forth the proposed conditions of use for which the applicant is seeking approval and be accompanied by the payment of a significant user fee. The FDA can refuse to file an application if it is deemed not sufficiently complete to permit review, or has some other deficiency.

Congress enacted the Food and Drug Administration Modernization Act of 1997, in part, to ensure the availability of safe and effective drugs, biologics and medical devices by expediting the FDA review process for new products. The Modernization Act establishes a statutory program for the approval of fast track products, including qualifying biologics. We may, from time to time, decide to request fast track approval for our product candidates. A fast track product is defined as a new drug or biologic intended for the treatment of a serious or life-threatening disease or condition that demonstrates the potential to address unmet medical needs for this disease or condition. Under the fast track program, the sponsor of a new drug or biologic may request the FDA to designate the drug or biologic as a fast track product at any time during the clinical development of the product.

The Modernization Act specifies that the FDA must determine whether the product qualifies for fast track designation within 60 days of receipt of the sponsor’s request. The FDA can base approval of a marketing application for a fast track product on an effect on a clinical endpoint or on another “surrogate” endpoint that is reasonably likely to predict clinical benefit. The FDA may subject approval of an application for a fast track product to post-approval studies to validate the surrogate endpoint or confirm the effect on the clinical endpoint and prior review of all promotional materials. In addition, the FDA may withdraw its approval of a fast track product on an expedited basis on a number of grounds, including the sponsor’s failure to conduct any required post-approval study with due diligence.

If the FDA’s preliminary review of clinical data suggests that a fast track product may be effective, the agency may initiate review of sections of a marketing or license application for a fast track product before the sponsor completes the entire application. This rolling review may be available if the applicant provides a schedule for submission of remaining information and pays applicable user fees. However, the time periods specified under the Prescription Drug User Fee Act concerning timing goals to which the FDA has committed in reviewing an application do not begin until the sponsor submits the entire application.

The FDA may, during its review of a new drug application or biologics license application, ask for additional test data. If the FDA does ultimately approve the product, it may require post-marketing testing,

including potentially expensive Phase IV studies, and surveillance to monitor the safety and effectiveness of the product. In addition, the FDA may in some circumstances impose restrictions on the use of the product, which may be difficult and expensive to administer, may affect whether the product is commercially viable and may require prior approval of promotional materials.

Before approving a new drug application or biologics license application, the FDA will also inspect the facilities where the product is manufactured and will not approve the product unless the manufacturing facilities are in compliance with cGMP. In addition, the manufacture, holding and distribution of a product must remain in compliance with cGMP following approval. Manufacturers must continue to expend time, money and effort in the area of production and quality control and record keeping and reporting to ensure full compliance with those requirements.

The labeling, advertising, promotion, marketing and distribution of a drug or biologic product must be in compliance with FDA regulatory requirements. Distribution of pharmaceutical samples to physicians must comply with the Prescription Drug Marketing Act. In addition, manufacturers are required to report adverse events and errors and accidents in the manufacturing process. Changes to an approved product, or changes to the manufacturing process, may require the filing of a supplemental application for FDA review and approval. Failure to comply with applicable requirements can lead to the FDA demanding that production and shipment cease, and, in some cases, that the manufacturer recall products or to FDA enforcement actions that can include seizures, injunctions and criminal prosecution. These failures can also lead to FDA withdrawal of approval to market the product. Where the FDA determines that there has been improper promotion or marketing, it may require corrective communications such as “Dear Doctor” letters. Even if we comply with FDA and other requirements, new information regarding the safety or effectiveness of a product, or a change in the law or regulations, could lead the FDA to modify or withdraw a product approval.

In addition to FDA requirements, our manufacturing, sales, promotion, and other activities following product approval are subject to regulation by numerous other regulatory authorities, including, in the United States, the Centers for Medicare & Medicaid Services, other divisions of the Department of Health and Human Services and state and local governments. Among other laws and requirements, our sales, marketing and scientific/educational programs must comply with the Federal Medicare-Medicaid anti-fraud and abuse statutes and similar state laws. Our pricing and rebate programs must comply with the Medicaid rebate requirements of the Omnibus Budget Reconciliation Act of 1990. If products are made available to authorized users of the Federal Supply Schedule of the General Services Administration, additional laws and requirements apply. All of our activities are potentially subject to federal and state consumer protection and unfair competition laws.

We are also subject to regulation by the Occupational Safety & Health Administration, or OSHA, and the Environmental Protection Agency, or EPA, and to various laws and regulations relating to safe working conditions, laboratory and manufacturing practices and the use and disposal of hazardous or potentially hazardous substances, including radioactive compounds used in connection with our research and development activities, and we may in the future be subject to other federal, state or local laws or regulations. OSHA, the EPA or other regulatory agencies may promulgate regulations that may affect our research and development programs. We are also subject to regulation by the Department of Transportation and to various laws and regulations relating to the shipping of cells and other similar items. We are unable to predict whether any agency will adopt any regulation that could limit or impede our operations.

Depending on the circumstances, failure to meet these other applicable regulatory requirements can result in criminal prosecution, fines or other penalties, injunctions, recall or seizure of products, partial or total suspension of production, denial or withdrawal of pre-marketing product approval or refusal to allow us to enter into supply contracts, including government contracts.

Sales of pharmaceutical products outside the United States are subject to foreign regulatory requirements that vary widely from country to country. Whether or not we have obtained FDA approval, we must obtain approval of a product by comparable regulatory authorities of foreign countries prior to the commencement of marketing the product in those countries. The time required to obtain this approval may be longer or shorter than that required for FDA approval. The foreign regulatory approval process includes all the risks associated

with FDA regulation set forth above, as well as country-specific regulations, including in some countries price controls.

During the fiscal years ending December 31, 2003 and 2004 we expended approximately $844,000 and $915,000 respectively on our research and development programs.

We have not incurred any substantial costs to comply with environmental laws or regulations as we are not subject to significant laws or regulations at the federal, state or local level.

As of December 31, 2004, we employed 8 personnel, including four employees involved in research. None of our employees are covered by a collective bargaining agreement. We have never experienced employment-related work stoppages and consider our employee relations to be positive.

Certain Factors That May Affect Our Business and Future Results

You should carefully consider the risks described below, together with all other information included in this Annual Report on Form 10-KSB in evaluating our company. If any of the following risks actually occur, our financial condition or operating results could be harmed. In such case, investors may lose part or all of their investment.


	We will need to raise additional capital to fund our operations, and our failure to obtain funding when needed may force us to delay, reduce or eliminate our product development programs or collaboration efforts.

Developing products and conducting pre-clinical testing of antimicrobial peptide technologies require substantial amounts of capital. To date, we have raised capital primarily through private equity financings. If we are unable to timely obtain additional funding, we may never obtain the results necessary to commercialize any of our products. We will need to raise additional capital to, among other things:


	•	commercialize our product candidates;

	•	fund our pre-clinical studies;

	•	continue our research and development activities;

	•	finance our general and administrative expenses; and

	•	prepare, file, prosecute, maintain, enforce and defend patent and other proprietary rights.

Our net cash used in operations has exceeded our cash generated from operations for each year since our inception. For example, we used $2.5 million in operating activities for the twelve months ended December 31, 2004 and $2.1 million in 2003. After giving effect to the private placement of common stock, which raised $2.5 million and closed in March 2005, we believe that based upon the current status of our product development and collaboration plans, our cash and cash equivalents should be adequate to satisfy our capital needs through at least the next twelve months. However, our future funding requirements will depend on many factors, including, among other things:


	•	our ability to enter into revenue producing agreements;

	•	the progress, expansion and cost of our pre-clinical and research and development activities;

	•	any future decisions we may make about the scope and prioritization of the programs we pursue;

	•	the development of new product candidates or uses for our antimicrobial peptide technologies;

	•	changes in regulatory policies or laws that affect our operations; and

	•	competing technological and market developments.

If we raise additional funds by issuing equity securities, further dilution to stockholders may result and new investors could have rights superior to holders of shares of our currently issued and outstanding common stock. In addition, debt financing, if available, may include restrictive covenants. If adequate funds are not

available to us, we may have to liquidate some or all of our assets or delay, reduce the scope of or eliminate some portion or all of our development programs. We also may have to license to other companies our products or technologies that we would prefer to develop and commercialize ourselves.


	*We expect to continue to incur substantial losses, and we may never achieve profitability.*

We are a development stage company and have incurred significant operating losses since we began operations in November 1988, including a net loss of approximately $3.1 million for the year ended December 31, 2004, and we may never become profitable. As of December 31, 2004, we had a deficit accumulated during the development stage of approximately $17.0 million. These losses have resulted principally from costs incurred in our research and development programs and from our general and administrative expenses. We intend to make substantial expenditures to further develop and commercialize our product candidates and expect that our rate of spending may accelerate as the result of the increased costs and expenses associated with expanded in-house research and development of our lead candidates, out-licensing initiatives, clinical trials, regulatory approvals and commercialization of our antimicrobial peptide technologies. We plan to identify lead peptides demonstrating the appearance of promise for commercially viable products. Development of these products will require extensive in-vitro and in-vivo testing. This testing, as well as the extension of existing pre-clinical testing, will require the establishment of strategic partnerships with third parties. Because of the numerous risks and uncertainties associated with our product development efforts, we are unable to predict when we may become profitable, if at all. If we are unable to achieve and then maintain profitability, the market value of our common stock will likely decline.


	*We are at an early stage of product development and do not yet have commercially marketable products to provide material revenue.*

Although we have been developing the antimicrobial peptide technology since 1988, we remain a development stage company and to date have generated no material revenue from product sales. Our strategic plan contemplates the development of both pharmaceutical and non-pharmaceutical products and applications for our proprietary peptides. However, there can be no assurance that products will be commercialized in either field as a result of continued development programs or from joint efforts with any future collaborative partner. The failure to develop safe, commercially viable pharmaceutical or non-pharmaceutical applications for our technology will have a material adverse effect on our business, operating results and financial condition.


	*We need to enter strategic alliances with third parties to develop, test and produce commercially viable products.*

A key element of our strategy is to enhance development programs and fund capital requirements, in part, by entering into collaborative agreements with cosmetics, pharmaceutical companies and other biotechnology companies. We also plan to explore collaborations with non-pharmaceutical companies and opportunities for incorporating our antimicrobial peptides into non-clinical applications such as cosmetics and biocides. We are at a very early stage in developing these strategic business alliances. Although the development of such alliances is one of our objectives, there can be no assurance that we will succeed in attracting substantial collaborative partners who can materially assist in the development and commercialization of our technology. The development of commercially viable products from our technology will likely require the technical collaboration and financial assistance of other, significantly larger third parties, to bear most of the costs of pre-clinical and clinical testing, regulatory approval, manufacturing and marketing prior to commercial sale. Even if we are successful in attracting collaborative partners and those collaborations yield commercially viable products, our receipt of revenue will be substantially dependent upon the decisions made by and the manufacturing and marketing resources of these strategic partners. Further, there can be no assurance that our interests will coincide with those of any future collaborative partner, that such a partner will not develop, independently or with third parties, products that could compete with those products contemplated by any agreement we may have with that partner, or that disagreements over rights, technology or other proprietary interests will not occur. The failure to develop strategic business alliances that facilitate the development,

testing and commercialization of our products will have a material adverse effect on its business, operating results and financial condition.


	Because of the specialized nature of our business, the termination of relationships with key management and scientific personnel or the inability to recruit and retain additional personnel could prevent us from developing our technologies, conducting clinical trials and obtaining financing.

The competition for qualified personnel in the biotechnology field is intense, and we rely heavily on our ability to attract and retain qualified scientific, technical and managerial personnel. We are highly dependent upon, R. Stephen Beatty, our President and Chief Executive Officer and Dr. Timothy Falla, our Vice President and Chief Scientific Officer. Our future success depends, in part, upon our ability to attract, retain and motivate highly skilled employees. In order to commercialize our products successfully, we will be required to expand our workforce, possibly in the areas of manufacturing, clinical trials management, regulatory affairs, business development and sales and marketing. These activities will require the addition of new personnel, including management, and the development of additional expertise by existing management personnel. We face intense competition for qualified individuals from numerous pharmaceutical, biopharmaceutical and biotechnology companies, as well as academic and other research institutions. To the extent we are unable to attract and retain these individuals on favorable terms our business may be adversely affected.


	We rely on collaborators to assist in the research and development activities necessary for the commercialization of our product candidates. If our collaborators do not perform as expected, we may not be able to commercialize our product candidates.

We intend to continue to develop alliances with third-party collaborators to develop and market our current and future product candidates. We may not be able to attract third-party collaborators to develop and market product candidates and may lack the capital and resources necessary to develop its product candidates alone. If we are unable to locate collaborators, or if our collaborators do not prioritize and commit substantial resources to programs associated with our product candidates, we may be unable to commercialize its product candidates, which would limit our ability to generate revenue and become profitable.


	*Clinical trials for our product candidates, and those for our partners and licensees, are expensive and time consuming and their outcome is uncertain.*

Before we or our collaborators can obtain regulatory approval for the commercial sale of any of our pharmaceutical products that we wish to develop, we will be required to complete preclinical development and extensive clinical trials in humans to demonstrate the safety and efficacy of the product. Each of these trials requires the investment of substantial expense and time. However, success in pre-clinical and early clinical trials will not ensure that large-scale trials will be successful and does not predict final results. Acceptable results in early trials may not be repeated in later trials. A number of companies in the biotechnology industry have suffered significant setbacks in advanced clinical trials, even after promising results in earlier trials. Negative or inconclusive results or adverse medical events during a clinical trial could cause it to be restructured or terminated. In addition, failure to construct appropriate clinical trial protocols could result in the test or control group experiencing a disproportionate number of adverse events and could cause a clinical trial to be repeated or terminated.


	Our partners and licensees or we may choose to, or may be required to, suspend, repeat or terminate any initiated clinical trials if they are not conducted in accordance with regulatory requirements, the results are negative or inconclusive or the trials are not well designed.

Clinical trials must be conducted in accordance with the FDA’s guidelines and are subject to oversight by the FDA and institutional review boards at the medical institutions where the clinical trials are conducted. In addition, clinical trials must be conducted with product candidates produced under the FDA’s Good Manufacturing Practices, and may require large numbers of test patients. Patient enrollment is a function of many factors, including the size of the patient population, the proximity of patients to clinical sites, the

eligibility criteria for the trial, the existence of competing clinical trials and the availability of alternative or new treatments. The FDA may suspend clinical trials at any time if it finds deficiencies in the conduct of these trials or it believes that these trials expose patients to unacceptable health risks.


	*We face substantial competition in our product development efforts from pharmaceutical and biotechnology companies, universities and other not-for-profit institutions.*

We face significant competition in our attempts to develop applications of our antimicrobial peptide technology from entities that have substantially greater research and product development capabilities and financial, scientific, marketing and human resources. These entities include cosmetic, pharmaceutical and biotechnology companies, as well as universities and not-for-profit institutions. We expect that competition in development of products analogous to our antimicrobial peptide technology to intensify. Our competitors may succeed in developing products earlier than we do, entering into successful collaborations before us, obtaining approvals from the U.S. Food and Drug Administration (FDA) other regulatory agencies for such products before us, or developing products that are more effective than those we develop or propose to develop. The success of any one competitor in these or other manners will have a material adverse effect on our business, operating results and financial condition.


	*We face product liability risks and may not be able to obtain adequate insurance to protect against losses.*

The current use of any of our products, including in pre-clinical trials and the sale of any of our products exposes us to liability claims. These claims might be made directly by consumers and healthcare providers or indirectly by pharmaceutical companies, our corporate collaborators or others selling such products. We may experience financial losses in the future due to product liability claims. We intend to expand our insurance coverage to include the sale of commercial products if marketing approval is obtained for product candidates in development. However, we may be unable able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect against losses. If a successful product liability claim or a series of claims is brought against us for uninsured liabilities or in excess of insured liabilities, our assets may be insufficient to cover such claims and our business operations could be impaired.


	*If we are unable to protect our proprietary rights, we may not be able to compete effectively.*

Our success depends in part on obtaining, maintaining and enforcing our patents and in-licensed and proprietary rights. We believe we own, or have rights under licenses to, issued patents and pending patent applications that are necessary to commercialize antimicrobial peptides. However, the patents on which we rely may be challenged and invalidated, and our patent applications may not result in issued patents. Moreover, our patents and patent applications may not be sufficiently broad to prevent others from practicing our technologies or developing competing products. We also face the risk that others may independently develop similar or alternative technologies or may design around our proprietary and patented technologies.

The patent positions of pharmaceutical and biotechnology companies can be highly uncertain and involve complex legal and factual questions for which important legal principles remain unresolved. No consistent policy regarding the breadth of claims allowed in biotechnology patents has emerged to date in the United States. Furthermore, the application and enforcement of patent laws and regulations in foreign countries is even more uncertain. Accordingly, we cannot assure you that we will be able to effectively file, protect or defend our proprietary rights in the United States or in foreign jurisdictions on a consistent basis.

Third parties may successfully challenge the validity of our patents. We will only be able to protect our technologies from unauthorized use by third parties to the extent that valid and enforceable patents or other proprietary rights cover them. Because the issuance of a patent is not conclusive of its validity or enforceability, we cannot assure you how much protection, if any, will be given to our patents if we attempt to enforce them or if others challenge their validity in court. It is possible that a competitor may successfully challenge our patents or that a challenge will result in limiting the coverage of our patents. If the outcome of litigation is adverse to us, third parties may be able to use our technologies without payment to us.

In addition, it is possible that competitors may infringe upon our patents or successfully avoid them through design innovation. We may initiate litigation to police unauthorized use of our proprietary rights. However, the cost of litigation to uphold the validity of our patents and to prevent infringement could be substantial, and the litigation will consume time and other resources. Some of our competitors may be better able to sustain the costs of complex patent litigation because they have substantially greater resources. Moreover, if a court decides that our patents are not valid, we will not have the right to stop others from using our inventions. There is also the risk that, even if the validity of our patents were upheld, a court may refuse to stop others on the ground that their activities do not infringe upon our patents. Because protecting our intellectual property is difficult and expensive, we may be unable to prevent misappropriation of our proprietary rights.

We also rely on certain proprietary trade secrets and know-how, especially where we believe patent protection is not appropriate or obtainable. Trade secrets and know-how, however, are difficult to protect. We have taken measures to protect our unpatented trade secrets and know-how, including the use of confidentiality and invention assignment agreements with our employees, consultants and some of our contractors. It is possible, however, that these persons may unintentionally or willingly breach the agreements or that our competitors may independently develop or otherwise discover our trade secrets and know-how.


	If the use of our technologies conflicts with the rights of others, we could be subject to expensive litigation or be required to obtain licenses from others to develop or market antimicrobial peptides.

Our competitors or others may have or acquire patent rights that they could enforce against us. If they do so, we may be required to alter our antimicrobial peptide technology, pay licensing fees or cease activities. If our antimicrobial peptide technology conflicts with patent rights of others, third parties could bring legal action against us or our licensees, suppliers, customers or potential collaborators, claiming damages and seeking to enjoin manufacturing and marketing of the affected products. If these legal actions are successful, in addition to any potential liability for damages, we might have to obtain a license in order to continue to manufacture or market the affected products. A required license under the related patent may not be available on acceptable terms, if at all.

We may be unaware that the use of our technology conflicts with pending or issued patents. Because patent applications can take many years to issue, there may be currently pending applications, unknown to us, that may later result in issued patents upon which our antimicrobial peptide technology or antimicrobial peptides may infringe. There could also be existing patents of which we are unaware upon which our antimicrobial peptide technology or antimicrobial peptides may infringe. In addition, if third parties file patent applications or obtain patents claiming technology also claimed by us in pending applications, we may have to participate in interference proceedings in the U.S. Patent and Trademark Office to determine priority of invention. If third parties file oppositions in foreign countries, we may also have to participate in opposition proceedings in foreign tribunals to defend the patentability of the filed foreign patent applications. We may have to participate in interference proceedings involving our issued patents or our pending applications.


	*A third party may claim that we infringe upon its proprietary rights.*

If a third party claims that we infringe upon its proprietary rights, any of the following may occur:


	•	we may become liable for substantial damages for past infringement if a court decides that our technology infringes upon a competitor’s patent;

	•	a court may prohibit us from selling or licensing our product without a license from the patent holder, which may not be available on commercially acceptable terms, if at all, or which may require us to pay substantial royalties or grant cross licenses to our patents; and

	•	we may have to redesign our technology or product candidate so that it does not infringe upon others’ patent rights, which may not be possible or could require substantial funds or time.

If any of these events occurs, our business will suffer and the market price of our common stock will likely decline.


	Our rights to use peptides and technologies licensed to us by third parties are not within our control, and we may not be able to implement our antimicrobial peptide technology without these peptides and technologies.

We have licensed patents and other rights which are necessary to our antimicrobial peptide technology and antimicrobial peptides. Our business will significantly suffer if these licenses terminate, if the licensors fail to abide by the terms of the license or fail to prevent infringement by third parties or if the licensed patents or other rights are found to be invalid. We have in-licensed several peptide patents and patent applications from the University of British Columbia. These licenses terminate upon the expiration of the last licensed patent and may also be terminated in the event of a material breach.

If we violate the terms of our licenses, or otherwise lose our rights to these peptides, patents or patent applications, we may be unable to continue development of our antimicrobial peptide technology. Our licensors or others may dispute the scope of our rights under any of these licenses. Additionally, the licensors under these licenses might breach the terms of their respective agreements or fail to prevent infringement of the licensed patents by third parties. Loss of any of these licenses for any reason could materially harm our financial condition and operating results.


	If our principal stockholders, executive officers and directors choose to act together, they may be able to control our management and operations, acting in their best interests and not necessarily those of other stockholders.

Our executive officers, directors and principal stockholders, and entities affiliated with them, beneficially own in the aggregate approximately 34% of our outstanding common stock and common stock derivatives as of December 31, 2004. This significant concentration of share ownership may adversely affect the trading price for our common stock because investors often perceive disadvantages in owning stock in companies with controlling stockholders. These stockholders, acting together, will have the ability to exert substantial influence over all matters requiring approval by our stockholders, including the election and removal of directors and any proposed merger, consolidation or sale of all or substantially all of our assets. In addition, they could dictate the management of our business and affairs.

This concentration of ownership could have the effect of delaying, deferring or preventing a change in control or impeding a merger or consolidation, takeover or other business combination that could be favorable to you.


	*The future sale of our common stock could negatively affect our stock price.*

If our common stockholders sell substantial amounts of common stock in the public market, or the market perceives that such sales may occur, the market price of our common stock could fall.

In addition, we will need to raise substantial additional capital in the future to fund our operations. If we raise additional funds by issuing equity securities, our stock price may decline and our existing stockholders may experience significant dilution.


	*Our common stock may experience extreme price and volume fluctuations, which could lead to costly litigation for us and make an investment in us less appealing.*

The market price of our common stock has and may continue to fluctuate substantially due to a variety of factors, including:


	•	announcements about our collaborators or licensees;

	•	results of our pre-clinical trials;

	•	announcements of technological innovations or new products or services by us or our competitors;

	•	announcements concerning our competitors or the biotechnology industry in general;

	•	new regulatory pronouncements and changes in regulatory guidelines;


	•	general and industry-specific economic conditions;

	•	additions or departures of our key personnel;

	•	changes in financial estimates or recommendations by securities analysts;

	•	variations in our quarterly results; and

	•	changes in accounting principles.

The market prices of the securities of biotechnology companies, particularly companies like ours without consistent product revenue and earnings, have been highly volatile and are likely to remain highly volatile in the future. This volatility has often been unrelated to the operating performance of particular companies. In the past, companies that experience volatility in the market price of their securities have often faced securities class action litigation. Moreover, market prices for stocks of biotechnology-related and technology companies frequently reach levels that bear no relationship to the operating performance of these companies. These market prices generally are not sustainable and are highly volatile. Whether or not meritorious, litigation brought against us could result in substantial costs, divert our management’s attention and resources and harm our financial condition and results of operations.


	*Our certificate of incorporation, bylaws and stockholder rights agreement may delay or prevent a change in our management.*

Our amended and restated certificate of incorporation and bylaws will contain provisions that could delay or prevent a change in our board of directors and management teams. Some of these provisions:


	•	authorize the issuance of preferred stock that can be created and issued by the board of directors without prior stockholder approval, commonly referred to as “blank check” preferred stock, with rights senior to those of our common stock;

	•	authorize our board of directors to issue dilutive shares of common stock upon certain events; and

	•	provide for a classified board of directors.

These provisions could make it more difficult for common stockholders to replace members of the board. Because our board of directors is responsible for appointing the members of our management team, these provisions could in turn affect any attempt to replace the current management team.

Executive Officers


Name	Age		Position

R. Stephen Beatty		55	President and Chief Executive Officer
Timothy J. Falla, Ph.D.		39	Vice President and Chief Scientific Officer
David H. Kirske		51	Vice President and Chief Financial Officer
David Drajeske		44	Vice President of Business Development

R. Stephen Beatty serves as our President and Chief Executive Officer and has served as a member of our board of directors since May 1999. Prior to joining us, Mr. Beatty established and operated Beatty Finance, Inc., a private financial services company. Mr. Beatty holds a B.S. in Mathematics from the University of South Alabama and an MBA from the University of New Orleans.

Timothy J. Falla, Ph.D. serves as our Vice President and Chief Scientific Officer. Dr. Falla joined us as Chief Scientific Officer in June 2001. From 1998 until 2001 Dr. Falla was Principal Scientist with IntraBiotics Pharmaceuticals, Inc. where he led a multi-disciplinary scientific research team focused on antibacterial drug discovery and development. Dr. Falla holds a B.S. in Applied Biology from the University of Wales and a Ph.D. in Molecular Biology in Infectious Disease from Oxford University and the University of Wales.

David H. Kirske has served as our Vice President and Chief Financial Officer since July 2004. From June 2001 to December 2003, Mr. Kirske served as a financial consultant to a number of public and privately held companies, as well as several not-for-profit entities. From January 1999 to June 2001, he was the Corporate Controller for F5 Networks, a leading provider of integrated Internet traffic management solutions. Mr. Kirske served as the Corporate Controller and Treasurer for Redhook Brewery, a specialty manufacturer of craft beers, from 1993 to January 1999. He currently serves on the board of directors of FareStart, a not-for-profit entity. Mr. Kirske holds a B.A. in Business Administration from the University of Puget Sound.

David Drajeske has served as our Vice President of Business Development since February 2004. Mr. Drajeske previously served as Manager of Business Development for Immunex from 2001 until 2002. From 1997 until 2001, Mr. Drajeske served as Senior Manager, Business Development and Alliance Management for Thermogen, Inc. and Medichem Life Sciences. Mr. Drajeske holds a M.S. degree in Biotechnology from Northwestern University’s Kellogg Center for Biotechnology.

Other Information

We make available on our website, free of charge, copies of our annual report on Form 10-KSB, quarterly reports on Form 10-QSB, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after filing or furnishing the information to the SEC. The Internet address for the information is http://www.helixbiomedix.com.


ITEM 2.	*PROPERTIES*

We maintain our headquarters in Bothell, Washington where we lease approximately 3,000 square feet of laboratory and general administration space. Our lease expires in September 2005. We believe with an increase in headcount projected in 2005, additional office space will be required.


ITEM 3.	*LEGAL PROCEEDINGS*

None.


ITEM 4.	*SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS*

None

PART II


ITEM 5.	*MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS*

Market Information

Our common stock has been quoted on the OTC Bulletin Board under the symbol “HXBM” since 1999. Prior to this date our common stock did not trade publicly. The following table summarizes our common stock’s high and low sales prices for the periods indicated as reported by the OTC Bulletin Board. These prices do not include retail markups, markdowns or commissions.


	Year Ended December 31,

	2004				2003

	High		Low		High		Low

First Quarter	$	2.15	$	1.27	$	1.00	$	0.65
Second Quarter	$	2.25	$	1.77	$	1.05	$	0.80
Third Quarter	$	2.10	$	1.50	$	5.00	$	0.90
Fourth Quarter	$	2.00	$	1.10	$	3.25	$	1.80

As of February 25, 2005, we had 827 holders of record and approximately 1,400 beneficial stockholders of our common stock. Such holders include any broker or clearing agencies as holders of record, but exclude the individual stockholders whose shares are held by broker or clearing agencies.

Dividend Policy

We have never declared or paid cash dividends on our capital stock. We currently intend to retain any future earnings to fund the development and growth of our business and do not currently anticipate paying any cash dividends in the foreseeable future. Any future determination relating to our dividend policy will be made by our board of directors.


ITEM 6.	*MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION*

Forward-Looking Statements

The following discussion should be read in conjunction with our financial statements and the notes to those statements included with this Annual Report. In addition to historical information, this report contains forward-looking statements. Words such as “believes”, “anticipates”, “expects”, and “intends” and similar expressions may identify forward-looking statements, but the absence of these words does not necessarily mean that a statement is not forward-looking. Forward-looking statements are subject to known and unknown risks and uncertainties and are based on potentially inaccurate assumptions that could cause actual results to differ materially from those expected or implied by the forward-looking statements. Our actual results could differ materially from those anticipated in the forward-looking statements for many reasons, including the factors described in the section entitled “Certain Factors That May Affect Our Business and Future Results” in this Annual Report. Other factors besides those described in this Annual Report could also affect actual results. You should carefully consider the factors in Part I entitled “Certain Factors That May Affect Our Business and Future Results” in evaluating our forward-looking statements.

Management Discussion and Analysis Overview

In Management’s Discussion and Analysis or Plan of Operations we explain the general financial condition and the plan of operations for our company, including:


	•	an overview of our business;

	•	results of operations and why those results are different from the prior years; and

	•	the capital resources that we currently have and possible sources of addition funding for future capital requirements.

Business Overview

Our mission is to become an industry leader in developing and commercializing small proteins known as bioactive peptides. We have a proprietary library containing a broad array of these synthetic bioactive peptides. Our business strategy is to develop and out-license the rights to use proprietary peptides in distinct fields of application. We have developed several peptide sequences in two broad areas of application which consist of:


	•	Skin care — we have developed a number of peptides capable of stimulating aspects of the skin’s innate ability to regenerate.

	•	Pharmaceutical — our peptides have demonstrated promising results in the areas of topical anti-infectives and would healing.

Plan of Operation

As of December 31, 2004, our accumulated deficit was approximately $17.0 million. We may incur substantial additional operating losses over the next several years. Such losses have been and may continue to be principally the result of various costs associated with our discovery, research and development programs and the purchase of technology. Substantially all of our working capital in recent years has resulted from equity financings. Our ability to achieve a consistent, profitable level of operations depends in large part on our ability to enter into revenue generating out-license arrangements. Even if we are successful in the aforementioned activities, our operations may not be profitable. In addition, payments under licensing arrangements are subject to significant fluctuations in both timing and amount. Therefore, our operating results for any period may fluctuate significantly and may not be comparable to the operating results for any other period.


	*Years Ended December 31, 2004 and December 31, 2003*

Revenues for the years ended December 31, 2004 were $93,700 compared to $88,500 in the prior year an increase of 5.9%. The increase in revenue is primarily attributable to fees associated with a scientific service arrangement. Revenues in 2005 will be dependent on our ability to enter into collaborative and licensing arrangements with third parties.

Research and development (R&D) expenses were $915,200 for the year ended December 31, 2004 compared to $844,500 in the prior year an increase of 8.4%. The increase reflects the continued efforts to further our skin care and pharmaceutical programs. These costs are anticipated to increase particularly in the development of our pharmaceutical programs. However, we will only develop our pharmaceutical programs once the required level of funding has been achieved.

Depreciation and amortization expenses were $160,600 for the year ended December 31, 2004 compared to $205,100 in the prior year a decrease of 21.7%. The decrease is primarily attributable to the sale of laboratory equipment. The equipment was sold because it was no longer compatible with current laboratory systems.

Accounting, legal, and professional expenses were $312,600 for the year ended December 31, 2004 compared to $257,200 an increase of 21.5%. The increase is attributable to additional accounting services provided during 2004.

Consulting fees were $128,000 for the year ended December 31, 2004 compared to $189,100 in the prior year a decrease of 32.3%. The decrease in consulting fees is associated with the expiration of various consulting agreements.

General and administrative (G&A) expenses were $1.7 million for the year ended December 31, 2004 compared to $1.8 million in the prior year a decrease of 5.6%. The decrease in general and administrative expenses is primarily attributable to a decrease in stock compensation expense incurred in 2003 from warrants and variable options granted to certain corporate officers. Stock compensation expense was $461,100 for the year ended December 31, 2004 compared to $662,000 in the prior year.

Total operating expenses in 2005 are anticipated to increase from 2004 as we begin our pharmaceutical development program. Our ability to initiate this program is directly dependent on our ability to raise additional funding in 2005.

Interest income was $22,100 for the year ended December 31, 2004 compared to $16,500 for the prior year an increase of 34.3%. The increase in interest income was primarily due to higher levels of cash invested during 2004 compared to 2003.


	*Years Ended December 31, 2003 and December 31, 2002*

Total revenue was $88,500 in 2003 compared to $70,000 in 2002. This increase was due to payments received under an existing royalty arrangement for the license of our anti-acne peptides.

Research and development expenses were $844,500 for the year ended December 31, 2003 compared to $546,100 in 2002, an increase of 54.6%. The increase was primarily attributable to an increase in expenditures for external trials associated with wound healing and consumer product testing. We anticipate that expenses for external trials and studies will continue to increase as we seek to commercialize our peptide technologies.

Depreciation and amortization expenses totaled $205,100 for the year ended December 31, 2003 compared to $115,100 in 2002, an increase of 78.2%. The increase is due primarily to the acquisition of laboratory equipment in the later part of 2002.

Accounting, legal and professional operating expenses totaled $257,200 for the year ended December 31, 2003 compared to $189,800 in 2002, an increase of 35.5%. The increase is primarily the result of increased outside accounting fees.

Consulting fees were $189,100 for the year ended December 31, 2003 compared to $535,600 in 2002, a decrease of 64.7%. The decrease was attributable to the expiration of certain consulting arrangements. Consulting fees include estimated fair values ascribed to warrants issued by us to strategic consultants, payments to our former president for assistance with international patent issues and business development consultants.

General and administrative expenses totaled $1.8 million in 2003 compared to $1.1 million in 2002, an increase of 57.1 %. The increase was primarily attributable to a $662,000 stock compensation charge for warrants and variable options granted to certain corporate officers. We revised substantially all variable options in the fourth quarter of 2003 to remove the variability.

We did not incur interest expense in 2003 compared to 2002 when we incurred $703,700 of interest expense. The interest expense in 2002 was primarily from the decision by our board of directors in March 2002 to amend the terms of the private placement of promissory notes that commenced in June of 2001 to provide for an automatic conversion into shares of common stock in the event of an equity financing in a single or series of related transactions of at least $1.5 million on or before December 31, 2002. This resulted in the recognition of the fair value of additional warrants which were treated as a debt discount and amortized to interest expense in 2002.

At the current stage of our operations, there are no seasonal aspects that materially affect our financial condition or results of operations.

Liquidity and Capital Resources

Since inception, we have financed our operations primarily through the private sale of debt and equity securities. During 2004 we received $2.35 million of gross proceeds from the sale of 1,184,000 shares of common stock and detachable warrants to purchase 414,400 shares of common stock. The common stock and the shares of common stock issuable upon exercise of the warrants have no registration rights or redemption features. The warrants have a term of 5 years and are exercisable at $2.00 per share. The net proceeds of the offering are being used to continue ongoing research and development efforts, out-licensing initiatives and for general corporate purposes.

On February 28, 2005, we announced that we closed the initial closing of a private equity financing, receiving cash of $2.3 million in exchange for 1,548,501 shares of $0.001 par value common stock and warrants to purchase up to 125,000 shares of $0.001 par value common stock. The warrants have a 5-year term and a per share purchase price of $1.50.

In a second closing held on March 2, 2005, we received $175,000 in exchange for 116,667 shares of common stock. We received a total of $2.5 million in this private placement financing for 1,665,168 shares of common stock and detachable warrants for the purchase of an additional 125,000 shares of common stock. The proceeds of the offering will be used to continue ongoing research and development efforts, the out-licensing initiatives for our peptides and for general corporate purposes.

On March 1, 2005, we commenced a tender offer to holders of certain of our warrants that were purchased in four private placement financings to exchange their warrants as follows:


	•	2001/2002 Warrants: (warrants to purchase shares of our common stock issued as part of the units described in our private placement memorandum dated May 2001) We will issue either (a) 0.82 shares for each warrant share tendered; or (b) 1.0 share for each warrant share tendered upon payment of $0.25 for each warrant share tendered.

	•	2002/2003 Warrants: (warrants to purchase shares of our common stock issued as part of the units described in our private placement memorandum dated September 2002, and amended December 2002) We will issue either (a) 0.84 shares for each warrant share tendered; or (b) 1.0 share for each warrant share tendered upon payment of $0.25 for each warrant share tendered.

	•	2003 Warrants: (warrants to purchase shares of our common stock issued as part of the units described in our private placement memorandum dated November 2003) We will issue either (a) 0.37 shares for each warrant share tendered; or (b) 1.0 share for each warrant share tendered upon payment of $0.56 for each warrant share tendered.

	•	2004 Warrants: (warrants to purchase shares of our common stock issued as part of the units described in our private placement memorandum dated March 2004) We will issue either (a) 0.60 shares for each warrant share tendered; or (b) 1.0 share for each warrant share tendered upon payment of $0.50 for each warrant share tendered.

The warrant exchange offer is scheduled to expire on April 1, 2005.

We will need to raise additional capital in order to grow our business operations. As of December 31, 2004 we had cash and cash equivalents of $1.9 million, compared to $2.1 million for the same period in 2003. Our net cash used in operations has exceeded our cash generated from operations for every year since our inception. Based on our current operating plan, we estimate that existing cash and cash equivalents will be sufficient to meet our cash requirements through 2005 based on current expense levels. We will need substantial additional funding to further develop our existing programs and initiate our pharmaceutical program. Accordingly, we intend to seek additional funding through available means, which may include debt and/or equity financing.

Our future capital requirements depend on many factors including:


	•	the ability to attract collaborative agreement partners;

	•	the ability to obtain funding under licensing agreements; and

	•	the costs of filing, prosecuting, enforcing, and defending patents, patent applications, patent claims, and trademarks.

The availability of additional capital to us is highly uncertain. We are actively pursuing out-licensing opportunities but do not expect those efforts to produce significant capital during the next twelve months. Any equity financing would likely result in dilution to our existing stockholders and debt financing, if available, would likely include restrictive covenants.

Critical Accounting Policies and Estimates

The preparation of the financial statements requires us to make estimates and assumptions that affect the reported amounts of liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. On an on-going basis, our management evaluates its estimates and judgments including those related to revenue recognition and research and development costs. We base our estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.


	•	Revenue Recognition. Since inception, we have generated limited revenue from licensing fees. Revenue is recorded as earned based on the performance requirements of the contract, generally as the services are performed. We recognize revenue from non-refundable, up front license fees and proceeds from the assignment of technology when delivery has occurred and no future obligations exist. Royalties from licensees are based on third-party sales and recorded as earned in accordance with contract terms, when third-party results are reliably measured and collection is reasonably assured. Payments received for which the earnings process is not complete are classified as deferred revenue.

	•	Research and Development Costs. These items include personnel costs, supplies, depreciation and other indirect research and development costs and are expensed as incurred. In instances where we enter into agreements with third parties for research and development activities, costs are expensed the earlier of when amounts are due or when services are performed.

	•	Capitalization of Patent Costs. We capitalize the third party costs associated with filing patents or entering into licenses associated with our underlying technology. We review our patent portfolio to determine whether any such costs have been impaired and are no longer being used in our research and development activities. To the extent we no longer use certain patents, the associated costs will be written-off at that time.

	•	Valuation of Stock Options and Warrants. We apply Accounting Principles Board (APB) Opinion No. 25 and related interpretations in accounting for our employee stock options and warrants. Accordingly, compensation expense is recorded on the date of grant of an option or warrant if the fair market value of the underlying stock at the time of grant exceeds the exercise price. Our non-employee options and warrants are accounted for under Financial Accounting Standards Board No. 123. Estimating the fair value of stock options and warrants involves a number of judgments and variables that are subject to significant change. A change in the fair value estimate could have a significant effect on the amount of compensation expense recognized.

Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board issued Statement Number 123 (revised 2004) (“SFAS 123R”), Share-Based Payments. SFAS 123R requires all entities to recognize compensation expense in an amount equal to the fair value of share-based payments, such as stock options granted to employees. The Company is required to apply SFAS 123R on a modified prospective method or by restating previously issued financial statements. Under the modified prospective method, the Company is required to record compensation expense (as previous awards continue to vest) for the unvested portion of previously granted awards that remain outstanding at the date of adoption. In addition, the Company may elect to adopt SFAS 123R by restating previously issued financial statements. SFAS 123R is effective for the first reporting period beginning after December 15, 2005. Management has not completed its evaluation of the effect that SFAS 123R will have, but believes that the effect will be consistent with the application disclosed in its pro forma disclosures.


ITEM 6A.	*QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK*

Our exposure to market risk is presently limited to the interest rate sensitivity of our cash which is affected by changes in the general level of U.S. interest rates. We are exposed to interest rate changes primarily as a result of our investment activities. The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive without significantly increasing risk. To minimize risk, we maintain our cash in interest-bearing instruments, primarily money market funds. Our interest rate risk management objective with respect to our borrowings is to limit the impact of interest rate changes on earnings and cash flows. Due to the nature of our cash, we believe that we are not subject to any material market risk exposure. We do not have any foreign currency or derivative financial instruments.


ITEM 7.	*FINANCIAL STATEMENTS*


Index to Financial Statements	Page

Report of KPMG LLP, Independent Registered Public Accounting Firm		23
Report of Prior Independent Registered Public Accounting Firm		24
Balance Sheets as of December 31, 2004 and 2003		25
Statements of Operations for the years ended December 31, 2004 and December 31, 2003 and for the period from inception (November 7, 1988) to December 31, 2004		26
Statements of Stockholder’s Equity (Deficit) for the period from inception (November 7, 1988) to December 31, 2004		27
Statements of Cash Flows for the years ended December 31, 2004 and December 31, 2003 and for the period from inception (November 7, 1988) to December 31, 2004		30
Notes to Financial Statements		31

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Director and Stockholders

Helix BioMedix, Inc.

We have audited the accompanying balance sheets of Helix BioMedix, Inc. (a development stage company) as of December 31, 2004 and 2003, and the related statements of operations, stockholders’ equity (deficit), and cash flows for the years then ended and for the period from November 7, 1988 (inception) to December 31, 2004. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. The cumulative statements of operations, stockholders’ equity (deficit), and cash flows for the period November 7, 1988 (inception) to December 31, 2004 include amounts for the period from November 7, 1988 (inception) to December 31, 1988 and for each of the years in the thirteen-year period ending December 31, 2001, which were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for the period November 7, 1988 through December 31, 2001 is based solely on the report of other auditors.

We conducted our audits in accordance with the auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. 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, the financial statements referred to above present fairly, in all material respects, the financial position of Helix BioMedix, Inc. (a development stage company) as of December 31, 2004 and 2003, and the results of its operations and its cash flows for the years then ended and for the period November 7, 1988 (inception) to December 31, 2004, in conformity with accounting principles generally accepted in the United States of America.


	/s/ KPMG LLP

Seattle, Washington

March 4, 2005

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors

Helix BioMedix, Inc.

Bothell, Washington

We have audited the accompanying statements of operations, cash flows, and changes in stockholders’ equity (deficit) of Helix BioMedix, Inc. (a development stage company) related to the period from inception (November 7, 1988) to December 31, 2001. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance that the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects the results of operations, cash flows, and changes in stockholders’ equity (deficit) of Helix BioMedix, Inc. for the period from inception (November 7, 1988) to December 31, 2001, in conformity with accounting principles generally accepted in the United States of America.


	/s/ COMISKEY & COMPANY
	PROFESSIONAL CORPORATION

Denver, Colorado

February 1, 2002

HELIX BIOMEDIX, INC.

(A DEVELOPMENT STAGE COMPANY)

BALANCE SHEETS


			December 31,

			2004			2003

ASSETS
Current assets:
	Cash and cash equivalents		$	1,908,028		$	2,070,906
	Accounts receivable			10,200			—
	Prepaid expenses and other current assets			91,071			57,800

		Total current assets		2,009,299			2,128,706

Property and equipment:
	Machinery and equipment			395,739			414,259
	Furniture and fixtures			14,627			10,628
	Leasehold improvements			28,215			28,215

				438,581			453,102
	Less: accumulated depreciation			(226,865	)		(149,636	)

	Property and equipment, net			211,716			303,466

Other assets:
	Deposits			10			29,405
	Antimicrobial technology, net			48,431			59,540
	Licensing agreements, net			50,606			54,201
	Patents pending and approved, net			547,018			564,630

				646,065			707,776

Total assets			$	2,867,080		$	3,139,948


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable		$	62,053		$	56,292
	Accrued expenses			125,993			149,461

		Total current liabilities		188,046			205,753

Commitments and contingencies Stockholders’ equity:
Preferred stock, $0.001 par value, 25,000,000 shares authorized; no shares issued or outstanding				—			—
Common stock, $0.001 par value, 100,000,000 shares authorized; 13,533,370 shares outstanding at December 31, 2004: 12,289,370 shares outstanding at December 31, 2003				13,533			12,290
Additional paid-in capital				20,007,845			17,364,975
Deferred stock compensation				(315,000	)		(525,000	)
Deficit accumulated during the development stage				(17,027,344	)		(13,918,070	)

		Total stockholders’ equity		2,679,034			2,934,195

Total liabilities and stockholders’ equity			$	2,867,080		$	3,139,948

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

HELIX BIOMEDIX, INC.

(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF OPERATIONS

For the Years ended December 31, 2004 and 2003 and

for the Period from Inception (November 7, 1988) to December 31, 2004


			Inception			For the years ended
			(November 7, 1988)			December 31,
			to December 31,
			2004			2004			2003

Revenue			$	271,626		$	93,661		$	88,465

Operating expenses:
	Research and development			4,696,015			915,157			844,450
	Depreciation and amortization			725,422			160,578			205,126
	Accounting, legal and professional			1,873,129			312,561			257,169
	Consulting fees			2,730,861			128,006			189,126
	General and administrative			5,993,238			1,715,196			1,804,554

		Total operating expenses		16,018,665			3,231,498			3,300,425

	Loss from operations			(15,747,039	)		(3,137,837	)		(3,211,960	)

Other (income) expense:
	Gain on settlement of lawsuit			(48,574	)		—			—
	Gain on sale of equipment			(6,453	)		(6,453	)		—
	Interest expense			1,459,442			—			—
	Interest income			(124,110	)		(22,110	)		(16,457	)

				1,280,305			(28,563	)		(16,457	)

	Net loss		$	(17,027,344	)	$	(3,109,274	)	$	(3,195,503	)

	Basic and diluted net loss per share					$	(0.23	)	$	(0.28	)

	Weighted average shares outstanding						13,290,408			11,231,277

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

HELIX BIOMEDIX, INC.

(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

For the Years ended December 31, 2004 and 2003 and

for the Period from Inception (November 7, 1988) to December 31, 2004


	Common Stock
						Additional				Stock				Stockholders’
	Number					Paid-In		Deferred		Subscription		Accumulated		Equity
	of Shares			Amount		Capital		Compensation		Receivable		Deficit		(Deficit)

Initial capitalization on November 7, 1988		1,000,000		$	66,486	$	—	$	—	$	—	$	—	$	66,486
Restated for recapitalization of the private company		(370,000	)		—		—		—		—		—		—
Reverse acquisition of Helix BioMedix, Inc. by Cartel Acquisitions, Inc. on March 20, 1989		151,262			855,292		—		—		—		—		855,292
Issuance of stock for current or prior services:


Period	Per Share Amount

December 1992	$	2.50	5,600	14,000	—	—	—	—	14,000
May 1993	$	5.00	8,000	40,000	—	—	—	—	40,000
December 1993	$	2.50	9,490	23,724	—	—	—	—	23,724
March 1998	$	1.00	4,900	4,900	—	—	—	—	4,900
December 1998	$	1.00	3,100	3,100	—	—	—	—	3,100
September 1999	$	0.70	40,000	28,000	—	—	—	—	28,000
September 1999	$	1.25	73,215	91,519	—	—	—	—	91,519

			144,305	205,243	—	—	—	—	205,243
Issuance of stock for settlement of debt or account payable:


Period	Per Share Amount

May 1993	$5.00	4,000	20,000	—	—	—	—	20,000
September 1993	$2.50	184,000	460,000	—	—	—	—	460,000
April 1995	$2.50	41,732	104,331	—	—	—	—	104,331
April 1995	$2.41	80,000	192,943	—	—	—	—	192,943
September 1995	$2.50	14,731	36,828	—	—	—	—	36,828
September 1997	$1.00	110,976	110,976	—	—	—	—	110,976
December 1997	$2.50 $1.00	326,785	780,025	—	—	—	—	780,025
March 1998	$1.00	3,100	3,100	—	—	—	—	3,100
June 1998	$1.00	1,395	1,395	—	—	—	—	1,395
September 1998	$1.00	2,500	2,500	—	—	—	—	2,500
September 1999	$1.25	2,000	2,500	—	—	—	—	2,500

		771,219	1,714,598	—	—	—	—	1,714,598
Fractional shares issued in connection with 1 for 500 reverse split		29	—	—	—	—	—	—
Issuance of stock for cash:


Period	Per Share Amount

March & December 1994...	$	2.50	16,000	40,000	—	—	—	—	40,000
April 1995	$	2.50	4,800	12,000	—	—	—	—	12,000
March 1998	$	1.00	10,000	10,000	—	—	—	—	10,000

			30,800	62,000	—	—	—	—	62,000


Issuance of common stock as consideration in cooperative endeavor agreement, in November 1995	10,000	25,000	—	—		—	—	25,000
Issuance of stock options in 1995	—	—	137,400	—		—	—	137,400
Issuance of stock for cash in private placement, during July-September 1999, at $0.70 per share, net of offering costs of $107,195	2,890,643	1,916,255	—	—		—	—	1,916,255
Escrow of stock for consulting agreement, in September 1999, at $0.70 per share	—	42,000	—	(42,000	)	—	—	—
Compensation and deferred compensation recorded for options granted, in December 1999	—	—	50,875	(44,000	)	—	—	6,875
Deferred compensation for stock awards in December 1999	—	87,225	—	(87,225	)	—	—	—

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

HELIX BIOMEDIX, INC.

(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) — (Continued)

For the Years ended December 31, 2004 and 2003 and

for the Period from Inception (November 7, 1988) to December 31, 2004


	Common Stock
							Additional				Stock				Stockholders’
	Number						Paid-In		Deferred		Subscription		Accumulated		Equity
	of Shares			Amount			Capital		Compensation		Receivable		Deficit		(Deficit)

Stock and options issued for services in January 2000		1,250			3,125			4,500		—		—		—		7,625
Amortization of deferred compensation costs		—			—			—		21,000		—		—		21,000
Retirement of share issued in December 1999		(250	)		(313	)		—		—		—		—		(313	)
Shares issued and options vested in connection with employment agreements, March 2000		267,445			700,000			—		41,306		—		—		741,306
Director shares and options issued:


Period	Per Share Amount

March 2000	$	4.05	7,747	18,399	12,976	—	—	—	31,375
June 2000	$	3.17	8,750	16,953	10,828	—	—	—	27,781
September 2000	$	4.61	8,750	24,063	16,297	—	—	—	40,360

			25,247	59,415	40,101	—	—	—	99,516


Revaluation of deferred compensation and options vested in connection with employment agreement in June 2000	—	(27,919	)	33,784		16,396		—	—		22,261
Options vested in connection with employment agreement, shares issued for services, and revaluation of options due to suspension of exercise date, in September 2000	41,000	2,313		85,000		51,012		—	—		138,325
Options issued in connection with two consulting agreements, in October 2000	—	—		100,000		(75,000	)	—	—		25,000
Directors shares and options issued in September 2000, at $2.36 per share	8,659	13,259		7,197		—		—	—		20,456
Options vested in connection with employment agreements, and shares issued for services, in September 2000	4,987	8,104		4,613		43,511		—	—		56,228
Compensation adjustment to variable plan options in December 2000	—	—		(83,828	)	—		—	—		(83,828	)
Exercise of options at $1.00 per share	45,000	112,500		(67,500	)	—		—	—		45,000
Exercise of option at $0.50 per share	600	1,500		(1,200	)	—		—	—		300
Adjustment to par value stock for Delaware re-incorporation	—	(5,841,061	)	5,841,061		—		—	—		—
Amortization of deferred compensation	—	—		—		75,000		—	—		75,000
Issuance of stock for services, in October 2001, at $2.00 per share	25,000	25		49,975		—		—	—		50,000
Issuance of stock for licensing arrangement October 2001, at $0.75 per share	97,500	98		73,027		—		—	—		73,125
Compensation adjustment for options and warrants in 2001	—	—		328,310		—		—	—		328,310
Value of detachable warrants issued with convertible notes payable	—	—		216,100		—		—	—		216,100
Net loss for the period from inception on November 7, 1988 to December 31, 2001	—	—		—		—		—	(7,560,663	)	(7,560,663	)

Balance at December 31, 2001	5,144,696	5,145		6,819,415		—		—	(7,560,663	)	(736,103	)

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

HELIX BIOMEDIX, INC.

(A DEVELOPMENT STAGE COMPANY)

STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) — (Continued)

For the Years ended December 31, 2004 and 2003 and

for the Period from Inception (November 7, 1988) to December 31, 2004


	Common Stock
					Additional					Stock						Stockholders’
	Number				Paid-In		Deferred			Subscription			Accumulated			Equity
	of Shares		Amount		Capital		Compensation			Receivable			Deficit			(Deficit)

Issuance of common stock for services rendered, at $0.80 per share on November 21, 2002		18,000		18		14,382		—			—			—			14,400
Conversion of convertible notes payable into equity, at $1.00 per share Principle		3,082,500		3,083		3,079,417		—			—			—			3,082,500
Accrued interest		231,180		231		230,949		—			—			—			231,180

		8,476,376		8,477		10,144,163		—			—			(7,560,663	)		2,591,977
Private placement of common stock (with common stock warrants equal to 60%), at $1.00 per share, September to December 2002		1,560,000		1,560		1,558,440		—			(135,000	)		—			1,425,000
Compensation adjustments for warrants in 2002		—		—		440,331		—			—			—			440,331
Value of detachable warrants issued with convertible notes payable		—		—		512,452		—			—			—			512,452
Net loss for the year		—		—		—		—			—			(3,161,904	)		(3,161,904	)

Balance at December 31, 2002		10,036,376		10,037		12,655,386		—			(135,000	)		(10,722,567	)		1,807,856
Exercise of warrants at $1.00 per share		80,500		81		80,419		—			—			—			80,500
Private placement of common stock (with common stock warrants, equal to 60%) at $1.00 per share, net of issuance costs, January to March 2003		2,172,494		2,172		2,159,213		—			—			—			2,161,385
Deferred stock compensation, net		—		—		630,000		(525,000	)		—			—			105,000
Proceeds from warrant exchange at $0.50 per warrant		—		—		1,176,550		—			—			—			1,176,550
Repayment of subscription receivable		—		—		—		—			135,000			—			135,000
Options and warrants issued for services						663,407											663,407
Net loss for the year		—		—		—		—			—			(3,195,503	)		(3,195,503	)

Balance at December 31, 2003		12,289,370		12,290		17,364,975		(525,000	)		—			(13,918,070	)		2,934,195
Exercise of warrants at $0.25 per share		60,000		60		14,940		—			—			—			15,000
Private placement of common stock (with common stock warrants equal to 35% at $2.00 per share, net of issuance cost), March to May 2004		1,184,000		1,183		2,346,793		—			—			—			2,347,976
Proceeds from 2003 warrant exchange at $0.50 per warrant		—		—		30,000		—			—			—			30,000
Deferred stock compensation		—		—		—		210,000			—			—			210,000
Options issued for services		—		—		251,137		—			—			—			251,137
Net loss for the year		—		—		—		—			—			(3,109,274	)		(3,109,274	)

Balance at December 31, 2004		13,533,370	$	13,533	$	20,007,845	$	(315,000	)	$	—		$	(17,027,344	)	$	2,679,034

The accompanying notes are an integral part of the financial statement.

HELIX BIOMEDIX, INC.

(A DEVELOPMENT STAGE COMPANY)

STATEMENT OF CASH FLOWS

For the Years ended December 31, 2004 and 2003 and

For the Period from Inception (November 7, 1988) to December 31, 2004


				Inception			For the Years Ended
				(November 7, 1988)			December 31,
				to December 31,
				2004			2004			2003

Cash Flows from Operating Activities
	Net loss			$	(17,027,344	)	$	(3,109,274	)	$	(3,195,503	)
		Adjustments to reconcile net loss to net cash used in operating activities:
			Depreciation and amortization		725,602			160,578			205,126
			Amortization of debt discount		728,552			—			—
			Stock-based compensation costs		3,779,794			461,137			768,407
			Interest expense converted to common stock		231,180			—			—
			Research and development		53,000			—			—
			Gain on sale of assets		(6,453	)		(6,453	)		—
		Changes in operating assets and liabilities:			—			—			—
			Accounts receivable		—			—			20,000
			Prepaid expenses and other current assets		(85,061	)		(33,271	)		(9,978	)
			Other assets		(67,400	)		29,396			680
			Accounts payable — related party		341,602			—			—
			Accounts payable		64,387			5,761			18,984
			Accrued expenses		200,271			(23,468	)		113,337

	Net cash used in operating activities				(11,061,870	)		(2,515,594	)		(2,078,947	)

Cash Flows from Investing Activities
	Investment in Helix Delaware				(10	)		—			—
	Proceeds from sale of assets				7,400			7,400			—
	Purchase of property and equipment				(569,799	)		(4,479	)		(310,442	)
	Increase in capitalized patents				(632,419	)		(43,181	)		(124,485	)

	Net cash used in investing activities				(1,194,828	)		(40,260	)		(434,927	)

Cash Flows from Financing Activities
	Cash received in reverse acquisition				634,497			—			—
	Proceeds from notes payable				3,089,894			—			—
	Proceeds from notes payable — related party				379,579			—			—
	Repayments from notes payable — related party				(163,154	)		—			—
	Issuance of stock and warrants for cash, net				10,223,910			2,392,976			3,553,435

	Net cash provided by financing activities				14,164,726			2,392,976			3,553,435

Net increase in cash and cash equivalents					1,908,028			(162,878	)		1,039,561
Cash and cash equivalents at beginning of period					—			2,070,906			1,031,345

Cash and cash equivalents at end of period				$	1,908,028		$	1,908,028		$	2,070,906

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

HELIX BIOMEDIX, INC.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS

for the Period from Inception (November 7, 1988) to December 31, 2004


Note 1.	Summary of Significant Accounting Policies


	*Description of Entity*

Helix BioMedix, Inc. was originally formed under the laws of the state of Colorado on February 2, 1988 under the name Cartel Acquisitions, Inc. On March 20, 1989, the Company acquired 100% of the outstanding shares of Helix BioMedix, Inc., a Louisiana corporation (“BioMedix of Louisiana”), in exchange for 151,262 shares of the Company’s common stock. Cartel Acquisitions, Inc. acquired its shares from Helix International Corporation (“Helix”). BioMedix of Louisiana was incorporated on November 7, 1988 as a separate corporate entity from Helix International, Inc., to develop therapeutic biopharmaceuticals for animal and human health care. On November 1, 2000, the Company incorporated as a wholly owned subsidiary, Helix BioMedix, Inc. in the state of Delaware (“Helix-Delaware”), for the purpose of merging into Helix-Delaware, with Helix-Delaware as the surviving corporation. This merger is reflected in the accompanying financial statements with an effective date of December 29, 2000.

Unless otherwise noted, all references herein to (the “Company”) refer to Helix BioMedix, Inc., a Delaware corporation.


	*Development Stage Activities*

Since 1988, the Company has been engaged in conducting research in the field of antimicrobial peptides, both internally and in conjunction with research and development arrangements with various academic and commercial organizations. During this period, the Company acquired the ownership and rights to various peptide patents and related technology. The Company is developing diverse commercial (non-FDA) and clinical (FDA) applications for its library of peptides.

Prior to September 1999, the Company’s research and development activities were constrained by patent related uncertainties and by limited working capital, with most of its financing during that time being advanced by the majority shareholder. In September 1999, the Company raised $2.0 million in an equity private placement through the sale of approximately 2.9 million common shares and stock purchase warrants.

Shortly thereafter, the Company entered into various employment and consulting agreements, and a restructuring of the board of directors occurred. The Company granted various compensatory options and share issuances to employees and consultants during the fourth quarter of 1999 and the year 2000.

During 2001, the Company raised approximately $2.0 million in a private placement of convertible debt and detachable common stock warrants. The Company relocated its corporate headquarters from Louisiana to Bothell, Washington, leasing both office and lab facilities in the new location. The Company also hired research and administrative personnel, assembled a Scientific Advisory Board and entered into a license agreement with the University of British Columbia.

During 2002, the Company amended the terms of its 2001 private placement of debt. Among other changes, the notes were amended to require automatic conversion into shares of common stock in the event of an equity financing of at least $1.5 million by December 31, 2002. The Company raised an additional $1.1 million through the first half of 2002 by issuing notes with detachable warrants under the amended private placement of debt. Beginning in September 2002, the Company began an equity financing consisting of a private placement of common stock, with detachable warrants equal to 60% of the common stock investments, raising a total of $1.56 million by year end. This amount included $135,000 of stock subscriptions receivable. The convertible notes and accrued interest, totaling $3,313,680 were converted into 3,313,680 shares of common stock at a per share price of $1.00 on December 31, 2002. As a continuation of

HELIX BIOMEDIX, INC.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS — (Continued)

the September 2002 equity financing and under the same terms, the Company raised an additional $2.2 million through March 31, 2003.

In December 2003, the Company initiated a warrant exchange program pursuant to which holders of certain warrants issued by the Company in October 1999 and expiring on October 18, 2004, and having a per share exercise price of $3.25 could exchange such warrants for new warrants that (i) expire on October 31, 2006; (ii) provide for cashless exercises; and (iii) reduce the per share exercise price from $3.25 to $2.25. Consideration for the exchange was $0.50 per warrant share and surrender of the old warrants prior to December 26, 2003. The exchange program generated net proceeds to the Company of $1.2 million.

During 2004, in a private placement of common stock, the Company received $2,348,000 of net proceeds for 1,184,000 shares of common stock and detachable warrants for the purchase of an additional 414,400 shares of common stock. The warrants issued in this financing have a term of five years and are exercisable at $2.00 per share.

On February 28, 2005, the Company announced that it has closed the initial closing of a private placement of common stock, receiving cash of $2.3 million in exchange for 1,548,501 shares of common stock and warrants to purchase up to 125,000 shares of common stock. The Warrants have a 5-year term and a per share purchase price of $1.50.

In a second closing held on March 2, 2005, the Company received $175,000 in exchange for 116,667 shares of common stock. The Company received a total of $2.5 million in this private placement financing for 1,665,168 shares of common stock and detachable warrants for the purchase of an additional 125,000 shares of common stock. The proceeds of the offering will be used to continue ongoing research and development efforts, the out-licensing initiatives for the Company’s peptides and for general corporate purposes.

On March 1, 2005, the Company commenced a tender offer to holders of certain of its warrants that were purchased in four private placement financings to exchange their warrants as follows:


	•	2001/2002 Warrants: (warrants to purchase shares of our common stock issued as part of the units described in our private placement memorandum dated May 2001) We will issue either (a) 0.82 shares for each warrant share tendered; or (b) 1.0 share for each warrant share tendered upon payment of $0.25 for each warrant share tendered.

	•	2002/2003 Warrants: (warrants to purchase shares of our common stock issued as part of the units described in our private placement memorandum dated September 2002, and amended December 2002) We will issue either (a) 0.84 shares for each warrant share tendered; or (b) 1.0 share for each warrant share tendered upon payment of $0.25 for each warrant share tendered.

	•	2003 Warrants: (warrants to purchase shares of our common stock issued as part of the units described in our private placement memorandum dated November 2003) We will issue either (a) 0.37 shares for each warrant share tendered; or (b) 1.0 share for each warrant share tendered upon payment of $0.56 for each warrant share tendered.

	•	2004 Warrants: (warrants to purchase shares of our common stock issued as part of the units described in our private placement memorandum dated March 2004) We will issue either (a) 0.60 shares for each warrant share tendered; or (b) 1.0 share for each warrant share tendered upon payment of $0.50 for each warrant share tendered.

The warrant exchange offer is scheduled to expire on April 1, 2005.

Management believes substantial progress has been made with respect to the licensing of the Company’s peptide technology and business development efforts. However, the Company’s net cash used in operations

HELIX BIOMEDIX, INC.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS — (Continued)

has exceeded our cash generated from operations for each year since our inception. For example, we used $2.5 million in operating activities for the year ended December 31, 2004 and $2.1 million in 2003. Based upon the private placement and warrant offering discussed above and the current status of the Company’s product development and collaboration plans, our cash and cash equivalents should be adequate to satisfy the Company’s capital needs through at least the next twelve months. However, additional funding through equity securities or other means will be necessary to meet the Company’s cash requirements in the future if significant licensing revenue is not achieved.


	*Use of Estimates*

The preparation of the Company’s financial statements in conformity with accounting principles generally accepted in the United States of America requires the Company’s management to make estimates and assumptions that affect the amounts reported in these financial statements and accompanying notes. Actual results could differ from those estimates.


	*Cash Equivalents*

The Company considers all highly liquid debt instruments with a maturity at date of purchase of three months or less to be cash equivalents. The Company regularly maintains cash balances in excess of the FDIC insured limitation of $100,000. As of December 31, 2004 the company’s cash balances exceeded the FDIC insured limit by $1.8 million.


	*Property and Equipment*

Property and equipment used in operations is recorded at cost and is depreciated using the straight-line method over useful lives of 3 to 7 years. Leasehold improvements are amortized over the life of the lease term or the estimated useful life of the improvements, whichever is shorter.


	*Intangibles*

Patent costs, consisting primarily of legal fees, are capitalized. Amortization is taken on the straight-line method over the life of the patent(s), commencing upon the issuance of the patents, not to exceed 17 or 20 years, depending on the date the patent was issued, or the date the application was filed.

Antimicrobial technology, which was purchased in conjunction with the patents, has been capitalized at the basis of the debt issued for it. This technology is being amortized ratably over twenty years.


	*Impairment of Long-lived Assets*

Long-lived assets including property and equipment are reviewed for possible impairment whenever significant events or changes in circumstances, including changes in our business strategy and plans, indicate that an impairment may have occurred. An impairment is indicated when the sum of the expected future undiscounted net cash flows identifiable to that asset or asset group is less than its carrying value. Impairment losses are determined from actual or estimated fair values, which are based on market values, net realizable values or projections of discounted net cash flows, as appropriate. No impairment of long-lived assets has been recognized in the accompanying financial statements.


	*Revenue Recognition*

The Company generates revenue from licensing fees. Revenue is recognized from non-refundable, upfront fees and proceeds when delivery has occurred and no future obligations exist. Royalties from licensees are based on third-party sales and recorded as earned in accordance with the contract terms when third-party

HELIX BIOMEDIX, INC.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS — (Continued)

results are reliably measured and collection is reasonably assured. Payments received for which the earnings process is not complete are classified as deferred revenue.


	*Research and Development*

Research and development costs, including personnel costs, supplies and other indirect costs, are expensed as incurred. In instances where the Company enters into collaborative agreements with third parties, costs are expensed the earlier of when amounts are due or when services are performed.


	*Income Taxes*

Deferred income taxes are provided based on the estimated future tax effects of carry forwards and temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those carry forwards and temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. Primary temporary differences relate to net operating loss carry forwards and research and development credit carry forwards, which are subject to a full valuation allowance.


	*Loss per Share*

Loss per share has been computed using the weighted average number of shares outstanding during the period. Diluted per share amounts reflect potential dilution from the exercise or conversion of securities into common stock or from other contracts to issue common stock. The Company’s capital structure includes common stock options and common stock warrants, all of which have been excluded from net loss per share calculations as they are antidilutive, as follows:


	December 31,

	2004		2003

Outstanding options		2,426,166		1,777,000
Outstanding warrants		7,952,369		7,950,513


	*Fair Value of Financial Instruments*

The fair value of all reported assets and liabilities representing financial instruments (none of which are held for trading purposes) approximate the carrying values of such instruments due to their short-term maturity.


	*Stock-based Compensation*

The Company applies Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations in measuring compensation costs for its employee stock option plan. The Company discloses pro forma net loss and net loss per share as if compensation cost had been determined consistent with Statement of Financial Accounting Standard (SFAS) No. 123, “Accounting for Stock-Based Compensation”. Stock options and warrants issued to non-employees are accounted for using the fair value method prescribed by SFAS 123 and Emerging Issues Task Force (EITF) Issue No. 96-18.

HELIX BIOMEDIX, INC.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS — (Continued)

Had the Company determined compensation cost for employees based on the fair value of stock options on the grant date under SFAS No. 123, net loss and net loss per share would have been the pro forma amounts indicated below:


		Year Ended December 31,

		2004			2003

Net loss
	As reported	$	(3,109,274	)	$	(3,195,503	)
	Add: Stock-based employee compensation expense included in reported net loss		210,000			661,961
	Deduct: Stock-based employee compensation determined under fair value based method for all awards		(543,726	)		(473,161	)

	Pro forma net loss	$	(3,443,000	)	$	(3,006,703	)

Net loss per share
	As reported	$	(0.23	)	$	(0.28	)

	Pro forma net loss	$	(0.26	)	$	(0.27	)

The per share weighted-average fair value of stock options granted during 2004 and 2003 was $1.35 and $1.22, respectively, on the grant date using the Black-Scholes option pricing model with the following assumptions:


	Year Ended
	December 31,

	2004			2003

Expected dividend yield		0	%		0	%
Risk-free interest rate		3.50	%		2.21	%
Expected volatility		110	%		125	%
Expected life in years		3.0			3.0


	*Recently Issued Accounting Pronouncements*


Note 2.	Notes Payable

In June 2001, the Company commenced the sale of six percent unsecured promissory notes pursuant to approval at its April 18, 2001 board meeting. The notes had an initial maturing date of May 31, 2002 at which time the holder had the option of converting principal and interest to stock. The offering of promissory notes,

HELIX BIOMEDIX, INC.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS — (Continued)

included warrants to purchase common shares initially having a total value of 25% of the principal amount of the notes based on a per share purchase price of the lower of either (a) $1.50 per share, or (b) the per share price of the next equity offering. The warrants have a term of ten years. As of December 31, 2001, the Company raised proceeds of $1,980,000 and had recorded $216,100 in paid in capital from the issuance of related common stock purchase warrants, which is considered a debt discount. The effective interest rate on the outstanding promissory notes, when compared to the valuation of the common stock purchase warrant incentives and debt issue cost, was 16.9% for the year ended December 31, 2001.

At a meeting in March 2002, the board amended the terms of the existing debt offering as follows: (a) the offering size was increased from $2.77 million to $3.5 million; (b) the maturity date of the notes was extended to December 31, 2002; (c) the notes were amended to require conversion into shares of common stock in the event of an equity financing in a single or series of related transactions of at least $1.5 million (the “subsequent financing”) on or before December 31, 2002; and (d) the warrant coverage was increased to a minimum of 35% of the principal amount in the event the subsequent financing was completed before August 31, 2002; 40% in the event the subsequent financing was completed before December 31, 2002; and 45% in the event the subsequent financing was completed after December 31, 2002. Purchasers prior to the date of the offering changes were given an opportunity to rescind their agreement and obtain a refund of principal plus accrued interest or accept the revised terms. Refunds for approximately $55,000 were subsequently made. During the year ended December 31, 2002, the Company raised an additional $1,157,500 from the convertible debt offering. As noted below, the Company also raised $1.56 million in an equity financing as of December 31, 2002. Accordingly, the convertible notes, totaling $3,082,500, together with the related accrued interest of $231,180 were converted into 3,313,680 shares of common stock, at a per share price of $1.00, on December 31, 2002.

The number of warrants from the convertible debt financing totaled 1,233,000 shares, equaling 40% of the total principal balance of $3,082,500. The warrants were originally valued based on the $1.50 strike price and were revalued at the time of conversion based on the final strike price of $1.00. The total value of the warrants during 2002 resulted in additional debt discount of approximately $512,000. The total amortization of debt discount to interest expense during 2002 totaled $643,000. The effective interest rate on the outstanding promissory notes, when compared to the valuation of the common stock purchase warrant incentives and debt issue cost, was 24.4% for the year ended December 31, 2002.


Note 3.	Identifiable Intangible Assets

Identifiable intangible assets consist of the following as of December 31, 2004:


	2004			2003

Antimicrobial technology	$	222,187		$	222,187
Licensing agreements		61,391			61,391
Patents pending and approved		811,776			768,595

		1,095,354			1,052,173
Less accumulated amortization		(449,299	)		(373,802	)

Identifiable intangible assets, net	$	646,055		$	678,371

HELIX BIOMEDIX, INC.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS — (Continued)

Scheduled amortization charges from identifiable assets as of December 31, 2004 are as follows:


					Patents
	Antimicrobial		Licensing		Pending and
Year	Technology		Agreements		Approved		Total

2005	$	11,109	$	3,595	$	62,443	$	77,147
2006		11,109		3,595		62,443		77,147
2007		11,109		3,595		62,443		77,147
2008		11,109		3,595		62,443		77,147
2009		3,995		3,595		62,443		70,033
Thereafter		0		32,631		234,803		267,434


Note 4.	Stockholders’ Equity


	*Preferred Stock*

The board of directors may authorize the issuance of preferred stock from time to time in one or more series and each series shall have such voting, redemption, liquidation and dividend rights as the board of directors (“the board”) may deem advisable. As of December 31, 2004, no preferred series shares had been designated by the board.


	*Stock Split*

On December 29, 1993, the Company underwent a 1 for 500 reverse stock split. All share and per share amounts in these financial statements have been retroactively restated to reflect this reverse split.


	*Shareholder Rights Agreement*

On August 15, 2003, the Company’s board approved the adoption of a Shareholder Rights Plan pursuant to which all of the Company’s stockholders as of September 15, 2003 (the “record date”) will receive rights to purchase shares of a new series of Preferred Stock. The rights will be distributed as a non-taxable dividend and will expire ten years from the record date. The rights will be exercisable only if a person or group acquires 15 percent or more of the Company’s common stock or announces a tender offer for 15 percent or more of the common stock. If a person acquires 15 percent or more of common stock, all rights holders, except the buyer, will be entitled to acquire the Company’s common stock at a discount. The effect will be to discourage acquisitions of more than 15 percent of the Company’s common stock without negotiations with the board.


	*Options*

On December 15, 2000, the shareholders of the Company approved the Helix BioMedix 2000 Stock Option Plan (“the 2000 Plan”). A total of 5,400,000 of the Company’s authorized and unissued common shares are reserved for issuance under the 2000 Plan. The 2000 Plan is to be administered by non-employee directors, who shall be authorized to grant stock options to the Company’s employees, consultants and/or directors. These options may be either Incentive Stock Options as defined and governed by Section 422 of the Internal Revenue Code, or Nonqualified Stock Options. The 2000 Plan specifically provides the Company with an option to repurchase, upon termination of an optionee’s employment, up to ten thousand shares acquired by the optionee through the exercise of options granted thereunder at its then-current fair market value. As of December 31, 2004, no shares had been exercised under the 2000 Plan and 2,928,834 shares remain available for grant.

HELIX BIOMEDIX, INC.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS — (Continued)

Pursuant to separate board resolutions the company issued an additional 621,893 stock options, which were not part of any plan. A total of 20,000 shares were exercised, and the remaining shares were cancelled. As of December 31, 2004 there were no shares outstanding.

A summary of activity for options for the years ended December 31, 2004 and 2003 is as follows:


		Options Outstanding

		Number of			Weighted Avg.
		Shares			Exercise Price

Balance at December 31, 2002			1,133,000		$	1.23
	Granted		694,000		$	1.00
	Exercised		—			—
	Canceled		(50,000	)	$	1.00

Balance at December 31, 2003			1,777,000		$	1.15
	Granted		810,000		$	1.80
	Exercised		—			—
	Canceled		(160,834	)	$	1.39

Balance at December 31, 2004			2,426,166		$	1.35

The following table summarizes information about options outstanding at December 31, 2004:


				Options Outstanding				Options Exercisable

				Weighted		Weighted				Weighted
				Avg.		Avg.				Avg.
		Number		Contractual		Exercise		Number		Exercise
Exercise Price		Outstanding		Term		Price		Exercisable		Price

$0.70			165,500		5.59 years	$	0.70		165,500	$	0.70
$1.00			948,166		7.32 years	$	1.00		546,609	$	1.00
$1.48-$1.75			607,500		7.15 years	$	1.53		607,500	$	1.53
$1.80-$2.00			705,000		7.83 years	$	1.82		229,999	$	1.85

	Total		2,426,166		7.31 years	$	1.35		1,549,608	$	1.30

As of December 31, 2003, there were 1,028,551 options exercisable at a weighted average exercise price of $1.26.

HELIX BIOMEDIX, INC.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS — (Continued)


	*Common Stock Purchase Warrants*

Information concerning outstanding common stock purchase warrants is set forth below:


		December 31,

		2004							2003

					Price		Wghtd.					Price		Wghtd.
		Number			Range		Avg.		Number			Range		Avg.

Warrants issued to employees and non-employees for services			2,087,954		$	0.25-$6.00	$	1.54		1,658,670		$	0.25-$6.00	$	1.52
	Exercised		(60,000	)	$	0.25	$	0.25
	Expired/ Cancelled		(304,285	)	$	1.00-$1.50	$	1.34
Remaining warrants issued in connection with 1999 equity financing			2,890,643		$	3.25	$	3.25		2,890,643		$	3.25	$	3.25
	Expired 2004		(477,543	)	$	3.25	$	3.25
	Exchanged		(2,413,100	)	$	2.25	$	2.25		(2,413,100	)	$	2.25	$	2.25
Remaining warrants issued in connection with 2003 warrant exchange			2,413,100		$	2.25	$	2.25		2,413,100		$	2.25	$	2.25
Remaining warrants issued in connection with 2001 convertible debt financing			1,153,000		$	1.00	$	1.00		1,153,000		$	1.00	$	1.00
	Exercised		—
Remaining warrants issued in connection with 2002 and 2003 equity financings			2,248,200		$	1.00	$	1.00		2,248,200		$	10.0	$	1.00
	Warrants issued in connection with 2004 equity financing		414,400		$	2.00	$	2.00

	Total outstanding warrants		7,952,369		$	0.25-$6.00	$	1.55		7,950,513		$	0.25-$6.00	$	1.64


	*Stock Offering*

During 2004, in a private placement equity financing, the Company received $2,348,000 of gross proceeds for 1,184,000 shares of common stock and detachable warrants for the purchase of an additional 414,400 shares of common stock. The warrants issued in this financing have a term of five years and are exercisable at $2.00 per share.

On February 28, 2005, the Company announced that it had closed the initial closing of a private equity financing, receiving cash of $2.3 million in exchange for 1,548,501 shares of common stock and warrants to purchase up to 125,000 shares of common stock. The Warrants have a 5-year term and a per share purchase price of $1.50.

HELIX BIOMEDIX, INC.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS — (Continued)


	*Employee Equity Compensation Costs*

In 2003, certain employment contracts previously approved by the board of directors resulted in a compensation charge of $386,920, as they granted variable options. In December 2003, the Company revised substantially all agreements to fix the option terms. Remaining deferred compensation related to these options totals $315,000 at December 31, 2004.


	*Stockholders’ Equity and Comprehensive Income*

SFAS No. 130 requires companies to present comprehensive income (consisting primarily of net income items plus other direct equity changes and credits) and its components as part of the basic financial statements. The Company’s financial statements do not contain any changes in equity that are required to be reported separately in comprehensive income.


Note 5.	Income Taxes

Significant components of the Company’s gross deferred tax assets and liabilities as of December 31, 2004 and 2003 are as follows:


		2004			2003

Gross deferred tax assets (liabilities):
	Net operating loss carry forwards	$	4,194,800		$	3,690,100
	Research and development credits		116,200			162,000
	Stock compensation		567,800			411,000
	Accrued expenses		21,400			24,600

Gross deferred tax assets			4,900,200			4,287,700
	Less valuation allowance		(4,873,000	)		(4,246,700	)

Net deferred tax assets			27,200			41,000
Deferred tax liabilities Fixed and Intangible Assets			(27,200	)		(41,000	)

Net deferred tax assets/liabilities		$	—		$	—

Due to the uncertainty of the Company’s ability to generate taxable income to realize its net deferred tax assets at December 31, 2004 and 2003, a valuation allowance has been recognized for financial reporting purposes. The Company’s valuation allowance for deferred tax assets increased $626,300 for the year ended December 31, 2004. The increase in the deferred tax assets in 2004 is primarily the result of increasing net operating loss carry forwards.

At December 31, 2004, the Company has federal net operating loss carry forwards of approximately $12.3 million for income tax reporting purposes and research and development tax credit carry forwards of approximately $116,200. The Company’s ability to utilize the carry forwards may be limited in the event of an ownership change as defined in current income tax regulations.

HELIX BIOMEDIX, INC.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS — (Continued)


Note 6.	Related Party Transactions

Dunsford Hill Capital Partners, Inc. (“Dunsford Hill”) is a California corporation owned and controlled by Randall L-W. Caudill, Ph.D., a member of the Company’s board of directors. The Company previously engaged Dunsford Hill as a consultant to provide professional assistance in the areas of strategic and financial planning. In 2004 and 2003, Dunsford Hill earned cash compensation in the amount of $0 and $49,500, respectively. As of December 31, 2004, the Company had issued warrants to purchase 250,000 shares of common stock to Dunsford Hill.

Carlyn J. Steiner served as a member of our board of directors from December 2000 until April 2004. The Paisley Group LLC, (“Paisley”) a Washington limited liability company is owned and controlled by Ms. Steiner. The Company previously engaged Paisley as a consultant to provide professional assistance in the areas of strategic and financial planning. In 2004 and 2003, Paisley earned cash compensation in the amount of $0 and $49,500, respectively. As of December 31, 2004, the Company had issued warrants to purchase a total of 300,000 shares of common stock to Paisley.

Ralph Katz served on our board of directors from December 2000 until his resignation in May 2002. From October 2002 through March 2004 we engaged Mr. Katz as a consultant to provide professional services in the areas of strategic and financial planning. In return for services performed, he was issued a warrant to purchase up to 100,000 shares of our common stock at an exercise price of $1.00 per share for a ten-year term.

In August 2004, we engaged Mr. Katz to advise us regarding financing initiatives, to identify and develop out-licensing opportunities and to design and implement an investor relations program. Pursuant to that agreement Mr. Katz was granted an option to purchase up to 75,000 shares of our common stock, with an exercise price of $1.80; 25,000 are fully vested upon grant and 50,000 vesting one year later with a five-year term. In addition to the foregoing he was granted an option to purchase up to 25,000 share of our common stock, with an exercise price of $2.00 which was fully vested upon grant.

Katz-Miller Ventures, LLC (“Katz-Miller”) is a former consultant to the Company. The principal members of Katz Miller are Ralph Katz and Jeffrey Miller. Mr. Katz is a former director of the Company, (see above) and Mr. Miller is a current director of the Company. No amounts were paid to Katz-Miller in 2004 or 2003 and the Company has issued Katz-Miller 280,000 shares of its common stock and 200,000 warrants as of December 31, 2004.

On June 18, 2001, the Company entered into a Consulting Agreement with Dr. Robert E.W. Hancock, Ph.D. Dr. Hancock has been engaged to serve as a member of the Company’s Scientific Advisory Board (“SAB”) for a period of three years as an expert consultant in the area of antimicrobial peptides. Additionally, Dr. Hancock was engaged to assist the Company in its efforts to license certain intellectual property from the University of British Columbia (“UBC”). Dr. Hancock is the lead investigator and inventor of the UBC patents and patent applications. Dr. Hancock’s Consulting Agreement generally provides for compensation in cash and in the form of warrants as follows: 1) For each year of service on the SAB, the Company will grant a warrant to purchase 10,000 shares of common stock with a purchase price based on the fair market value of the Company’s stock and a ten-year term, and 2) upon execution of the license agreement with UBC, the Company agreed to grant warrants to purchase up to 250,000 shares of common stock at a purchase price of $1.50 with a ten-year term. These warrants vest in six equal installments every six months after the grant date.

On October 1, 2001, the Company entered into a License Agreement (“License”) with UBC whereby UBC granted to the Company an exclusive worldwide License to use and sublicense certain defined “Technology”. Dr. Hancock is the lead investigator and inventor of the UBC patents and patent applications.

HELIX BIOMEDIX, INC.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO FINANCIAL STATEMENTS — (Continued)

Under the License, the Company agreed to pay UBC certain royalties, and issued stock, options and cash to UBC or its nominees. See also Note 9.


Note 7.	Supplemental Disclosure of Cash Flow Information


	Inception
	(November 7,
	1988) to		Years Ended
	December 31,		December 31,

	2004		2004		2003

Deferred stock compensation	$	525,000		—	$	525,000
Stock issued to acquire patents		66,486		—		—
Debt issued to acquire technology		200,000		—		—
Bridge loans outstanding at acquisition		200,000		—		—
Patent costs included in accounts payable		99,859		—		—
Accounts payable converted to notes		704,559		—		—
Accrued interest converted to notes		403,453		—		—
Notes converted to equity		4,722,048		—		—
Accrued interest converted to equity		231,180		—		—
Detachable warrants issued with notes payable		728,552		—		—
Issuance of stock for services provided		14,400		—		—
Purchase of property included in accrued expenses		224,458		—		—
Stock subscription receivable		135,000		—		—
Cash paid for interest		105,430		—		—
Accounts receivable from sale of equipment		10,200		10,200		—


Note 8.	Long Term Leases

The Company leases office and lab space under an operating lease expiring in August 2005. Rent expense for the years ended December 31, 2004 and 2003 was $46,784 and $64,220, respectively. Future minimum lease payments required under the lease obligation for 2005 is $30,200.


Note 9.	License Agreement

The Company entered into a License Agreement (“License”) with the UBC commencing October 1, 2001, whereby UBC granted to the Company an exclusive worldwide License to use and sublicense certain defined “Technology” and any improvements within a specified field of use and including the right to manufacture, distribute and sell products utilizing the Technology. Dr. Hancock, a member of the Company’s Scientific Advisory Board, is the lead investigator and inventor of the UBC patents and patent applications. The Technology is comprised primarily of three broad patents for antimicrobial peptides and related methods of use. The License extends to the Company’s affiliates. In exchange for the exclusive, worldwide License, the Company agreed to pay UBC a royalty comprised of 3.5% of revenue generated from the Technology and any improvements related thereto. The Company agreed to pay graduated minimum annual royalties of $10,000, $20,000 and $25,000 beginning with the 5th, 6th, 7th and all subsequent anniversaries of the Commencement Date of the License Agreement, respectively. Minimum royalties begin in 2006. As called for by the License, the Company has issued to UBC, 97,500 shares of the Company’s common stock, options to purchase an additional 152,500 common shares at $1.50 and $61,391 in cash, such cash payment constituting reimbursement of UBC for expenses related to the licensed patents. The options have a term of ten years. The agreement also requires the Company to reimburse UBC for all further costs incurred with respect to the patents, including maintenance fees.


ITEM 8.	*CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE*

None.


ITEM 8a.	*CONTROLS AND PROCEDURES*

As of the end of the period covered by this Annual report, the Company carried out an evaluation, under the supervision and participation of management, by the Company’s Chief Executive Officer and Chief Financial Officer of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13A-14. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information required to be included in the Company’s periodic SEC filings. There were no significant changes during the fourth quarter or the year in the Company’s internal controls over financial reporting or in other factors that could significantly affect, or is reasonably likely to significantly affect such internal controls.

PART III


ITEM 9.	*DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT*

The information required by this Item is contained in part in the sections captioned “Board of Directors — Nominees for Director”, “Board of Directors — Continuing Directors — Not Standing for Election This Year”, “Board of Directors — Contractual Arrangements” and “Voting Securities and Principal Holders — Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement for Helix BioMedix Annual Meeting of Stockholders scheduled to be held on May 11, 2005, and such information is incorporated herein by reference.

The remaining information required by this Item is set forth in Part I of this report under the caption “Executive Officers of the Registrant”.


ITEM 10.	*EXECUTIVE COMPENSATION*

The information required by this Item is incorporated by reference from the information contained in the section captioned “Compensation and Benefits” of the Proxy Statement for Helix BioMedix Annual Meeting of Stockholders scheduled to be held on May 11, 2005.


ITEM 11.	*SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.*

The information required by this Item is incorporated by reference from the information contained in the sections captioned “Voting Securities and Principal Holders” of the Proxy Statement for Helix BioMedix Annual Meeting of Stockholders scheduled to be held on May 11, 2005.


ITEM 12.	*CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS*

The Company has entered into certain contractual agreements with the following parties:


*(a)*	*With University of British Columbia*

The Company entered into a License Agreement (“License”) with the University of British Columbia (“UBC”) commencing October 1, 2001 whereby UBC granted to the Company an exclusive worldwide License to use and sublicense certain defined “Technology” and any improvements within a specified field of use and including the right to manufacture, distribute and sell products utilizing the Technology. Dr. Hancock, a member of the Company’s Scientific Advisory Board, is the lead investigator and inventor of

the UBC patents and patent applications. The Technology is comprised primarily of three broad patents for antimicrobial peptides and related methods of use. The License extends to the Company’s affiliates. In exchange for the exclusive, worldwide License, the Company agreed to pay UBC a royalty comprised of 3.5% of revenue generated from the Technology and any improvements related thereto. The Company agreed to pay graduated minimum annual royalties of $10,000, $20,000 and $25,000 beginning with the 5th, 6th, 7th and all subsequent anniversaries of the Commencement Date of the License Agreement respectively. Minimum royalties begin in 2006. As called for by the License, the Company has issued to UBC or its assigns, 97,500 shares of the Company’s common stock, options to purchase an additional 152,500 common shares at $1.50, and $61,391 in cash, such cash payment constituting reimbursement of UBC for expenses related to the licensed patents. The options have a term of ten years. The agreement also requires the Company to reimburse UBC for all further costs incurred with respect to the patents, including maintenance fees.


*(b)*	*With Katz- Miller Ventures, LLC*

Katz-Miller Ventures, LLC (“Katz-Miller”) is a former consultant to the Company. The principal members of Katz Miller are Ralph Katz and Jeffrey Miller. Mr. Katz is a former director of the Company and Mr. Miller is a current director of the Company. The Company first entered into a consulting agreement with Katz-Miller on October 1, 1999. In May 2001, the Company entered into an Amended and Restated Consulting Agreement with Katz-Miller. The Amended and Restated Consulting Agreement modifies the terms of compensation for services rendered under the prior agreement by providing for a cash payment of $80,000, a short term loan of $80,000, and issuance of warrants to purchase shares of common stock as follows: 1) 50,000 at $1.50; 2) 50,000 at $3.00; 3) 50,000 at $4.50 and 4) 50,000 at $6.00. All warrants vested upon issuance and will expire on June 30, 2011. As of December 31, 2003, the Company has paid Katz-Miller $80,000 and issued Katz-Miller 280,000 shares of its common stock and 200,000 warrants as described above. See also Certain Relationships and Related Transactions — Ralph Katz, below.


*(c)*	*With Dunsford Hill Capital Partners, Inc.*

Dunsford Hill Capital Partners, Inc. (“Dunsford Hill”) is owned and controlled by Randall L-W. Caudill, Ph.D. Dr. Caudill also serves as a Director of the Company. Dunsford Hill provides consulting services to the Company on strategic, management and financial issues. The Company first entered into a Consulting Agreement with Dunsford Hill in October 2000. The original consulting agreement has been amended and extended by subsequent agreements which extend the term of the original agreement and provide for additional compensation. Under the May 30, 2001 Amended and Restated Consulting Agreement (“Amended Agreement”) with Dunsford Hill, the Company agreed to pay additional compensation in the form of warrants to purchase an aggregate of 120,000 shares of common stock at $1.50 per share, thereby eliminating certain conditions precedent that were contained in the earlier agreement. Under the August 15, 2002 Second Amended and Restated Consulting Agreement, the Company agreed to cash payments totaling $72,000 payable in installments and warrants to purchase an aggregate of 50,000 shares of common stock at the lower of $1.50 or the price of the next equity financing ($1.00). As of December 31, 2003, the Company has issued to Dunsford Hill warrants to purchase 250,000 shares of common stock and made cash payments of $49,500 in 2003. There was no cash compensation paid in 2004.


*(d)*	*With Paisley Group, LLC*

Carlyn J. Steiner, who served as a member of our board of directors from December 2000 until April 2004, controls the activities of the Paisley Group, LLC. The Paisley Group has provided the Company with financial consulting services including consulting in conjunction with the 2001 Private Placement. The Company first entered into a Consulting Agreement with the Paisley Group in October 2000. The original consulting agreement has been amended and extended by subsequent agreements which extend the term of the original agreement and provide for additional compensation. Under the May 30, 2001 Amended and Restated Consulting Agreement (“Amended Agreement”) with the Paisley Group, the Company agreed to pay additional compensation in the form of warrants to purchase an aggregate of 120,000 shares of common stock at $1.50 per share, thereby eliminating certain conditions precedent that were contained in the earlier

agreement. Under the August 15, 2002 Second Amended and Restated Consulting Agreement, the Company agreed to cash payments totaling $72,000 payable in installments and warrants to purchase an aggregate of 100,000 shares of common stock at the lower of $1.50 or the price of the next equity financing ($1.00). As of December 31, 2003, the Company has issued to The Paisley Group warrants to purchase 300,000 shares of common stock and made cash payments of $49,500 in 2003. There was no cash compensation paid in 2004.


*(e)*	*With Robert E.W. Hancock, Ph.D.*

On June 18, 2001, the Company entered into a Consulting Agreement with Dr. Robert E.W. Hancock, Ph.D. Dr. Hancock has been engaged to serve as a member of the Company’s Scientific Advisory Board (“SAB”) for a period of three years as an expert consultant in the area of antimicrobial peptides. On January 17, 2005, Dr. Hancock signed a new three year agreement to serve on the Scientific Advisory Board and serve in a consulting capacity. Additionally, Dr. Hancock was engaged to assist the Company in its efforts to license certain intellectual property from the University of British Columbia (“UBC”). Dr. Hancock is the lead investigator and inventor of the UBC patents and patent applications. The Company entered into a license agreement with UBC in October 2001. Dr. Hancock’s Consulting Agreement generally provides for compensation in cash and in the form of warrants as follows: 1) For each year of service on the SAB, the Company will grant a warrant to purchase 10,000 shares of common stock with a purchase price based on the fair market value of the Company’s stock and a ten year term, and 2) upon execution of the license agreement with UBC, the Company agreed to grant warrants to purchase up to 250,000 shares of common stock at a purchase price of $1.50 with a ten year term. These warrants vest in six equal installments every six months after the grant date.


*(g)*	*With Ralph Katz*


ITEM 13.	*EXHIBITS*


(a)	Exhibits


Exhibit
No.			Description and Location

Plan of acquisition or reorganization
	2	.1	Proposal for Approval of Reincorporation of Helix BioMedix, Inc., a Colorado corporation, from Colorado to Delaware (incorporated by reference from Exhibit 2 to the Company’s Form 10-KSB for the year ended December 31, 2000)

Articles of Incorporation and Bylaws

	3	.1	Certificate of Ownership and Merger of Helix BioMedix, Inc. a Delaware corporation and Helix BioMedix, Inc., a Louisiana corporation (incorporated by reference from Exhibit 2 to the Company’s Form 10-KSB for the year ended December 31, 2000)

	3	.2	Certificate of Incorporation of Helix BioMedix, Inc. (incorporated by reference from Exhibit 3-a to the Company’s Form 10-KSB for the year ended December 31, 2000)


Exhibit
No.			Description and Location


	3	.3	Certificate of Amendment of Helix BioMedix, Inc. (incorporated by reference from Exhibit 3.3 to the Company’s Form 10-KSBA for the year ended December 31, 2002).

	3	.4	Bylaws of Helix BioMedix, Inc. (incorporated by reference from Exhibit 3-b to the Company’s Form 10-KSB for the year ended December 31, 2000)

Executive Compensation Plans and Agreements

	10	.1	R. Stephen Beatty Employment Agreement dated July 1, 2001 (incorporated by reference from Exhibit 10.1 to the Company’s Form 10-KSB for the year ended December 31, 2001)

	10	.2	Tim Falla Employment Agreement dated June 15, 2001 (incorporated by reference from Exhibit 10.3 to the Company’s Form 10-KSB for the year ended December 31, 2001)

	10	.3	Helix BioMedix, Inc. Amended and Restated 2000 Stock Option Plan (incorporated by reference from Exhibit 10.3 to the Company’s Form 10-KSBA for the year ended December 31, 2002)

	10	.4	Employment Agreement dated September 24, 2003, effective July 1, 2003 between the Company and Tim Falla (incorporated by reference from Exhibit 10.8 to the Company’s Form 10-KSB for the year ended December 31, 2003)

	10	.5	Employment Agreement dated September 24, 2003, effective July 1, 2003 between the Company and R. Stephen Beatty (incorporated by reference from Exhibit 10.9 to the Company’s Form 10-KSB for the year ended December 31, 2003)

	10	.6	Letter Agreement dated May 19, 2003 between the Company and Parker Sroufe (incorporated by reference from Exhibit 10.10 to the Company’s Form 10-KSB for the year ended December 31, 2003)

	10	.7	Separation Agreement and Release dated November 26, 2003 between the Company and Kerry Palmer (incorporated by reference from Exhibit 10.11 to the Company’s Form 10-KSB for the year ended December 31, 2003)

	10	.8	Amendment to Employment Agreement dated December 10, 2003 between the Company and Timothy Falla (incorporated by reference from Exhibit 10.12 to the Company’s Form 10-KSB for the year ended December 31, 2003)

	10	.9	Amendment to Employment Agreement dated December 10, 2003 between the Company and R. Stephen Beatty (incorporated by reference from Exhibit 10.13 to the Company’s Form 10-KSB for the year ended December 31, 2003)

	10	.10	Employment Agreement with David H. Kirske dated July 2 (incorporated by reference from Exhibit 10.1 to the Company’s Form 10QSB for the fiscal quarter ended September 30, 2004)

	10	.11	Employment Agreement with David Drajeske dated August 12 (incorporated by reference from Exhibit 10.2 to the Company’s Form 10QSB for the fiscal quarter ended September 30, 2004)

Other Material Contracts

	10	.12	TPI Licensing Agreement dated September 5, 2001 (incorporated by reference from Exhibit 10.4 to the Company’s Form 10-KSB for the year ended December 31, 2001)

	10	.13	University of British Columbia License Agreement dated October 1, 2001 (incorporated by reference from Exhibit 10.5 to the Company’s Form 10-KSB for the year ended December 31, 2001)

	10	.14	Amended and Restated Consulting Agreement with Dunsford Hill Capital Partners dated May 30, 2001 (incorporated by reference from Exhibit 10.7 to the Company’s Form 10-KSB for the year ended December 31, 2001)

	10	.15	Second Amended and Restated Consulting Agreement with Dunsford Hill Capital Partners dated August 15, 2002 (incorporated by reference from Exhibit 10.13 to the Company’s Form 10-KSBA for the year ended December 31, 2002)

	10	.16	Hancock Consulting Agreement dated June 18, 2001 (incorporated by reference from Exhibit 10.9 to the Company’s Form 10-KSB for the year ended December 31, 2001)

	10	.17	Lease between the Company and Teachers Insurance & Annuity Association of America, Inc. dated August 14, 2001 (incorporated by reference from Exhibit 10.11 to the Company’s Form 10-KSB for the year ended December 31, 2001)


Exhibit
No.			Description and Location


	10	.18	Rights Agreement dated August 21, 2003 (incorporated by reference from Exhibit 10.27 to the Company’s Form 10-KSB for the year ended December 31, 2003)

	10	.19	Acceptance and Acknowledgement of Appointment dated January 4, 2004 (incorporated by reference from Exhibit 10.28 to the Company’s Form 10-KSB for the year ended December 31, 2003)

	10	.20	License Agreement with E.I. du Pont de Nemours dated March 9, 2004 (incorporated by reference from Exhibit 99.1 to the Company’s Form 8-K dated March 16, 2004)

	10	.21	Joint Marketing Agreement with Body Blue Inc. dated November 2, 2004. Confidential treatment has been requested for confidential commercial and financial information contained in this document, pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended

	10	.22	Purchase Agreement with SynPep dated February 4, 2005. Confidential treatment has been requested for confidential commercial and financial information contained in this document, pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended

Code of Ethics

	14	.0	Code of Ethics adopted August 11, 2003 (incorporated by reference from Exhibit 14.0 to the Company’s Form 10-KSB for the year ended December 31, 2003)

Certifications

	31	.1	Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) or Rule 15d14(a) of the Securities Exchange Act of 1934

	31	.2	Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) or Rule 15d14(a) of the Securities Exchange Act of 1934

	32	.1	Certification of Chief Executive Officer Pursuant to Section 1350 of Title 18 of the United States Code, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
	32	.2	Certification of Chief Financial Officer Pursuant to Section 1350 of Title 18 of the United States Code, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


ITEM 14.	*PRINCIPAL ACCOUNTANT FEES AND SERVICES*

The information required by this Item is incorporated by reference from the information contained in the section captioned “Audit Fees” of the Proxy Statement for Helix BioMedix Annual Meeting of Stockholders scheduled to be held on May 11, 2005.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.


	By:	/s/ R. Stephen Beatty



	R. Stephen Beatty
	President, Chief Executive Officer


	By:	/s/ David H. Kirske



	David H. Kirske
	Vice President, Chief Financial Officer

Dated: March 31, 2005

POWER OF ATTORNEY

Each person whose signature appears below hereby constitutes and appoints R. Stephen Beatty, his or her true and lawful attorney-in-fact and agent, with full power to act, and with full power of substitution and resubstitution, to execute in his or her name and on his or her behalf, individually and in each capacity stated below, any and all amendments and supplements to this Report, and any and all other instruments necessary or incidental in connection herewith, and to file the same with the Commission.

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated below on March 31, 2005.


Signature				Title


/s/ R. STEPHEN BEATTY R. Stephen Beatty				Director, Chief Executive Officer and Principal Accounting Officer (Principal Executive Officer and Principal Accounting Officer)

/s/ RANDALL L-W. CAUDILL, PH.D. Randall L-W. Caudill, Ph.D.				Director

/s/ JOHN C. FIDDES, PH.D. John C. Fiddes, Ph.D.				Director

/s/ JEFFREY A. MILLER, PH.D. Jeffrey A. Miller, Ph.D.				Director

/s/ GEORGE A. MURRAY George A. Murray				Director

/s/ BARRY L. SEIDMAN Barry L. Seidman				Director

/s/ DANIEL O. WILDS Daniel O. Wilds				Director