-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, As1+pBvNjL/XmNt4B78Iz6Z2gHt7gNKjygsRg7GaiqNaVoJ0iJ8DFdD13jHMEw+u 4Y3/qeRaCb/TfYJpvG0E9A== 0001079974-03-000231.txt : 20030418 0001079974-03-000231.hdr.sgml : 20030418 20030417181410 ACCESSION NUMBER: 0001079974-03-000231 CONFORMED SUBMISSION TYPE: 10KSB/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030418 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HELIX BIOMEDIX INC CENTRAL INDEX KEY: 0000831749 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 912099117 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB/A SEC ACT: 1934 Act SEC FILE NUMBER: 033-20897 FILM NUMBER: 03655084 BUSINESS ADDRESS: STREET 1: 22122 20TH AVE SE CITY: BOTHELL STATE: WA ZIP: 98021 BUSINESS PHONE: 425 402 8400 MAIL ADDRESS: STREET 1: 22122 20TH AVE SE CITY: BOTHELL STATE: WA ZIP: 98021 FORMER COMPANY: FORMER CONFORMED NAME: CARIBBEAN ACQUISTIONS INC DATE OF NAME CHANGE: 19880725 FORMER COMPANY: FORMER CONFORMED NAME: CARTEL ACQUISITIONS INC DATE OF NAME CHANGE: 19890718 10KSB/A 1 helix10ksba1_4172003.txt AMENDMENT #1 TO FORM 10KSB =============================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-KSB/A [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2002 OR [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______________ to _____________. Commission File No. 33-20897-D HELIX BIOMEDIX, INC. Delaware 91-2099117 (State or other Jurisdiction of (I.R.S. Employer Incorporation or organization) Identification No.) 22122 20th Ave SE Bothell, Washington 98021 425-402-8400 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE 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[X] No[ ] 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. [X] Registrant's revenues for the fiscal year ending December 31, 2002: $ 70,000 As of March 31, 2003, there were 7,840,690 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 approximately: $4,660,000. DOCUMENTS INCORPORATED BY REFERENCE: None Transitional Small Business Disclosure Format (Check One): Yes[ ] No[X] ================================================================================ HELIX BIOMEDIX, INC. FORM 10-KSB TABLE OF CONTENTS
PART I............................................................................................................1 Item 1. Description of Business...............................................................................1 Item 2. Description of Properties.............................................................................5 Item 3. Legal Proceedings.....................................................................................6 Item 4. Submission of Matters to a Vote of Security Holders...................................................6 PART II...........................................................................................................6 Item 5. Market for Common Equity and Related Stockholder Matters..............................................6 Item 6. Management's Discussion and Analysis or Plan of Operation.............................................8 Item 7. Financial Statements.................................................................................14 Item 8. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.................14 PART III.........................................................................................................14 Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance With Section 16(a) of the Exchange Act..................................................................................14 Item 10. Executive Compensation..............................................................................15 Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters......15 Item 12. Certain Relationships and Related Transactions......................................................15 Item 13. Exhibits and Reports on Form 8-K....................................................................15 Item 14. Controls and Procedures.............................................................................15 Item 15. Principal Accountant Fees and Services..............................................................15
- i - PART I Item 1. Description of the Business The following discussion in this annual report on Form 10-KSB contains forward-looking statements regarding the Company, its business, prospects and results of operations that involve risks and uncertainties. The Company's actual results could differ materially from the results that may be anticipated by such forward-looking statements and discussed elsewhere herein. Forward-looking statements typically are identified by the use of such terms as "may," "will," "expect," "believe," "anticipate," "estimate," "plan," and similar words, although some forward-looking statements are expressed differently. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. The Company undertakes no obligation to revise any forward-looking statements in order to reflect on events or circumstances that may subsequently arise. Readers are urged to carefully review and consider the various disclosures made by the Company in this report and the Company's other reports filed with the Securities and Exchange Commission that attempt to advise interested parties of the risks and factors that may affect the Company's business, prospects and results of operations. In particular, readers are cautioned to review the Risk Factors set forth in Item 6 of this annual report on Form 10-KSB. Helix BioMedix, Inc. ("Helix" or the "Company"), a development stage company, is actively engaged in the research, development and commercialization of bioactive peptides (small proteins). For the fiscal year ended December 31, 2002 the Company had revenues of $70,000, and at the close of that period we had incurred an operating deficit (since inception) of approximately $10,723,000. Helix, through a predecessor entity, was originally incorporated in Colorado on February 2, 1988. On December 29, 2000, following approval by its shareholders, the Company merged with a wholly owned subsidiary that was incorporated in the State of Delaware (the "Merger"). As a result of the Merger, the Company adopted Delaware as its state of incorporation, adopted the subsidiary's certificate of incorporation and bylaws, and assumed the subsidiary's 2000 Stock Option Plan. In October 2001, the Company relocated its headquarters to Bothell, Washington. The Company's technology consists of a proprietary library of bioactive peptides that exhibit a broad range of activities, which the Company believes may be harnessed to develop products for various non-pharmaceutical applications including skin care products, biocides and commercial disinfectants, as well as pharmaceutical products to aid in wound healing and treating infectious diseases. These peptides are synthetic variations based on naturally occurring molecules present in many plants and animals, including humans, which fend off a variety of microbes, including bacteria, fungi, viruses and protozoa; they also facilitate the healing process. The peptides contained in the Company's intellectual property library may be referred to as "antimicrobial peptides of the innate immune system" or simply as "antimicrobial peptides." In earlier scientific journals and Company reports, the Company's peptides have been referenced as "lytic peptides" or "cytoporins". The antimicrobial peptides of the innate immune system are an important component of the host immune defense system of many species and provide a first line of defense against invading bacteria and other pathogens. The Company believes that its patent library encompasses a variety of structural classes of peptides and is supported by patent protection covering both composition of matter and all relevant use claims. The Company believes that the bioactive compounds contained in Helix's library are very wide ranging, with antibacterial, antifungal, antiviral and antiparasitic properties. In addition, some aspects of the Company's peptides exhibit properties associated with wound healing, cell proliferation and anti-inflammatory processes. In the 1990's the Company's collaborative research with Therapeutic Peptides, Inc. ("TPI") led to the development of an entirely new structural class of peptides, collectively referred to by the Company as "third generation" peptides. In September 2001, the Company entered into a Licensing Agreement with TPI, whereby the Company granted TPI a non-exclusive license relating to three particular peptides and their use in topical, non-pharmaceutical skin care products. 2 In October 2001, the Company and the University of British Columbia ("UBC") reached agreement on terms for an exclusive license to the Company for the rights to several distinct classes of peptides. These various classes can be generally categorized as cecropin/melittin hybrids, bactenecins, polyphemusins and pleurocidin peptides derived from fish. A number of these peptides have demonstrated efficacy in animal models including the Pseudomonas aeruginosa lung infection model, an anti-endotoxic shock model and a fish protection model. These novel antimicrobial peptides were discovered through research conducted by R.E.W. Hancock, Ph.D., Professor, Department of Microbiology and Immunology, University of British Columbia, and Director, UBC Center for Microbial Diseases and Host Defense Research. Dr. Hancock is an internationally recognized authority on antimicrobial peptides and holds numerous patents describing their composition and use as novel antibacterial, antifungal and antiviral agents. Dr. Hancock became a consultant to the Company and a member of the Company's Scientific Advisory Board in June 2001. The UBC licensing agreement provides the Company with a diversity of peptides that further supports the development of proprietary molecules for a wide range of applications by expanding the potential number of lead peptide candidates. This acquisition of distinct structural classes of peptides has distinguished the Company from its competitors, some of whom are engaged in developing only a single class of peptide for a number of applications. The Company believes it is advantageous for future drug development to increase the diversity of its library of lead compounds. The Company believes that these new classes of synthetic, non-naturally-occurring, peptides offer promise as (i) anti-infective agents; (ii) wound healing compounds; and (iii) anti-cancer drugs. Company management believes that the Company has created a powerful platform technology based upon its extensive library of novel molecules and the acquisition of distinct structural classes of peptides as a result of the license with the University of British Columbia. The Company's technology is based on the discovery that its proprietary bioactive antimicrobial peptides appear to have the ability to kill, in-vitro, a broad spectrum of bacteria, protozoa, fungi, and viruses, which cause disease in animals and humans. In addition, some of these peptides have demonstrated the potential to promote wound healing, decrease inflammation and cause proliferation of white blood cells, which are essential to the maintenance of an effective immune system. Based upon preliminary testing, certain of the Company's peptides have been identified as having specific activity against a number of tumor cell lines. These peptides may have potential as chemotherapeutic agents in certain cancer therapies. The cost and complexity of bringing new drugs to market has led Company management to conclude that it is prudent to seek strategic alliances and licensing arrangements with larger, well-financed companies to bring the peptides through the clinical trials stage for certain applications such as wound healing, cystic fibrosis and sexually transmitted diseases. While the Company is pursuing the long-term introduction of prescription drugs through a program of strategic-partnering, it will also focus in-house efforts on the near-term introduction of proprietary products in the area of cosmetics, topical antiseptics and industrial disinfectants. All of these initiatives are in the development stage, and the Company currently has no products approved for commercial sale. In the event that the Company develops a pharmaceutical product candidate, it will be required to demonstrate safety and efficacy of that product candidate prior to receiving regulatory approval for the product's sale to the public. This regulatory process is difficult, time-consuming and expensive, and its results are uncertain. There can be no assurance that the Company will ever develop such a product for commercial sale or ever become profitable. Development Programs The Company has a number of ongoing development programs an overview of which is described below. 3 Wound Healing The aim of this program is to develop a peptide targeted at increasing the speed of wound healing and reducing scarring. A lead peptide has been identified which has demonstrated significant efficacy in pre-clinical studies, conducted at the VA Hospital San Diego by Professor Richard Gallo M.D. The peptide has no observable systemic toxicity and is entering non-GLP pig efficacy studies in a gel formulation in Q2 2003. This peptide will be targeted as a treatment for both acute and chronic wounds. Cystic Fibrosis The aim of this program is to develop a peptide therapeutic for the cystic fibrosis (CF) lung capable of improving lung function by reducing bacterial bioburden. Two Helix peptides initially demonstrated a proof of concept in the rat chronic lung infection model. Following a screening program of over 200 antimicrobial peptides from the Helix library five lead candidates were identified and assayed in pre-clinical testing. A lead peptide has now been identified which significantly reduces lung bioburden when administered by nebulizer and has activity against multi-drug-resistant pathogens of the CF lung. This peptide is now undergoing extended in vivo efficacy and toxicity profiling. Topical Antimicrobial The aim of this program is to develop a peptide as a broad-spectrum topical antimicrobial capable of preventing and treating skin and wound infections. A lead peptide has been identified from an in-house screening program with broad-spectrum activity including activity against multi-resistant organisms. This lead peptide is now entering pre-clinical testing. Sexually-transmitted disease (STD) / vaginitis Certain peptides in the Helix library have been identified that have broad-spectrum activity against bacteria and yeast associated with sexually-transmitted disease and vaginitis. The lead candidates in gel formulation have demonstrated rapid killing of gram-positive and gram-negative bacterial pathogens as well as fungal pathogens including antimicrobial resistant strains. Once selected the lead peptide will be promoted to in vivo testing. HIV microbicide A number of Helix peptides have demonstrated activity against cells acutely infected with HIV as well as those chronically infected with the virus. Researchers have previously demonstrated such effects with peptides of the innate immune system. However, the reduced length and cost effective production of the Helix peptides provides the first opportunity for a realistic topical therapy. Once lead and backup peptides have been identified and characterized, the feasibility of animal studies will be investigated. Anti-acne In addition to broad-spectrum antimicrobial peptides (described above) Helix has also identified certain peptides with more specific activity against Propionibacterium acnes, one of the biological factors involved in the pathogenesis of acne. The lead peptide in gel formulation is now in studies to determine its acceptability and efficacy as an anti-acne product. Helix currently has five peptides that can be synthesized using cost effective solution phase subunit synthesis with activity against P. acnes. The developmental course for such an application could be cosmetic, over-the-counter (OTC) or prescription. Anti-wrinkle Helix has identified a number of peptides capable of stimulating the proliferation of fibroblasts. Further testing has demonstrated that this attribute can provide significant benefit in relation to prevention and elimination of wrinkles. This property is currently being optimized to produce a peptide capable of reducing the effects of aging at a cost that would permit inclusion in non-prescription skin care products. 4 Other advances Cost of goods is an important issue in both consumer and pharmaceutical product development. During 2002 the Company made significant progress in reducing the cost of its lead peptides by (1) minimizing peptide length, (2) optimizing activity and (3) selecting peptides consisting of specific repeat units able to be assembled into full- length peptides at a fraction of the cost of standard synthesis. Business development During 2002, the Company presented its peptide technology to a wide range of potential licensees in certain consumer and pharmaceutical areas. Development licenses were signed with two such companies. In addition, the Company has provided six other companies with research quantities of specific peptides for internal assessment. The Company's Patent Estate Through its early sponsorship of research at Louisiana State University ("LSU"), as well as its prosecution and defense of patent applications, the Company obtained outright assignment of peptide patents and patent applications derived from collaborative research between the Company and LSU. These patents and patent applications have relatively early priority dates (i.e., 1987-1989) with little prior art cited. The patents include broad composition and use claims. The status of each of these patents and patent applications is as follows: Five (5) U.S. patents have issued. Twenty-two (22) foreign patents have issued, a Canadian application is pending, and a divisional application is pending in five European countries. In addition, the Company's License Agreement with the University of British Columbia ("UBC") allows the Company the use of the following patents: Antimicrobial cationic peptide derivates of Bactenecin (US Patent 6,172,185) Anti-endotoxic, cationic antimicrobial peptides and methods of use thereof (US Patent 6,288,212 B1) Antimicrobial peptides and methods of use thereof (US Patent 6,337,317) Additional Canadian, European and Australian divisional applications are pending with respect to the UBC intellectual property. Starting in 2001, the Company began efforts to protect the intellectual property regarding the "third generation" peptides developed as a collaborative effort between TPI and the Company. Two (2) U.S. patent applications and one (1) PCT international patent application are currently pending. From inception to the close of fiscal year 2002, the Company has invested approximately $644,000 to protect its patent estate. Competition The Company has continued its efforts to establish a strong patent position with respect to the proprietary compositions and use of its multiple structural classes of antimicrobial peptides. There is increasing interest in the biopharmaceutical industry in examining the potential for using such peptides as therapeutic drug agents. To the best of the Company's knowledge, there are five other North American biotechnology companies actively working in the field of biopharmaceutical peptide research. Some of these competitors have substantial financial resources available to them, and are pursuing product commercialization via clinical trials, strategic partnerships and other mechanisms to further develop the potential for commercialization of antimicrobial peptides. Although the Company believes the early priority dates on its patents and patent applications represent a competitive advantage, the Company has little or no control over how successful competitors may be in potential litigation affecting the Company's patent estate. However, the Company believes its experience in the field complements its patent estate and represents an asset that the Company will utilize in its attempts to commercialize the peptides. The Company further believes that the activity of certain competitors is helping to accelerate the advance of this basic technology to the commercial stage. 5 The Company's key competitive advantages include the following: 1. An extensive and diverse peptide library which generates enhanced prospects for matching the optimal peptide with each therapeutic target. 2. The Company has the ability to access both pharmaceutical and non-pharmaceutical markets providing a greater opportunity for success. 3. The Company's peptides are more cost effective to manufacture due to their shorter sequence as compared to the peptides of some other companies. 4. Many of the inventors of our core intellectual property work at the Company i.e.: Robert Hancock, Ph.D., Timothy Falla, Ph.D., and Lijuan Zhang, Ph.D. The Company also has recognized experts with substantial pharmaceutical industry experience serving on its Scientific Advisory Board, including Robin Cooper, Ph.D., William Baker, Ph.D., and Arnold Smith, M.D. Research and Development Investment The Company's direct investment in research and development of its peptide technology has aggregated approximately $3,866,000 from inception (November 7, 1988) to December 31, 2002. Approximately $644,000 has been capitalized as legal costs incurred in patent prosecution. Other capitalized R & D and licensing costs include (i) $200,000 capitalized as a cost paid by promissory note to Helix International Corporation to acquire the antimicrobial technology at the Company's inception; (ii) $25,000 paid in the form of 10,000 shares of common stock as partial consideration for antimicrobial technology developed for the Company by TPI prior to entering of the Cooperative Endeavor Agreement in November 1995; and (iii) approximately $61,000 for a license fee representing reimbursement to the University of British Columbia of all outstanding and future costs incurred to the date of the execution of this Agreement in applying for, registering and maintaining the patents in connection with the technology. The balance of $2,936,000 has been expensed as R & D operating expenses as the Company incurred them. Research and development expenses in 2002 and 2001 approximated $546,000 and $444,000, respectively. The Company's total investment in R & D and other operating and interest expenses to develop its peptide technology has aggregated $10,723,000 from the Company's inception through December 31, 2002. Regulatory Concerns The Company's business plan embraces the concepts of (i) long-term strategic partnering for developing pharmaceutical products; and (ii) introduction of near-term proprietary non-drug products (e.g., topical antiseptics, cosmetics, industrial disinfectants and biocides) to niche markets that do not require an extensive regulatory approval process. The time and expense of bringing prescription drugs through the FDA regulatory approval process is a factor that has influenced the Company's decision to seek well-financed strategic partners. For this reason, the Company anticipates developing, for near-term market introduction, certain non-drug products. Such products are subject to less stringent regulatory approval processes than those imposed for prescription pharmaceuticals. Employees As of December 31, 2002, the Company had seven full-time employees and one part-time employee. 6 Other Information The Company has not incurred any substantial costs to comply with environmental laws or regulations as it is not subject to significant laws or regulations at the federal, state or local level. Item 2. Description of Properties The Company's principal place of business and corporate office is in Bothell, Washington. The corporate office was relocated in October 2001 from New Orleans, Louisiana to the new location to allow the Company to incorporate in-house scientific testing and peptide synthesis essential to support its development of commercial and pharmaceutical applications. The address and telephone number for the Company office are: Helix BioMedix, Inc. Corporate Office 22122 20th Ave SE Bothell, WA 98021 Tel: (425) 402-8400 Fax: (425) 806-2999 The corporate headquarters includes a total of approximately 3,000 square feet of which half is used for administrative purposes and the remainder represents a laboratory. The Company entered into a four-year lease of the premises at a base monthly rent of $3,463. The Company's laboratories have been designed to support a central role in both clinical and non-clinical applications. State of the art peptide synthesis, analysis and purification allow the Company to provide peptides for in-house programs, research collaborations and potential licensee's evaluation in all fields of application. The biology laboratory has been equipped as a clinical microbiology facility with necessary equipment to isolate, grow and test clinical isolates and multidrug resistant pathogens. The Company also utilizes the services and facilities of third-party contract research organizations. Item 3. Legal Proceedings The Company is currently not involved in any litigation or other legal proceedings. Item 4. Submission of Matters to a Vote of Security Holders On December 16, 2002 at a duly called Annual Meeting of the Stockholders of the Company, two matters were submitted to a stockholder vote. Specifically, stockholders of the Company voted on (i) the election of two Class II directors to serve until the Annual Meeting of Stockholders to be held in 2005, and until their successors are elected and qualified and (ii) an amendment of the Company's Certificate of Incorporation to increase the number of authorized Preferred Shares from 2,000,000 to 25,000,000 and to increase the number of authorized Common Shares from 25,000,000 to 100,000,000. The nominees for director at that meeting were: Jeffrey A. Miller , Ph.D. Daniel O. Wilds Of a total of 5,144,696 shares of common stock issued and outstanding as of the record date, October 23, 2002, 2,731,831 shares or 53% were voted in favor of the election of Dr. Miller and 2,740,671 shares or 53% were voted in favor of the election of Mr. Wilds. Continuing directors are: R. Stephen Beatty, Dr. Randall L.-W. Caudill, George A. Murray and Carlyn J. Steiner, J.D. The Company appointed officers of the Delaware corporation as follows: 7 President: R. Stephen Beatty Chief Executive Officer: R. Stephen Beatty Executive Vice President: Parker A. Sroufe Vice President: Timothy J. Falla, Ph.D. Treasurer: Kerry D. Palmer Secretary: Kerry D. Palmer Chief Financial Officer: Kerry D. Palmer Of a total of 5,162,696 shares of common stock issued and outstanding as of the record date, October 23,2002, 2,725,701 shares or 53% were voted in favor of the amendment of the Certificate of Incorporation to increase the number of authorized Preferred and Common Shares. PART II Item 5. Market for Common Equity and Related Stockholder Matters MARKET INFORMATION Shares of the Company's common stock are traded on the Over-the-Counter Bulletin Board (the "OTCBB"). During fiscal year 2001 and 2002, public trading transactions in the Company's common stock (as reported on the OTCBB) have fluctuated at low/high price ranges and average daily market volumes shown below. The low/high quotations described reflect inter-dealer prices, without retail markup, markdown or commission, and may not represent actual transactions.
Q1 2001 Q2 2001 Q3 2001 Q4 2001 Q1 2002 Q2 2002 Q3 2002 Q4 2002 ------- ------- ------- ------- ------- ------- ------- ------- Low $1.31 $0.90 $0.68 $0.58 $0.60 $0.63 $0.43 $0.40 High $2.19 $1.34 $1.25 $1.10 $0.95 $0.99 $0.80 $0.90 Volume 2,292 6,552 4.775 6,659 5,307 1,691 6,011 4,249
Holders of Common Stock As of December 31, 2002, there were approximately 650 stockholders of record with respect to the Company's common stock. The Company estimates an additional 800 individuals hold Company common stock in "street name" in brokerage accounts. Dividends Holders of common stock are entitled to receive such dividends as may be declared by the Board of Directors. No dividends have been paid with respect to the common stock since the Company's inception, and no dividends are anticipated to be paid in the foreseeable future. Recent Sales of Unregistered Securities In September 2002, the Company began a private placement offering of common stock pursuant to approval at it August, 2002 Board meeting in accordance with Regulation D under Section 4(2) of the Securities Act of 1933 (the "Securities Act") at a per share price of $1.00. The offering included detachable stock purchase warrants equal to 60% of the common stock investments. The exercise price of the warrants equals $1.00 per share. As of December 31, 2002, the Company raised $1.56 million from the offering. 8 The proceeds from the private placement offering are being used to finance operations. Management continued raising funds under the private placement through March 31, 2003. As of March 31, 2003, the total amount raised in the private placement offering approximated $3.6 million. Management believes this amount will be sufficient to finance operations through at least December 31,2003. 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 promissory notes, which were originally due May 31, 2002, contained warrants to purchase common shares initially equivalent to 25% of the principal amount of the notes, at an exercise price of the lower of $1.50 per share or the price in the next equity offering, with such warrants having 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 495,000 common stock purchase warrants, which is considered a debt discount. The effective interest rate on the outstanding promissory notes, when coupled 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 follow: (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 on or before December 31, 2002, and (d) the warrant coverage was increased to 35% of the principal amount, subject to an increase to 40% if the principal was not paid or converted by August 31, 2002 and a further increase to 45% if the principal was not paid or converted by December 31, 2002. Purchasers prior to the date of the offering changes were given an opportunity to accept the revised terms or to reject them and obtain a refund of their purchase plus accrued interest. Refunds for approximately $55,000 were subsequently made. During the year ended December 31, 2002, the Company raised an additional $1,102,500 from the convertible debt offering. As noted above, the Company 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 3.314 million shares of common stock, at a per share price of $1.00, on December 31, 2002. Most of the shares from the 2002 equity financing through December 31, 2002, 1.55 million and the 3.314 million shares from the debt conversion were not issued until after year-end. Accordingly, the combined total, or approximately 4.86 million shares, are considered to be outstanding, but unissued at December 31, 2002 for accounting purposes. Item 6. Management's Discussion and Analysis or Plan of Operation Risk Factors This section briefly discusses certain risks that should be considered by existing and prospective investors. Investors should carefully consider the risks described below, together with all other information included in this Annual Report on Form 10-KSB. If any of the following risks actually occur, the Company's financial condition or operating results could be harmed. In such case, investors may lose part or all of their investment. The Company has a history of net losses. The Company expects to continue to incur net losses and may not achieve or maintain profitability. The Company's limited operating history may make it difficult to evaluate its business and an investment in its common stock. The Company is a development stage Company, in a pre-clinical stage of research, and has a limited operating history upon which an investor may evaluate operations and future prospects. The Company has incurred a cumulative operating loss of approximately $10.7 million from inception (November 7, 1988) through December 31, 2002. The Company expects to make substantial expenditures to further develop and commercialize its product candidates and expects that its rate of spending will accelerate as the result of the increased costs and expenses associated with expanded in-house research and development of its lead candidates, potential clinical trials, regulatory approvals and commercialization of its antimicrobial peptide technologies. In the long-term, the Company will endeavor to identify lead compounds 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. In the near-term, the Company expects revenues to be derived from the non-pharmaceutical license of proprietary compounds for development in applications not requiring FDA approval, such as cosmetics and commercial disinfectants. However, the Company's revenue and profit potential is unproven and its limited operating history makes future operating results difficult to predict. Consequently, an investment in the Company's common stock must be considered in light of the risks and uncertainties that may be encountered by a development stage biotechnology Company, including the need for substantial capital to support the development of its products and technologies and its ability to manage growth. 9 The Company will need to enter strategic alliances with third parties to develop, test and produce commercially viable products from its antimicrobial peptide technologies. A key element of the Company's strategy is to enhance development programs and fund capital requirements, in part, by entering into collaborative agreements with major pharmaceutical companies and other biotechnology companies. The Company also plans to explore collaborations with non-pharmaceutical companies and opportunities for incorporating the Company's antimicrobial peptides into non-clinical applications such as cosmetics and biosides. The Company has only recently begun to seek these strategic business alliances. Although the development of such alliances is one of the Company's objectives, there can be no assurance that the Company will succeed in attracting substantial collaborative partners who can materially assist in the development and commercialization of the Company's technology. The development of commercially viable products from the Company's 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 and regulatory approval prior to commercial sale. Even if the Company is successful in attracting collaborative partners and those collaborations yield commercially viable products, the Company's receipt of revenues will be substantially dependent upon the decisions made by and the manufacturing and marketing resources of these strategic business partners. Further, there can be no assurance that the Company's 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 the Company 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 the Company's products will have a material adverse effect on its business, operating results and financial condition. The Company may continue to need significant amounts of additional capital, which may not be available on favorable terms. The Company may need to raise significant amounts of additional capital. The Company's future capital requirements will be substantial and will depend on many factors, including the pace of its research and development efforts, its ability to identify pharmaceutical and non-pharmaceutical applications for its antimicrobial peptide compounds, its ability to enter into collaboration agreements and receive government grants (if any), the amount and timing of payments under such agreements and grants, the level and timing of its research and development expenditures, and other factors. If the Company is unable to raise sufficient additional capital it will have to curtail or cease operations. Because of the specialized nature of the Company's business, the termination of relationships with key management and scientific personnel or the inability to recruit and retain additional personnel could prevent the Company from developing its technologies, conducting clinical trials and obtaining financing. The Company is highly dependent upon several key individuals, including R. Stephen Beatty, the Company's Chief Executive Officer, Dr. Timothy Falla, its Chief Scientific Officer, and Dr. Robert E.W. Hancock, a consultant to the Company and an international authority on antimicrobial peptides and their development for commercial application, all of whom have played a critical role in the Company's research and development programs, raising financing and conducting initial trials of its antimicrobial technologies. Additionally, the Company employs several scientific personnel with significant and unique experience in the antimicrobial peptide field, some of whom may not be replaceable. The loss of the services of these key members of management or scientific personnel may prevent the Company from achieving its business objectives. 10 The competition for qualified personnel in the biotechnology field is intense, and the Company relies heavily on its ability to attract and retain qualified scientific, technical and managerial personnel. The Company's future success depends upon its ability to attract, retain and motivate highly skilled employees. In order to commercialize its products successfully, the Company will be required to expand its 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. The Company faces intense competition for qualified individuals from numerous pharmaceutical, biopharmaceutical and biotechnology companies, as well as academic and other research institutions. To the extent the Company is unable to attract and retain these individuals on favorable terms, its business may be adversely affected. The Company is at an early stage of product development and does not yet have commercially marketable products to provide revenues. Although the Company has been developing the antimicrobial peptide technology since 1987, it remains a development stage Company and to date has generated no material revenue from product sales. The Company's strategic plan contemplates the development of both pharmaceutical and non-pharmaceutical products and applications for its proprietary compounds. 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 the Company's technology will have a material adverse effect on the Company's business, operating results and financial condition. Clinical trials for the Company's product candidates are expensive and time consuming and their outcome is uncertain. Before the Company can obtain regulatory approval for the commercial sale of any pharmaceutical product that it may wish to develop, it 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. The Company 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. 11 The Company will rely on collaborators to assist in the research and development activities necessary for the commercialization of its product candidates. If the Company's collaborators do not perform as expected, the Company may not be able to commercialize its product candidates. The Company intends to continue to develop alliances with third-party collaborators to develop and market its current and future product candidates. The Company 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 all its product candidates alone. If the Company is unable to locate collaborators, or if its collaborators do not prioritize and commit substantial resources to programs associated with the Company's product candidates, the Company may be unable to commercialize its product candidates, which would limit its ability to generate revenue and become profitable. The Company faces substantial competition in its product development efforts from pharmaceutical and biotechnology companies, universities and other not-for-profit institutions. The Company faces significant competition in its attempts to develop applications of its antimicrobial peptide technology from entities that have substantially greater research and product development capabilities and financial, scientific, marketing and human resources. These entities include pharmaceutical and biotechnology companies, as well as universities and not-for-profit institutions. The Company expects that competition in development of products analogous to its antimicrobial peptide technology to intensify. The Company's competitors may succeed in developing products earlier than it does, entering into successful collaborations before the Company, obtaining approvals from the U.S. Food and Drug Administration or other regulatory agencies for such products before the Company, or developing products that are more effective than those the Company develops or proposes to develop. The success of any one competitor in these or other manners will have a material adverse effect on the Company's business, operating results and financial condition. The Company may encounter difficulties in managing its growth. The Company may enter a period of rapid growth that may place a significant strain on its human and capital resources. The Company's ability to conduct research and development activities effectively may require it to continue to expend funds to improve its operational, financial and management controls, reporting systems and procedures. If the Company is unable to successfully implement improvements to its management information and control systems in an efficient and timely manner, or if the Company encounters deficiencies in existing systems and controls, management may not have adequate information to manage the Company's day-to-day operations. Issued patents may not fully protect the Company's discoveries, and the Company's competitors may be able to commercialize products similar to those covered by its issued patents. Issued patents may not provide commercially meaningful protection against competitors. Other companies or entities may challenge the Company's or any prospective collaborators' patents or independently develop products that could result in an interference proceeding in the Patent and Trademark Office or a legal action. In the event any single researcher or institution infringes upon the Company's or a prospective collaborators' patent rights, enforcing these rights may be difficult and can be time-consuming. Others may be able to design around these patents or develop unique products providing effects similar to the Company's products. In addition, others may discover uses for the Company's antimicrobial peptide technology, and these other uses may be separately patentable. Even if the Company has a patent claim on a particular antimicrobial peptide technology, the holder of a patent covering the use of that technology could exclude the Company from selling a product that is based on the same use of that technology. In addition, with respect to certain of the Company's patentable inventions, the Company may decide not to pursue patent protection outside the United States, both because management does not believe it is cost effective and because of confidentiality concerns. Accordingly, the Company's international competitors could develop and receive foreign patent protection for antimicrobial peptide technologies for which the Company has or is seeking U.S. patent protection. Failure of any of the Company's issued patents to provide meaningful protection against competition, or success by a competitor in the manner described, will have a material adverse effect on the Company's business, operating results and financial condition. 12 The Company's rights to the use of technologies to be licensed from third parties are not within its control. The Company may need to rely, in part, on licenses to use certain technologies and materials, which are important to its business. The Company will not own the patents that underlie these licenses and there can be no assurance that the Company can obtain all the licenses necessary for its business. The Company's rights to use these technologies and practice the inventions claimed in the licensed patents are subject to the Company's licensors abiding by the terms of those licenses and not terminating them. In many cases, the Company will not control the prosecution or filing of the patents to which it may hold licenses. The Company will rely upon its licensors to prevent infringement of those patents. Certain of the licenses under which the Company may obtain rights will provide it with exclusive rights in specified fields, but there can be no assurance that the scope of these rights under these and other licenses will not be subject to dispute by its future licensors or third parties. Failure of its enjoyment of any necessary licenses will have a material adverse effect on the Company's business, operating results and financial condition. The Company faces product liability risks and may not be able to obtain adequate insurance to protect against losses. The Company currently has no products that are available for commercial sale. However, the current use of any of the Company's product candidates in clinical trials and the sale of any approved products in the future may expose the Company to liability claims. These claims might be made directly by consumers and healthcare providers or indirectly by pharmaceutical companies, the Company's corporate collaborators or others selling such products. The Company may experience financial losses in the future due to product liability claims. The Company intends to expand its insurance coverage to include the sale of commercial products if marketing approval is obtained for product candidates in development. However, the Company 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 the Company for uninsured liabilities or in excess of insured liabilities, Company assets may be insufficient to cover such claims and the Company's business operations could be impaired. The current legal and accounting regulatory burden is likely to increase. The current regulatory and political environment, in part a response to the recent accounting scandals, has and will continue to increase the amount and degree of legal and accounting rule-making. New laws and accounting rules issued by a variety of authoritative bodies, coupled with frequent changes to existing rules, may serve to restrict the growth of profitability and increase the cost of compliance. Plan of Operation In March, 2003, the Company completed its private placement of common stock that began during 2002. Through December 31, 2002, the Company sold 1.56 million shares at a per share price of $1.00. The offering included detachable warrants equal to 60% of the equity investment. Subsequently through March 31, 2003, the Company sold approximately 2.1 million additional shares at the same $1.00 per share price. Management believes that it has sufficient funds to satisfy its cash requirements through at least December 31, 2003. To the extent the Company is successful in completing its business development efforts and consummating license transactions, the proceeds from any such revenues will delay the point at which the Company will need to obtain new financing. 13 The Company's major research and development efforts planned for 2003 include the following: o Human acceptability and efficacy testing of the Company's skin care product candidates. o Pre-clinical evaluation of wound healing peptide. o Pre-clinical evaluation of topical antibiotic peptide. o Pre-clinical evaluation of cystic fibrosis lung antibiotic peptide. o Pre-clinical evaluation of topical sexually transmitted disease antibiotic peptide. o Selection of a lead peptide as a topical HIV microbicide. The Company's present plan for 2003 does not include the purchase or sale of any significant fixed assets. Management does not expect a significant increase in the number of employees in 2003, although the percentage increase may be substantial given the low current headcount. Management's Discussion and Analysis of Financial Condition and Results of Operations The Company is still a development stage entity which means that it has not yet achieved a significant amount of revenue. Given the nature of the Company's business and the stage of its development, it is difficult to determine with reasonable certainty when it will achieve significant revenue and reach the end of its development state. The Company intends to initiate third party testing of some of its peptides in 2003. It is unlikely that its business development efforts will materially progress until after some of this outside testing is completed with satisfactory results. It is possible that the results of early outside tests will be unsatisfactory in which case the Company will need to conduct additional internal and external research, further extending the Company's development stage. With little revenue, the Company's external sources of liquidity are limited. While management does not anticipate the need for additional funding in 2003, circumstances could change. The Company's ability to raise additional financing may be limited if the difficult biotech financing market continues or deteriorates further. Revenue The Company recognized revenue of $70,000 during 2002 while no revenue was earned in 2001. The revenue sources were described in the Company's Form 8-K filings during the fourth quarter of 2002. Management does not anticipate significant increases in revenues until certain outside testing of its peptides are satisfactorily completed and license agreements are negotiated. Research and development operating expenses Research and development expenses approximated $546,000 during the year ended December 31, 2002 compared to approximately $444,000 in the prior year, representing an increase of 23%. The increase primarily resulted from incurring a full year of salaries and benefits for scientific staff compared to a partial year in 2001 as the Company did not establish its own research facilities staffed by its own employees until the last several months in 2001. Management anticipates that research and development expenses will increase significantly during 2003, due primarily to expected increases in outside testing, consulting expenses and higher peptide synthesis costs required to achieve the research and development objectives noted above, under "Plan of Operation". These increases result from the Company's evolution toward converting its peptide technology into commercially-viable products. Depreciation and amortization operating expenses 14 Depreciation and amortization expenses totaled $115,000 in 2002 compared to $52,000 in 2001. The increase approximates $63,000 or 121%. The increase is due to higher depreciation charges 2002 as a result of the establishment of the Company's office and laboratory facilities in October 2001. The Company does not expect any significant changes in depreciation and amortization in 2003, except for higher depreciation charges resulting from the acquisition of a mass spectrometer for approximately $225,000 in late 2002. No significant fixed asset expenditures are anticipated for 2003. Accounting, legal and professional operating expenses Accounting, legal and professional operating expenses totaled $190,000 during 2002 compared to $227,000 in 2001, resulting in a decrease of approximately $37,000 or 16%. The decrease is primarily due to the volume of professional services required during 2001 as a result of the Company's reorganization as a Delaware corporation and relocation to Washington from Louisiana. Management expects that accounting, legal and professional fees will increase in 2003 substantially due to higher expenses for patent prosecution, and contract negotiation assistance. Consulting fees operating expenses Consulting fees operating expenses approximated $536,000 in 2002 compared to $557,000 in the prior year, resulting in a decrease of $21,000, or 4%. Consulting fees include estimated fair values ascribed to warrants issued by the Company to key strategic consultants, using the Black Scholes model and payments to a former president of the Company for assistance with international patent issues and to business development consultants. Consulting fees are expected to increase in 2003 primarily due to a higher planned use of business development consultants for specific industries in addition to the commencement of monthly cash payments to key strategic partners. Other general and administrative operating expenses Other general and administrative operating expenses totaled $1,149,000 in 2002 compared to $605,000 during 2001. The increase approximated $544,000 or 90%. The increase was largely due to higher expenses for salaries and wages, insurance and rent attributable to a full year of such expenses in 2002 compared to 2001 when several employees were hired and the office and laboratory facility in Bothell Washington was opened in the later half of the year. The Company does not expect other general and administrative expenses to increase significantly in 2003. Interest expense Interest expense for 2002 totaled approximately $704,000 compared to $198,000 in 2001. The increase of $506,000 primarily resulted from the decision by the Company's Board 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 and additional warrants. 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 the Company's operations, there are no seasonal aspects that materially affect its financial condition or results of operations. 15 Item 7. Financial Statements Please see Pages F-1 through F-19. The following Financial Statements are filed as part of this report: Page ---- Independent Auditors' Report................................................ F-1 Report of Prior Independent Auditors........................................ F-2 Balance Sheets as of December 31, 2002 and 2001............................. F-3 Statement of Operations for the years ended December 31, 2002 and December 31, 2001 and for the period from inception (November 7, 1988) to December 31, 2002................................ F-4 Statement of Stockholders, Equity (Deficit) for the period from inception (November 7, 1988) to December 31, 2002................................ F-5 Statement of Cash Flows for the years ended December 31, 2002 and December 31, 2001 and for the period from inception (November 7, 1988) to December 31, 2002................................ F-8 Notes to Financial Statements............................................... F-9 All schedules have been omitted, as the required information is inapplicable or the information is presented in the financial statements or the notes thereto. Independent Auditors' Report The Board of Directors and Stockholders Helix Biomedix, Inc.: We have audited the accompanying balance sheet of Helix Biomedix, Inc. (a development stage company) as of December 31, 2002, and the related statements of operations, stockholders' equity (deficit), and cash flows for the year then ended and for the period from November 7, 1998 (inception) to December 31, 2002. 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 audit. The cumulative statements of operations, stockholders' equity (deficit), and cash flows for the period November 7, 1988 (inception) to December 31, 2002 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 audit in accordance with auditing standards generally accepted in the United States of America. 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 audit provides a reasonable basis for our opinion. In our opinion, based on our audit and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the financial position of Helix Biomedix, Inc. (a development stage entity) as of December 31, 2002, and the results of its operations and its cash flows for the year ended December 31, 2002 and for the period from inception (November 7, 1988) to December 31, 2001, 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/KPMG LLP - ----------- KPMG LLP Seattle, WA April 11, 2003 F-1 REPORT OF INDEPENDENT ACCOUNTANTS The Board of Directors Helix BioMedix, Inc. Bothell, Washington We have audited the accompanying balance sheet of Helix BioMedix, Inc. (a development stage company) as of December 31, 2001, and the related statements of operations, cash flows, and changes in stockholders' equity (deficit) for the year ended December 31, 2001, and for 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 auditing standards generally accepted in the United States of America. 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 financial position of Helix Biomedix, Inc. as of December 31, 2001, and the results of its operations, cash flows, and changes in its stockholders' equity (deficit) for the year ended December 31, 2001 and 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. Denver, Colorado February 1, 2002 /S/COMISKEY & COMPANY ----------------------- PROFESSIONAL CORPORATION F-2 Helix BioMedix, Inc. (a development stage company) Balance Sheets December 31, 2002 and 2001
December 31, ---------------------------- 2002 2001 ----------- ----------- ASSETS CURRENT ASSETS Cash $ 1,031,345 $ 401,045 Accounts receivable 20,000 - Prepaid expenses and other current assets 47,822 28,989 ----------- ----------- Total current assets 1,099,167 430,034 PROPERTY AND EQUIPMENT Machinery and equipment 439,246 186,008 Furniture and fixtures 11,874 10,627 Leasehold improvements 28,216 27,324 ----------- ----------- 479,336 223,959 Less: accumulated depreciation (59,087) (9,828) ----------- ----------- 420,249 214,131 OTHER ASSETS Deposits and long-term prepaids 30,085 29,830 Antimicrobial technology (net) 73,462 87,500 Licensing agreement (net) 57,796 61,391 Patents pending and approved (net) 499,266 516,844 ----------- ----------- 660,609 695,565 ----------- ----------- Total assets $ 2,180,025 $ 1,339,730 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES Accounts payable - related party $ - $ 4,500 Other Accounts payable 37,308 Accrued interest payable - 45,196 Other accrued expenses 334,861 13,390 Notes payable - related parties - 163,154 Notes payable (net of unamortized discount and - 1,849,593 issue costs of $130,407 in 2001) ----------- ----------- Total current liabilities 372,169 2,075,833 ----------- ----------- STOCKHOLDERS' EQUITY (DEFICIT) 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; 10,036,376 shares outstanding at December 31, 2002; 5,144,696 shares issued and outstanding at December 31, 2001. 10,037 5,145 Additional paid-in capital 12,655,386 6,819,415 Less stock subscriptions receivable (135,000) - Deficit accumulated during the development stage (10,722,567) (7,560,663) ----------- ----------- 1,807,856 (736,103) ----------- ----------- Total liabilities and stockholders' equity (deficit) $ 2,180,025 $ 1,339,730 ----------- -----------
The accompanying notes are an integral part of the financial statements. F-3 Helix BioMedix, Inc. (a development stage company) Statements of Operations For the Years ended December 31, 2002 and 2001 and For the Period from Inception ( November 7, 1988) to December 31, 2002
Inception (November 7, 1988) For the year ended to December December 31, 31, 2002 2002 2001 ------------- ------------ ------------ REVENUE $ 89,500 $ 70,000 $ - OPERATING EXPENSES Research and development 2,936,408 546,115 443,744 Depreciation and amortization 359,718 115,105 52,351 Accounting, legal and professional 1,303,399 189,750 227,426 Consulting fees 2,413,729 535,635 557,261 Other general and administrative costs 2,473,489 1,148,807 605,340 ------------- ------------ ------------ TOTAL OPERATING EXPENSES 9,486,743 2,535,412 1,886,122 LOSS FROM OPERATIONS (9,397,243) (2,465,412) (1,886,122) OTHER (INCOME) EXPENSE Gain on settlement of lawsuit (48,574) - - Interest expense 1,459,442 703,669 198,468 Interest income (85,544) (7,177) (5,783) ------------- ------------ ------------ 1,325,324 696,492 192,685 ------------- ------------ ------------ NET LOSS $ (10,722,567) $ (3,161,904) $ (2,078,807) ============= ============ ============ BASIC NET LOSS PER SHARE $ (5.50) $ (0.61) $ (0.41) ============= ============ ============ WEIGHTED AVERAGE SHARES OUTSTANDING 1,949,898 5,146,998 5,047,477 ============= ============ ============
The accompanying notes are an interal part of the financial statements. F-4 Helix BioMedix, Inc. (a development stage company) Statement of Stockholder's Equity (Deficit) For the years ended December 31, 2002 and 2001 and For the period from inception (November 7, 1988) to December 31, 2002
Common Stock Stock- ---------------------- Additional Deferred Stock holders' Number Paid-in Compensation Subscription Accumulated Equity of Shares Amount Capital Costs 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 Isssuance 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 accounts 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 December 1997 $1.00 110,976 110,976 110,976 December 1997 $2.50 and $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 and 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 - Sept 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. F-5 Helix BioMedix, Inc. (a development stage company) Statement of Stockholder's Equity (Deficit) For the years ended December 31, 2002 and 2001 and For the period from inception (November 7, 1988) to December 31, 2002
Common Stock Stock- ----------------------- Additional Deferred Stock holders' Number Paid-in Compensation Subscription Accumulated Equity of Shares Amount Capital Costs 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 shares 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 36586 4.05 7,747 18,399 12,976 31,375 36678 3.17 8,750 16,953 10,828 27,781 36770 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 agreements, shares issued for 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 Director 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 options 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 - Net loss for the period from inception on November 7, 1988 to December 31, 2000 (5,481,856) (5,481,856) ---------- ---------- ----------- ---------- ---------- ----------- ------------ Balance at December 31, 2000 5,022,196 5,022 6,152,003 (75,000) (5,481,856) 600,169 Amortization of deferred compensation 75,000 75,000 Issuance of stock for services, in October 25,000 25 49,975 50,000 2001, at $2.00 per share 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 year ended December 31, 2001 (2,078,807) (2,078,807)
The accompanying notes are an integral part of the finanical statements. F-6 Helix BioMedix, Inc. (a development stage company) Statement of Stockholder's Equity (Deficit) For the years ended December 31, 2002 and 2001 and For the period from inception (November 7, 1988) to December 31, 2002
Common Stock Deferred Stock- ----------------------- Additional Compen- Stock holders' Number Paid-in sation Subscription Accumulated Equity of Shares Amount Capital Costs Receivable Deficit (Deficit) ---------- ---------- ---------- -------- ---------- ----------- ---------- Balance at December 31, 2001 5,144,696 5,145 6,819,415 - (7,560,663) (736,103) 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 quity, at $1.00 per share Principal 3,082,500 3,083 3,079,417 3,082,500 Accrued interest 231,180 231 230,949 231,180 3,313,680 3,314 3,310,366 - - 3,313,680 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 ====================================================================================
The accompanying notes are an integral part of the financial statements. F-7 Helix BioMedix, Inc. (a development stage entity) Statements of Cash Flows For the Perod from Inception ( November 7, 1988) to December 31, 2002
Inception For the year ended to December 31, December 31, 2002 2002 2001 ---------------------------------------------- Cash Flows from Operating Activities Net loss $ (10,722,567) $ (3,161,904 $ (2,078,807) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 359,898 115,105 51,795 Amortization of debt discount to interest expense 728,552 642,859 85,693 Stock-based compensation costs 2,550,250 454,732 526,435 Interest expense converted to common stock 231,180 185,984 -- Research and development 53,000 -- -- (Increase) decrease in operating assets: Accounts receivable (20,000) (20,000) Prepaid expenses (41,812) (12,833) (22,128) Other assets (97,476) (6,255) (91,221) Increase (decrease) in operating liabilities: Accounts payable - related party 341,602 (4,500) -- Other accounts payable 39,642 37,308 2,334 Payroll taxes payable 1,675 (11,715) 13,065 Accrued interest payable -- -- -- Other accrued expenses 108,727 108,727 45,196 ----------- ---------- ----------- Net cash used for operating activities (6,467,329) (1,672,492) (1,467,638) Cash Flows from Investing Activities Investment in Helix Delaware (10) -- -- Purchase of property and equipment (254,878) (30,919) (221,975) Increase in capitalized patents (464,753) (30,635) (53,617) ----------- ---------- ----------- Net cash used for operating activities (719,641) (61,554) (275,592) ----------- ---------- ----------- Cash Flows from Financing Activities Cash received in reverse acquisition 634,497 -- -- Notes payable 3,089,894 1,102,500 1,980,000 Notes payable - related party 379,579 -- (326,308) Payment of notes payable - related party (163,154) (163,154) Issuance of stock for cash 3,444,680 1,425,000 -- Issuance of debt subsequently converted to stock 832,819 -- -- ----------- ---------- ----------- Net cash provided by financing activities 8,218,315 2,364,346 1,653,692 Net increase (decrease) in cash 1,031,345 630,300 (89,538) Cash at beginning of period -- 401,045 490,583 ----------- ---------- ----------- Cash at end of period $ 1,031,345 $ 1,031,345 $ 401,045 =========== =========== ============ Supplemental Cash Flow Information 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 $ 3,082,500 $ -- Accrued interest converted to equity $ 231,180 $ 231,180 $ -- Detachable warrants issued with notes payable $ 728,552 $ 512,452 $ 216,100 Issuance of stock for services provided $ 14,400 $ 14,400 $ -- Purchase of property included in accrued expenses $ 224,458 $ 224,458 $ -- Stock subscription receivable $ 135,000 $ 135,000 $ -- Cash paid for interest $ 105,430 $ 13,052 $ 22,842 Cash paid for taxes $ -- $ -- $ --
The accompanying notes are an integral part of the financial statments. F-8 Helix BioMedix, Inc. (a development stage company) NOTES TO FINANCIAL STATEMENTS For the Period From Inception (November 7, 1988) to December 31, 2002 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. to create a corporate vehicle to seek and acquire a business opportunity. 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. The Company 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 a wholly owned subsidiary, Helix BioMedix, Inc. in the state of Delaware ("Helix-Delaware"), for the purpose of merging the Company 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., the 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 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 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 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 of notes payable with detachable warrants under the private placement through the first half of 2002. Beginning in September 2002, the Company began 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 subscription receivable. The convertible notes and accrued interest, approximating $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. Subsequent to year-end, the Company raised an additional $2.1 million from the equity financing through March 31.2003. During 2002, the Company continued to conduct research into its peptides, both internally in the lab facilities opened in the prior year and externally through the services of consultants. The Company also hired new officers to round out its management team and began business development activities. The Company believes it is now positioned to implement a business plan providing for both near-term and long-term product introductions. This plan contemplates revenues from licensing and strategic alliances. Due to the fact that the Company's research and development activities are still in process, there has been no significant revenue. Accordingly, the Company is still in the development stage as defined in Statement of Financial Accounting Standards No. 7. F-9 Helix BioMedix, Inc. (a development stage company) NOTES TO FINANCIAL STATEMENTS For the Period From Inception (November 7, 1988) to December 31, 2002 Management believes that substantial progress was made during the year ended December 31, 2002 to provide sufficient cash resources to finance operations for 2003. Coupled with the progress made with respect to the Company's peptide technology and initial business development efforts, as well as continuing fund raising activities, management believes it will succeed in improving the Company's cash resources beyond 2003. However, if the Company does not begin generating revenue in 2003 or early 2004, it will be required to raise additional funds to finance operations in 2004. 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. Revenue Recognition License fee revenue with no continuing involvement by the Company is recognized upon the effective date of the license. Research and Development Research and development costs are expensed as incurred. Depreciation Cost of equipment used in operations is recorded and is depreciated using the straight-line method over useful lives of 5 to 7 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. Effective January 1, 2002, the Company adopted SFAS No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 supercedes SFAS No. 121 Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. SFAS No. 144 excludes goodwill from its impairment scope, allows different approaches in cash flow estimation, and extends discontinued operations treatment, previously applied only to operating segments, to more discrete business components. The impairment model under SFAS No. 144 is otherwise largely unchanged from SFAS No. 121, and adoption of this standard did not have a material effect on the Company's financial statements. No impairment of long-lived assets has been recognized in the accompanying financial statements. Concentrations of Credit Risk From time-to-time, the Company maintains cash balances in excess of FDIC insured limits. The amount of such excess at December 31, 2002 was approximately $1.0 million. Cash Equivalents The Company considers all highly liquid debt instruments with an original maturity at date of purchase of three months or less to be cash equivalents. F-10 Helix BioMedix, Inc. (a development stage company) NOTES TO FINANCIAL STATEMENTS For the Period From Inception (November 7, 1988) to December 31, 2002 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, ------------------------------------- 2002 2001 -------------- ----------------- Outstanding options 1,133,000 836,893 -------------- ----------------- Outstanding warrants 6,675,262 4,135,643 -------------- ----------------- Use of Estimates The preparation of the Company's financial statements in conformity with generally accepted accounting principles generally accepted in the United States 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. Income Taxes Deferred income taxes are provided based on the estimated future tax effects of carryforwards 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 carryforwards 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 carryforwards and R & D credit carryforwards, which are subject to a full valuation allowance. 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. Stock-based Compensation The Company applies ABP Opinion No.25, Accounting for Stock Issued to Employees and related interpretations in measuring compensation costs for its employee stock option plans. Proforma 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 or 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 Issue No. 96-18. Had the Company determined compensation cost based on the fair value of our stock options on the grant date under Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation," our net loss and net loss per share would have been the pro forma amounts indicated below:
Year ended December 31 ----------------------------- 2002 2001 ------------- --------------- Net loss As reported $ 3,161,904 $ 2,078,807 Add: Stock-based employee compensation expense included in reported net loss - - Deduct: Stock-based employee compensation determined under fair value based method for all awards (248,600) (300,450) ------------- --------------- Pro forma net loss $ 3,410,504 $ 2,379,257 ------------- --------------- Net loss per share As reported $ 0.61 $ 0.41 ------------- --------------- Pro forma net loss $ 0.66 $ 0.47 ------------- ---------------
F-11 Helix BioMedix, Inc. (a development stage company) NOTES TO FINANCIAL STATEMENTS For the Period From Inception (November 7, 1988) to December 31, 2002 The per share weighted-average fair value of stock options granted during 2002 and 2001 was $ 0.30 , and $0.58 respectively, on the grant date using the Black-Scholes option pricing model with the following assumptions:
Year ended December 31 ---------------------------- 2002 2001 ----------- -- ------------- Expected dividend yield 0% 0% Risk-free interest rate 4.65% 6.07 Expected volatility 110% 127% Expected life in years 3.0 2.2
Reclassifications Certain 2001 balances have been reclassified to conform with classifications adopted in 2002. Such reclassifications had no effect on the Company's financial condition or results of operations. Recently Issued Accounting Pronouncements In November 2002, the Financial Accounting Standards Board Emerging Issues Task Force issued its consensus concerning Revenue Arrangements with Multiple Deliverables ("EITF 00-21"). EITF 00-21 addresses how to determine whether a revenue arrangement involving multiple deliverables should be divided into separate units of accounting, and, if separation is appropriate, how the arrangement consideration should be measured and allocated to the identified accounting units. The guidance in EITF 00-21 is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The Company does not anticipate that adoption of EITF 00-21 will have a material impact on its financial statements. In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The adoption of SFAS No. 146 is not expected to have a material effect on the Company's financial statements. In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34. This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. The Interpretation also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken. The initial recognition and measurement provisions of the Interpretation are applicable to guarantees issued or modified after December 31, 2002 and are not expected to have a material effect on the Company's financial statements. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of ARB No. 51. This Interpretation addresses the consolidation by business enterprises of variable interest entities as defined in the Interpretation. The Interpretation applies immediately to variable interests in variable interest entities created after January 31, 2003, and to variable interests in variable interest entities obtained after January 31, 2003. The application of this Interpretation is not expected to have a material effect on the Company's financial statements. The Interpretation requires certain disclosures in financial statements issued after January 31, 2003 if it is reasonably possible that the Company will consolidate or disclose information about variable interest entities when the Interpretation becomes effective. F-12 Helix BioMedix, Inc. (a development stage company) NOTES TO FINANCIAL STATEMENTS For the Period From Inception (November 7, 1988) to December 31, 2002 Note 2. Notes Payable
December 31, ------------------------- 2002 2001 ---------- -------------- 6% unsecured notes payable, initially maturing on May 31, 2002 $ - $1980,000 8% note payable to shareholder, maturing September 2002 - $163,154 ----------- --------------- Total notes payable $ - $2,143,154 =========== Less discount 130,407 --------------- Notes payable $2,012,747 ===============
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 promissory notes, which were originally due May 31, 2002, contained warrants to purchase common shares initially equivalent to 25% of the principal amount of the notes divided by $1.50 per share, at an exercise price of the lower of either (a) $1.50 per share, or (b) the per share price of the next equity offering with such warrants having 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 follow: (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 on or before December 31, 2002 and (d) the warrant coverage was increased to 35% of the principal amount, subject to an increase to 40% if the principal was not paid or converted by August 31, 2002 and a further increase to 45% if the principal was not paid or converted by December 31, 2002. Purchasers prior to the date of the offering changes were given an opportunity to accept the revised terms or to reject them and obtain a refund of their purchase plus accrued interest. 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 totals 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. In September 2002, the Company began a private placement offering of common stock pursuant to approval at it August, 2002 Board meeting in accordance with Regulation D under Section 4(2) of the Securities Act of 1933 (the "Securities Act") at a per share price of $1.00. The offering included detachable stock purchase warrants equal to 60% of the common stock investments. The exercise price of the warrants equals $1.00 per share. As of December 31, 2002, the Company raised $1.56 million from the offering. The 3,313,680 shares from the debt conversion plus 1,545,000 of the shares to be issued in the 2002 equity private placement (See Note 3) were not issued until after December 31, 2002. Accordingly, the combined total, or 4,858,680 shares, are considered to be outstanding, but unissued at December 31, 2002 for accounting purposes. F-13 Helix BioMedix, Inc. (a development stage company) NOTES TO FINANCIAL STATEMENTS For the Period From Inception (November 7, 1988) to December 31, 2002 The shareholder note for $163,154 was secured by a first security interest in technology and intellectual property rights or other assets of the Company in the event of default. Interest was payable quarterly. The total note and related accrued interest were paid in 2002. Note 3. Identifiable Intangible Assets Identifiable intangible assets consist of the following as of December 31:
December 31, ------------ 2002 2001 ---------- -------------- Antimicrobial technology 225,000 225,000 Licensing agreements 61,391 61,391 Patents pending and approved 644,110 613,476 ---------- -------------- 930,501 899,867 Less accumulated amortization (299,977) (234,132) ---------- -------------- Identifiable intangible assets, net 630,524 665,735 ---------- --------------
Scheduled amortization charges from identifiable assets as of December 31, 2002 are as follows:
Antimicrobial Licensing Patents pending Year technology Agreements and approved ------------- ------------------ ------------ ---------------- 2003 11,109 3,595 49,545 2004 11,109 3,595 49,545 2005 11,109 3,595 49,545 2006 11,109 3,595 49,545 Thereafter 29,026 43,416 301,086
Note 4. Stockholders' Equity On December 29, 2000, the Company was re-incorporated in the State of Delaware. The Articles of Incorporation increased the number of authorized shares of stock to 27,000,000, $0.001 par value. Of these, 25,000,000 shares are designated as Common Stock and 2,000,000 are designated as Preferred Stock. On December 16,2002, the Company's shareholders approved an amendment to the Company's Certificate of Incorporation to increase the number of authorized Preferred Shares from 2,000,000 to 25,000,000 and to increase the number of authorized Common Shares from 25,000,000 to 100,000,000. 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 may deem advisable. As of December 31, 2002, 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. 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, 2002, no shares had been issued under the 2000 Plan and 4,277,000shares remain available for grant. During 2002, the Company amended the 2000 Plan as follows: F-14 Helix BioMedix, Inc. (a development stage company) NOTES TO FINANCIAL STATEMENTS For the Period From Inception (November 7, 1988) to December 31, 2002 a. The role of a committee appointed by the Board to administer the plan was clarified; b. Specific authority was granted to the Chief Executive Officer to determine stock option grants for employees, other than non-executive officers, subject to certain conditions. c. The vesting rights in the event of a change of control were specified for employees and Executive Officers. d. Extended the stock option expiration period in certain cases for up to three years. e. Increased the vesting period for future option grants generally from two to three years. A summary of activity for options for the years ended December 31, 2002 and 2001 is as follows:
Options Outstanding --------------------------------------- Number Weighted Avg. of Shares Exercise Price ------------------ ----------------- Balance at December 31, 2000 336,193 $ 1.16 Granted 660,700 $ 1.50 Exercised Canceled (160,000) $ 0.70 ------------------ ----------------- Balance at December 31, 2001 836,893 $ 1.31 Granted 350,000 $ 1.00 Exercised - - Canceled (53,893) $ 0.70 ------------------ ----------------- Balance at December 31, 2002 1,133,000 $ 1.29 ================== =================
Options Options Outstanding Exercisable ------------------------------------------------------------ --------------------------- Weighted Weighted Weighted Average Average Average Range of Number Contractual Exercise Number Exercise Exercise Price Outstanding Life Price Exercisable Price ---------------- -------------- --------------- ------------ -------------- ------------ $ 0.70 165,500 4.4 $0.70 165,500 $ 0.70 $ 1.00 350,000 9.6 $1.00 - $ - $ 1.50 602,500 8.6 $1.50 540,000 $ 1.50 $ 2.50 15,000 0 $2.50 15,000 $ 2.50
Common Stock Purchase Warrants Information concerning outstanding common stock purchase warrants is set forth below:
December 31 2002 2001 ------------------------------------- -------------------------------------- Number Price range Wghtd. Number Price range Wghtd. Avg. Avg. ------------ -------------- --------- ------------ ---------------- -------- Warrants issued for services 1,615,619 $1.00 - $6.00 $1.45 750,000 $1.50 - $6.00 $2.10 Warrants issued in connection with 1999 equity financing 2,890,643 $3.25 $3.25 2,890,643 $3.25 $3.25 Warrants issued in connection with 2001 convertible debt financing 1,233,000 $1.00 $1.00 495,000 $1.50 $1.50 Warrants issued in connection with 2002 equity financing 936,000 $1.00 $1.00 - ------------ ------------ Total outstanding warrants 6,675,262 4,135,643 ------------ ------------
F-15 Helix BioMedix, Inc. (a development stage company) NOTES TO FINANCIAL STATEMENTS For the Period From Inception (November 7, 1988) to December 31, 2002 Stock Offering During 1999, the Company issued 2,890,643 shares of common stock in a private placement for $1,916,255, net of offering costs of $107,195. The shares were sold in units, each unit consisting of 150,000 common shares and 150,000 warrants. Each warrant entitles the holder to purchase one common share at an exercise price of $3.25 per share. For a period of three years, the warrants were callable at the option of the Company at a premium equal to the greater of market price less $3.25 or a price of $0.75 for the first year, $1.75 for the second year, and $2.75 for the third year. No warrants were called during the three year period. Deferred Compensation Costs During the year ended December 31, 1999, the Board of Directors approved and ratified certain consulting agreements and employment contracts. These agreements called for the issuance of stock and the granting of options, at various intervals during the year 2000. The Company recorded deferred compensation costs of $173,225 that were charged to operations, $21,000 in 1999 and $152,225 in 2000. Other agreements signed during 2000 resulted in an amount of $75,000 recorded as deferred compensation as of December 31, 2000 that was charged to operations during 2001. 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 No income tax benefit was recognized for the Company's net losses in 2002 and 2001 The following are the components of the Company's deferred tax assets and liabilities: 2002 2001 ----------- ----------- Net operating loss carryforwards $ 3,190,000 $ 2,204,000 Research and development credits 162,000 162,000 Gross deferred tax assets 3,352,000 2,366,000 Valuation allowance (3,352,000) (2,366,000) Total deferred tax assets $ - $ - Total deferred tax liabilities $ - $ - The Company has federal net operating loss carryforwards totaling approximately $9.2 million, which expire between 2003 and 2022. The Company also has approximately $162,000 in Federal Credits for Increasing Research Activities available to offset future taxable income and related tax. The Company's ability to utilize the carryforwards may be limited in the event of an ownership change as defined in current income tax regulations. Note 6. Related Party Transactions During 2002, the Company paid $163,154 in payment of a note payable to a shareholder, the former president of the Company as more fully described in Footnote 2. On December 29, 2000, the Company entered into an agreement by which the Company, at its option, may have acquired up to 250,000 of its common shares from the shareholder at $2.00 per share through February 28, 2001 ("first option"), up to 75,000 shares at $2.75 per share through June 30, 2001 ("second option"), and up to 75,000 shares at $3.25 per share through June 30, 2001 ("third option"). Exercise of the first option would have extended the due dates of $326,308 in debt maturing in September 2001 and 2002 by one year from the original date. As of December 31, 2002, these options had not been exercised and the $326,308 of debt had been repaid. Interest paid to this shareholder approximated $13,000 and $23,000 during 2002 and 2001, respectively. F-16 Helix BioMedix, Inc. (a development stage company) NOTES TO FINANCIAL STATEMENTS For the Period From Inception (November 7, 1988) to December 31, 2002 A consulting firm substantially owned by a spouse of one of the Company's Board members serves as a key strategic consultant to the company. Another key strategic consulting firm is owned by another Board member. The companies owned by these individuals received warrants totaling 150,000 shares during 2002 and 400,000 in 2001 with exercise prices of $1.00 and $1.50, respectively. Note 7. Long Term Leases The Company leases office and lab space under non-cancelable operating lease expiring in August 2005. Future minimum lease payments required by the lease over the next three years are as follows: 2003 43,990 2004 37,774 2005 21,555 Rent expense for the years ended December 31, 2002 and 2001 approximated $83,750 and $ 72,725, respectively. Note 8. License Agreement Effective October 1, 2001, the Company entered into an exclusive, twenty year world-wide license agreement with the University of British Columbia ("UBC") for the manufacture, distribution, marketing, and sale of sublicensed products derived or developed from certain antimicrobial peptides owned by UBC and contained within the license agreement. As called for by the license agreement, 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 ($97,863 CDN), such cash payment constituting reimbursement of UBC for expenses related to the licensed patents. The agreement also requires the Company to reimburse UBC for all further costs incurred with respect to the patents, including maintenance fees. Minimum annual royalties under the agreement, ranging from $10,000 to $25,000 annually, begin in 2006. Note 9. Restatement of Quarterly Information (Unaudited) During the fourth quarter of 2002, the Company recorded the following non-cash adjustments, which resulted in the restatement of previously reported quarterly information for 2002 to properly account for the convertible notes and warrants issued to non-employees under EITF 96-18: 1. To increase stock compensation for warrants granted to non-employees for services rendered to the company $143,747 2. To decrease interest expense related to convertible notes payable for adjustments to debt discount ($7,358) F-17 Helix BioMedix, Inc. (a development stage company) NOTES TO FINANCIAL STATEMENTS For the Period From Inception (November 7, 1988) to December 31, 2002 The effect of the adjustments on the 2002 quarters is as follows: Q1 Q2 Q3 ----------- ----------- ----------- Income Statement: Research and Development As reported $ 28,425 $ 143,509 $ 115,286 As adjusted $ 28,425 $ 123,231 $ 115,286 Consulting fees As reported $ 15,000 $ 33,196 $ 73,362 As adjusted $ 137,500 $ 33,196 $ 114,887 Other general and administrative As reported $ 313,284 $ 397,776 $ 344,865 As adjusted $ 313,384 $ 256,803 $ 344,865 Interest expense As reported $ 91,606 $ 128,912 $ 108,716 As adjusted $ 146,377 $ 143,530 $ 172,942 Net loss: As reported $ (514,015) $ (777,986) $ (701,102) As adjusted $ (691,286) $ (631,353) $ (806,853) Net loss per share: As reported $ (0.10) $ (0.15) $ (0.14) As adjusted $ (0.13) $ (0.12) $ (0.16) Balance Sheet: Notes payable, net As reported $ 2,634,694 $ 2,957,230 $ 3,016,065 As adjusted $ 2,705,665 $ 2,765,496 $ 3,080,291 Additional paid-in capital As reported $ 6,909,415 $ 7,072,987 $ 7,213,470 As adjusted $ 7,015,715 $ 7,118,178 $ 7,254,995 Deficit accumulated during the development stage As reported $(8,074,678) $(8,852,665) $(9,553,767) As adjusted $(8,251,949) $(8,706,032) $(9,659,518) The adjustments had no effect in any quarter on operating, investing or financing cash flows. F-18 Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure On November 27, 2002, the Company filed a Form 8-K to report the change in its independent accountants from Comiskey & Co. to KPMG, LLP. PART III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance With Section 16(a) of the Exchange Act The information called for by Part III, Item 9 will be provided by amendment to this Form 10-KSB by April 30, 2003. Item 10. Executive Compensation The information called for by Part III, Item 10 will be provided by amendment to this Form 10-KSB by April 30, 2003. Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. The information called for by Part III, Item 11 will be provided by amendment to this Form 10-KSB by April 30, 2003. Item 12. Certain Relationships and Related Transactions The information called for by Part III, Item 12 will be provided by amendment to this Form 10-KSB by April 30, 2003. Item 13. Exhibits and Reports on Form 8-K The information called for by Part III, Item 13 will be provided by amendment to this Form 10-KSB by April 30, 2003. Item 14. Controls and Procedures Within 90 days prior to the date of this annual report, the Company carried out an evaluation, under the supervision and participation of management, including 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 to the Company's internal controls or in other factors that could significantly affect such internal controls subsequent to the date that the Company carried out its evaluation. Item 15. Principal Accountant Fees and Services The information called for by Part III, Item 15 will be provided by amendment to this Form 10-KSB by April 30, 2003. 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. Registrant: HELIX BIOMEDIX, INC. Date: April 15, 2003 By: /s/ R. STEPHEN BEATTY ---------------------------- R. Stephen Beatty President and Chief Executive Officer 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 and on the dates indicated. By: /s/ R. STEPHEN BEATTY Date: April 15, 2003 ---------------------------------- R. Stephen Beatty Director, President and Principal Executive Officer By: /s/ KERRY D. PALMER Date: April 15, 2003 --------------------------------- Kerry D. Palmer Principal Financial Officer and Principal Accounting Officer By: /s/ JEFFREY A. MILLER Date: April 15, 2003 --------------------------------- Jeffrey A. Miller Director By: /s/ RANDALL L-W. CAUDILL Date: April 15, 2003 --------------------------------- Randall L-W. Caudill Director By: /s/ RALPH KATZ Date: April 15, 2003 --------------------------------- Ralph Katz Director By: /s/ GEORGE A. MURRAY Date: April 15, 2003 --------------------------------- George A. Murray Director By: /s/ CARLYN J. STEINER Date: April 15, 2003 --------------------------------- Carlyn J. Steiner Director By: /s/ DANIEL O. WILDS Date: April 15, 2003 --------------------------------- Daniel O. Wilds Director By: Date: April 15, 2003 --------------------------------- John C. Fiddes 18 Certification Pursuant to Rule 13a-14 and Rule 15d-14 of the Securities Exchange Act of 1934 I, R. Stephen Beatty, certify that: 1. I have reviewed this annual report on Form 10-KSB of Helix BioMedix, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: i. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; ii. evaluated the effectiveness of the Company's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and iii. presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Company's other certifying officers and I have disclosed, based on our most recent evaluation, to the Company's auditors and the audit committee of Company's board of directors (or persons performing the equivalent function): i. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the Company's auditors any material weaknesses in internal controls; and ii. any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal controls; and 6. The Company's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: April 15, 2003 /s/ R. STEPHEN BEATTY --------------------- R. Stephen Beatty President and Chief Executive Officer 19 Certification Pursuant to Rule 13a-14 and Rule 15d-14 of the Securities Exchange Act of 1934 I, Kerry D. Palmer, certify that: 1. I have reviewed this annual report on Form 10-KSB of Helix BioMedix, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The Company's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: i. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; ii. evaluated the effectiveness of the Company's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and iii. presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Company's other certifying officers and I have disclosed, based on our most recent evaluation, to the Company's auditors and the audit committee of Company's board of directors (or persons performing the equivalent function): i. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the Company's auditors any material weaknesses in internal controls; and ii. any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal controls; and 6. The Company's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: April 15, 2003 /s/ KERRY D. PALMER -------------------- Kerry D. Palmer Chief Financial Officer 20 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 (SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002) In connection with the Annual Report of Helix Biomedix, Inc. (the "Company") on Form 10-KSB for the period ending December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, R. Stephen Beatty, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, that: 1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ R. Stephen Beatty - --------------------- R. Stephen Beatty President, Chief Executive Officer April 15, 2003 21 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 (SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002) In connection with the Annual Report of Helix Biomedix, Inc. (the "Company") on Form 10-KSB for the period ending December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Kerry D. Palmer, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, that: 1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Kerry D. Palmer - ------------------- Kerry D. Palmer Chief Financial Officer April 15, 2003 22 -----END PRIVACY-ENHANCED MESSAGE-----