UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended ~~June~~September 30, 2012

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

For the transition period from to

Commission file number: 33-20897-D

HELIX BIOMEDIX, INC.

(Exact name of registrant as specified in its charter)

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

22121 17th Avenue SE, Suite 112, Bothell, Washington 98021

(Address of principal executive offices, including zip code)

(425) 402-8400

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨	Accelerated filer ¨	Non-accelerated filer ¨	Smaller reporting company x
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x

As of ~~July~~October 3031, 2012, 49,720,255 shares of the registrant’s common stock were issued and outstanding.

HELIX BIOMEDIX, INC.

FORM 10-Q

TABLE OF CONTENTS

	Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements	1
Condensed Balance Sheets (unaudited)	1
Condensed Statements of Operations and Comprehensive Loss (unaudited)	2
Condensed Statements of Stockholders’ Equity (unaudited)	3
Condensed Statements of Cash Flows (unaudited)	4
Notes to Condensed Financial Statements (unaudited)	5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	1213
Item 3. Quantitative and Qualitative Disclosures About Market Risk	1920
Item 4. Controls and Procedures	1920
PART II - OTHER INFORMATION
Item 1A. Risk Factors	2021
Item 6. Exhibits	2122
Signatures	2223

PART I - FINANCIAL INFORMATION

ITEM 1.

Financial Statements.

HELIX BIOMEDIX, INC.

CONDENSED BALANCE SHEETS

(Unaudited)

	June 30, 2012			December 31, 2011
	September 30, 2012			December 31, 2011
ASSETS
Current assets:
Cash and cash equivalents	$	~~739~~216,~~108~~534		$	1,688,945
Accounts receivable, net		~~219~~284,~~141~~809			239,773
Accounts receivable, affiliated company, net		~~117~~112,~~599~~691			200,935
Inventory		~~295~~330,~~584~~989			363,869
Deferred debt issuance costs, current		201,040			—
Prepaid expenses and other assets		~~119~~64,~~265~~009			64,583
Total current assets		1,~~691~~210,~~737~~072			2,558,105
Property and equipment, net		1419,~~825~~602			26,098
Intangible assets, net		~~112~~95,~~412~~470			146,297
Deferred debt issuance costs, non-current		~~201~~150,~~590~~917			—
Other long term assets		98,~~667~~522			20,884
Investment in affiliated company		~~202~~217,~~665~~339			223,255
Total assets	$	21,~~232~~701,~~896~~922		$	2,974,639
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	~~110~~321,~~957~~565		$	125,324
Accrued compensation and benefits		5664,~~445~~933			87,859
Accrued expenses		4763,~~831~~603			55,463
Deferred revenue		137,~~602~~060			—
Deferred gross profit, affiliated company		6962,~~718~~509			134,842
Deferred rent, current		~~8,341~~—			7,155
Total current liabilities		~~306~~519,~~894~~670			410,643
Deferred rent, non-current		2332,~~995~~258			28,660
Total liabilities		~~330~~551,~~889~~928			439,303
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.001 par value, 25,000,000 shares authorized; no shares issued or outstanding		—			—
Common stock, $0.001 par value, 100,000,000 shares authorized; 49,720,255 shares outstanding at June 30, 2012 and December 31, 2011		49,721			49,721
Common stock, $0.001 par value, 100,000,000 shares authorized; 49,720,255 shares outstanding at September 30, 2012 and December 31, 2011		49,721			49,721
Additional paid-in capital		49,~~159~~192,~~261~~432			48,542,453
Accumulated deficit		(4748,~~306~~092,~~975~~159	)		(46,056,838	)
Total stockholders’ equity		1,~~902~~149,~~007~~994			2,535,336
Total liabilities and stockholders’ equity	$	21,~~232~~701,~~896~~922		$	2,974,639

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

HELIX BIOMEDIX, INC.

CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

	Three Months Ended June 30,							Six Months Ended June 30,
	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012	~~2012~~			2011	~~2011~~
Revenue:
Licensing fees	$	~~173~~240,~~453~~550		$	~~164~~176,~~975~~922		$	$729,095	~~488,545~~		$	$513,322	~~336,400~~
Peptide and consumer product sales		~~175~~176,~~794~~669			~~340~~100,~~349~~884			605,190	~~428,521~~			576,165	~~475,281~~
Consumer product sales to affiliated company		~~121~~51,~~275~~852			~~187~~116,~~779~~901			285,730	~~233,878~~			355,951	~~239,050~~
Total revenue		~~470~~469,~~522~~071			~~693~~394,~~103~~707			1,620,015	~~1,150,944~~			1,445,438	~~1,050,731~~
Cost of revenue:
Cost of peptide and consumer product sales		~~109~~113,~~363~~407			~~247~~70,~~698~~834			380,543	~~267,136~~			409,829	~~338,995~~
Cost of consumer product sales to affiliated company		5521,~~094~~832			~~104~~56,~~995~~961			128,684	~~106,852~~			191,486	~~134,525~~
Total cost of revenue		~~164~~135,~~457~~239			~~352~~127,~~693~~795			509,227	~~373,988~~			601,315	~~473,520~~
Gross profit		~~306~~333,~~065~~832			~~340~~266,~~410~~912			1,110,788	~~776,956~~			844,123	~~577,211~~
Operating expenses:
Research and development		87133,~~942~~009			90109,~~747~~221			308,036	~~175,027~~			425,131	~~315,910~~
Marketing and business development		~~269~~302,~~645~~040			~~244~~225,~~018~~732			874,791	~~572,751~~			674,187	~~448,455~~
General and administrative		~~329~~418,~~235~~868			~~374~~327,~~889~~162			1,132,679	~~713,811~~			1,043,843	~~716,681~~
Accounting, legal and professional fees		~~181~~205,~~201~~192			~~144~~168,~~196~~043			605,615	~~400,423~~			477,676	~~309,633~~
Depreciation and amortization		22,~~063~~896			2827,~~147~~845			68,054	~~45,158~~			82,609	~~54,764~~
Total operating expenses		~~890~~1,~~086~~082,005			~~881~~858,~~997~~003			2,989,175	~~1,907,170~~			2,703,446	~~1,845,443~~
Loss from operations		(~~584~~748,~~021~~173	)		(~~541~~591,~~587~~091	)		(1,878,387	~~(1,130,214~~)	)		(1,859,323	~~(1,268,232~~)	)
Other income (expense):
Interest income		~~384~~133			~~928~~704			1,257	~~1,124~~			2,836	~~2,132~~
Amortization of debt issuance costs		(50,~~123~~673	)		—			(112,913	~~(62,240~~)	)		—	—
Equity in loss of affiliated company		(29,942	)		(59,065	)			(47,590	)			(51,073	)
Equity in income (loss) of affiliated company		14,674			(23,373	)		(32,916	)			(74,446	)
Change in fair value of option to purchase interest in affiliated company		(41,~~597~~145	)		~~(25~~8,~~151~~143	)		(12,362	~~(11,217~~)	)		(9,293	~~(17,436~~)	)
Total other income (expense), net		(8437,~~278~~011	)		(8314,~~288~~526	)		(156,934	~~(119,923~~)	)		(80,903	~~(66,377~~)	)
Net loss and comprehensive loss	$	(~~668~~785,~~299~~184	)	$	(~~624~~605,~~875~~617	)	$	$(2,035,321	~~(1,250,137~~)	)	$	$(1,940,226	~~(1,334,609~~)	)
Basic and diluted net loss per share	$	(0.0102	)	$	(0.01	)	$	$(0.04	~~(0.03~~)	)	$	$(0.04	~~(0.03~~)	)
Weighted average shares outstanding		49,720,255			49,720,255			49,720,255	~~49,720,255~~			49,720,255	~~49,720,255~~

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

HELIX BIOMEDIX, INC.

CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the Year Ended December 31, 2011 and for the ~~Six~~Nine Months Ended ~~June~~September 30, 2012

(Unaudited)

	Common Stock				~~Additional~~
	Number of Shares		Amount		Additional Paid-in Capital		Accumulated Deficit			Stockholders’ Equity
Balance at December 31, 2010		49,720,255	$	49,721	$	48,392,985	$	(43,568,262	)	$	4,874,444
Stock-based compensation		—		—		149,468		—			149,468
Net loss		—		—		—		(2,488,576	)		(2,488,576	)
Balance at December 31, 2011		49,720,255		49,721		48,542,453		(46,056,838	)		2,535,336
Stock-based compensation		—		—		~~151~~185,~~938~~109		—			~~151~~185,~~938~~109
Fair value of warrants issued in connection with letter of credit		—		—		464,870		—			464,870
Net loss		—		—		—		(12,~~250~~035,~~137~~321	)		(12,~~250~~035,~~137~~321	)
Balance at June 30, 2012		49,720,255	$	49,721	$	49,159,261	$	(47,306,975	)	$	1,902,007
Balance at September 30, 2012		49,720,255	$	49,721	$	49,192,432	$	(48,092,159	)	$	1,149,994

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

HELIX BIOMEDIX, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

	Six Months Ended June 30,
	Nine Months Ended September 30,
	2012			2011
Cash flows from operating activities
Net loss	$	(12,~~250~~035,~~137~~321	)	$	(1,~~334~~940,~~609~~226	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		4568,~~158~~054			5482,~~764~~609
Stock-based compensation expense		~~151~~185,~~938~~109			~~118~~132,~~949~~964
Amortization of debt issuance costs		62112,~~240~~913			—
Equity in loss of affiliated company		4732,~~590~~916			5174,~~073~~446
Change in fair value of option to purchase interest in affiliated company		1112,~~217~~362			179,~~436~~293
Changes in assets and liabilities:
Accounts receivable, net		20(45,~~632~~036	)		(~~131~~19,~~199~~097	)
Accounts receivable, affiliated company, net		8388,~~336~~244			(~~104~~204,~~558~~010	)
Inventory		6832,~~285~~880			(2777,~~447~~695	)
Prepaid expenses and other current assets		~~(54,682~~574	)		~~(52~~18,~~341~~746	)
Accounts payable		~~(14~~196,~~367~~241	)		61(54,~~259~~547	)
Accrued compensation and benefits		(3122,~~414~~926	)		65,~~119~~814
Other accrued expenses		~~(11~~4,~~111~~583	)		(5661,~~129~~118	)
Deferred gross profit		13,602			—
Deferred revenue		7,060			—
Deferred gross profit, affiliated company		(6572,~~124~~333	)		36121,~~031~~098
Net cash used in operating activities		(~~922~~1,~~837~~434,680	)		(1,~~360~~911,~~652~~723	)
Cash flows from investing activities
Purchases of property and equipment		—(10,731	)		(2,669	)
Website development		—			(20,655	)
Investment in affiliated company		(27,000	)		—(42,000	)
Net cash used in investing activities		(2737,~~000~~731	)		(2365,324	)
Net decrease in cash and cash equivalents		(~~949~~1,~~837~~472,411	)		(1,~~383~~977,~~976~~047	)
Cash and cash equivalents at beginning of period		1,688,945			4,044,309
Cash and cash equivalents at end of period	$	~~739~~216,~~108~~534		$	2,~~660~~067,~~333~~262

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

HELIX BIOMEDIX, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Summary of Significant Accounting Policies

Basis of Presentation and Preparation

The accompanying unaudited condensed financial statements of Helix BioMedix, Inc. (the Company) have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial reporting and pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in annual financial statements have been condensed or omitted for interim financial information in accordance with the SEC rules and regulations for quarterly reporting. These condensed financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2011, included in the Company’s Annual Report on Form 10-K filed with the SEC on March 27, 2012.

Use of Estimates

The preparation of the Company’s financial statements in conformity with U.S. GAAP requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the dates of the balance sheets and the reported amounts of revenue and expenses during the reporting periods. In the opinion of management, the accompanying unaudited condensed financial statements include all normal recurring accruals and adjustments necessary for a fair presentation of the Company’s financial position, results of operations and cash flows for the periods indicated and to ensure that the financial statements are not misleading. Significant items subject to such estimates and assumptions include, but are not limited to, revenue recognition, impairments of long-lived assets, and valuation of receivable allowances, inventories, deferred income tax assets, stock-based compensation and option to purchase interest in affiliated company. Actual results could differ from those estimates.

The results of operations for the three and ~~six~~nine months ended ~~June~~September 30, 2012 are not necessarily indicative of the results of operations that may be achieved for the entire year ending December 31, 2012.

Recent Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2011-04 (ASU 2011-04), Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs to provide a uniform framework for fair value measurements and related disclosures between U.S. GAAP and International Financial Reporting Standards (“IFRS”). Additional disclosure requirements in the update include: (1) for Level 3 fair value measurements, quantitative information about unobservable inputs used, a description of the valuation processes used by the entity, and a qualitative discussion about the sensitivity of the measurements to changes in the unobservable inputs; (2) for an entity’s use of a nonfinancial asset that is different from the asset’s highest and best use, the reason for the difference; (3) for financial instruments not measured at fair value but for which disclosure of fair value is required, the fair value hierarchy level in which the fair value measurements were determined; and (4) the disclosure of all transfers between Level 1 and Level 2 of the fair value hierarchy. ASU 2011-04 requires prospective application for interim and annual periods beginning on or after December 15, 2011. ~~The~~Adoption ~~Company~~of ~~is currently evaluating the impact that~~ ASU 2011-04 ~~will~~did not have a material impact on ~~its~~ the Company’s financial position and results of operations.

In June 2011, the FASB issued ASU No. 2011-05 (ASU 2011-05), Comprehensive Income (Topic 220): Presentation of Comprehensive Income. ASU No. 2011-05 amends existing guidance by allowing an entity the option to present the components of net income and other comprehensive income in either a single continuous statement of comprehensive income or in two separate but consecutive statements. This ASU eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. ASU No. 2011-05 requires retrospective application and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, with early adoption permitted. As the adoption of this guidance concerns disclosures only, it ~~does~~did not have a material impact on the Company’s financial position or results of operations.

Note 2. Financing Activities

On March 9, 2012, the Company entered into an LOC Agreement (the LOC Agreement) with Frank T. Nickell, who beneficially owned approximately 40% of the Company’s outstanding common stock, pursuant to which Mr. Nickell established an irrevocable standby letter of credit by JPMorgan Chase Bank, N.A. (JPMorgan) in the amount of $2.0 million on the Company’s behalf and deposited $2.0 million with JPMorgan as collateral. Bank administrative fees for the letter of credit are expected to be 0.75% per year and borrowings under this line of credit (LOC), if not immediately repaid by the collateral, will accrue interest at a rate of 4% per year. The LOC with JPMorgan will expire on July 1, 2013 but will automatically renew until July 1, 2014 unless terminated by JPMorgan at least 14 days prior to the end of the current term, at which time the Company may draw up to the balance remaining on the LOC. Pursuant to the LOC Agreement, the Company agreed to use commercially reasonable efforts to consummate an equity financing prior to the termination date of the LOC in which it would sell and issue shares of its common stock at a price per share of at least $0.60 for aggregate proceeds of at least $3.0 million, upon consummation of which all amounts outstanding under the LOC shall be immediately repaid.

In connection with the LOC Agreement, the Company issued to Mr. Nickell a five-year fully vested warrant to purchase 2,000,000 shares of the Company’s common stock at an exercise price of $0.25 per share and agreed to reimburse Mr. Nickell for his reasonable expenses in connection with the LOC, including any interest and bank fees. As of June 30, 2012, reimbursements to Mr. Nickell had not been significant.

As the warrant was issued to obtain a letter of credit rather than in connection with a debt issuance, the Company measured this warrant at fair value on the inception date and accounted for it as equity in accordance with Accounting Standard Codification (ASC) 505-50-25, Equity-Based Payments to Non-Employees. The issuance of this warrant was equivalent to the payment of a loan commitment or access fee, and, therefore, the offset was recorded as deferred debt issuance costs to be amortized on a straight-line basis over the term of the LOC.

The Company estimated the fair value of this warrant to be $464,870 on March 9, 2012, based on the Black-Scholes option pricing model using an exercise period of 5 years, risk-free rate of 0.90%, volatility of 161%, and a trading price of the underlying shares of $0.25. For the three and six months ended June 30, 2012, the Company recorded a total of $50,123 and $62,240, respectively, of amortization expense related to the establishment of the LOC.

As of June 30, 2012, the Company had no borrowings outstanding under the LOC.

HELIX BIOMEDIX, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

Note 2. Financing Activities

On March 9, 2012, the Company entered into an LOC Agreement (the LOC Agreement) with Frank T. Nickell, who beneficially owned approximately 40% of the Company’s outstanding common stock as of March 26, 2012, pursuant to which Mr. Nickell established an irrevocable standby letter of credit (LOC) by JPMorgan Chase Bank, N.A. (JPMorgan) in the amount of $2.0 million on the Company’s behalf and deposited $2.0 million with JPMorgan as collateral. Bank administrative fees for the LOC are expected to be 0.75% per year and borrowings under this LOC, if not immediately repaid by the collateral, will accrue interest at a rate of 4% per year. The LOC will expire on July 1, 2013 but will automatically renew until July 1, 2014 unless terminated by JPMorgan at least 14 days prior to the end of the current term, at which time the Company may draw up to the balance remaining on the LOC. Pursuant to the LOC Agreement, the Company agreed to use commercially reasonable efforts to consummate an equity financing prior to the termination date of the LOC in which it would sell and issue shares of its common stock at a price per share of at least $0.60 for aggregate proceeds of at least $3.0 million, upon consummation of which all amounts outstanding under the LOC shall be immediately repaid.

In connection with the LOC Agreement, the Company issued to Mr. Nickell a five-year fully vested warrant to purchase 2,000,000 shares of the Company’s common stock at an exercise price of $0.25 per share and agreed to reimburse Mr. Nickell for his reasonable expenses in connection with the LOC, including any interest and bank fees. As of September 30, 2012, reimbursements to Mr. Nickell had not been significant.

The Company estimated the fair value of this warrant to be $464,870 on March 9, 2012, based on the Black-Scholes option pricing model using an exercise period of 5 years, risk-free rate of 0.90%, volatility of 161%, and a trading price of the underlying shares of $0.25. For the three and nine months ended September 30, 2012, the Company recorded a total of $50,673 and $112,913, respectively, of amortization expense related to the establishment of the LOC.

As of September 30, 2012, the Company had no borrowings outstanding under the LOC. On October 12, 2012, the Company drew $750,000 against the LOC for working capital purposes.

Note 3. Fair Value of Financial Instruments

The inputs used to measure fair value are summarized in the three broad levels listed below:

●• Level 1 — Quoted prices in active markets for identical securities;

●• Level 2 — Other significant observable inputs (including quoted prices in active markets for similar securities); and

●• Level 3 — Significant unobservable inputs (including the Company’s own assumptions in determining fair value of investments).

The following table sets forth by level, within the fair value hierarchy, financial assets and liabilities accounted for at fair value as of ~~June~~September 30, 2012. As required by ASC 820-10, assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

	June 30, 2012		Quoted Prices in Active Market for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Money market funds	$	435,225	$	435,225	$	—	$	—
Option to purchase interest in affiliated company	$	1,145	$	—	$	—	$	1,145

Option to Purchase Interest in Affiliated Company. The Company estimated the fair value of the option to purchase an interest in an affiliated company to be $1,145 and $12,362 at June 30, 2012 and December 31, 2011, respectively, using the multiple of earnings method based on a number of factors and assumptions regarding the affiliated company’s potential future revenue and projected earnings before interest, tax, depreciation and amortization (EBITDA). The Company recorded decreases in fair value of $4,597 and $11,217 in the accompanying condensed statement of operations for the three and six months ended June 30, 2012, respectively.

Financial Instruments. The carrying amount of the Company’s cash, accounts receivable, accounts payable, accrued compensation and benefits, and accrued expenses approximated their estimated fair values at June 30, 2012 and December 31, 2011 because of the short-term nature of these instruments.

Note 4. Inventory

Inventory consisted of the following as of June 30, 2012 and December 31, 2011:

	June 30, 2012		December 31, 2011
Work in process	$	86,090	$	156,425
Finished goods		209,494		207,444
	$	295,584	$	363,869

Note 5 Property and Equipment

Property and equipment consisted of the following as of June 30, 2012 and December 31, 2011:

	June 30, 2012			December 31, 2011
Machinery and equipment	$	520,950		$	520,950
Website development costs		63,175			63,175
Furniture and fixtures		50,441			50,441
Leasehold improvements		43,993			43,993
		678,559			678,559
Less accumulated depreciation		(663,734	)		(652,461	)
Property and equipment, net	$	14,825		$	26,098

Aggregate depreciation expense for property and equipment during the three months ended June 30, 2012 and 2011 was $5,121 and $11,205, respectively, and was $11,273 and $20,879 during the six months ended June 30, 2012 and 2011, respectively.

HELIX BIOMEDIX, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

	September 30, 2012		Quoted Prices in Active Market for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Money market funds	$	35,358	$	35,358	$	—	$	—
Option to purchase interest in affiliated company	$	—	$	—	$	—	$	—

Option to Purchase Interest in Affiliated Company. The Company estimated the fair value of the option to purchase an interest in an affiliated company to be zero and $12,362 at September 30, 2012 and December 31, 2011, respectively, using the multiple of earnings method based on a number of factors and assumptions regarding the affiliated company’s potential future revenue and projected earnings before interest, tax, depreciation and amortization (EBITDA). The Company recorded decreases in fair value of $1,145 and $12,362 in the accompanying condensed statements of operations for the three and nine months ended September 30, 2012, respectively.

Financial Instruments. The carrying amount of the Company’s cash, accounts receivable, accounts payable, accrued compensation and benefits, and accrued expenses approximated their estimated fair values at September 30, 2012 and December 31, 2011 because of the short-term nature of these instruments.

Note 4. Inventory

Inventory consisted of the following as of September 30, 2012 and December 31, 2011:

	September 30, 2012		December 31, 2011
Work in process	$	132,085	$	156,425
Finished goods		198,904		207,444
	$	330,989	$	363,869

Note 5. Property and Equipment

Property and equipment consisted of the following as of September 30, 2012 and December 31, 2011:

	September 30, 2012			December 31, 2011
Machinery and equipment	$	520,716		$	520,950
Website development costs		63,175			63,175
Furniture and fixtures		51,630			50,441
Leasehold improvements		5,519			43,993
		641,040			678,559
Less accumulated depreciation		(621,438	)		(652,461	)
Property and equipment, net	$	19,602		$	26,098

Aggregate depreciation expense for property and equipment during the three months ended September 30, 2012 and 2011 was $5,954 and $10,902, respectively, and was $17,227 and $31,781 during the nine months ended September 30, 2012 and 2011, respectively. The Company relocated to a new location in July 2012 and, as part of the move, disposed of certain fixed assets and wrote off all leasehold improvements at its former facilities, totaling approximately $48,000, which were fully depreciated. There was no gain or loss associated with these disposals and writeoffs.

Note 6. Intangible Assets

Identifiable intangible assets consisted of the following as of ~~June~~September 30, 2012 and December 31, 2011:

	June 30, 2012			December 31, 2011
	September 30, 2012			December 31, 2011
Antimicrobial technology	$	222,187		$	222,187
Licensing agreements		61,391			61,391
Patents, pending and approved		834,301			834,301
Total intangible assets		1,117,879			1,117,879
Less accumulated amortization		(1,~~005~~022,~~467~~409	)		(971,582	)
Intangible assets, net	$	~~112~~95,~~412~~470		$	146,297

Amortization expense for intangible assets was $16,942 during each of the three months ended June 30, 2012 and 2011, and was $33,885 during each of the six months ended June 30, 2012 and 2011.

Note 7. Investment in Affiliated Company

In July 2010, the Company obtained a 30% membership interest in NuGlow Cosmaceuticals, LLC (NuGlow), a direct-response company selling specialty skin care products, in exchange for an initial capital contribution of $350,000. Subsequently in September 2011, in connection with NuGlow’s additional capital raise, the Company contributed an additional $42,000 to maintain its 30% interest in NuGlow. In March 2012, the Company entered into a Second Amendment to the Amended and Restated Operating Agreement with NuGlow and consented to certain monthly payments by NuGlow. In exchange, the Company’s option to purchase the remaining interest of NuGlow (the Purchase Option) was extended from July 1, 2015 to July 1, 2017. In April 2012, in connection with NuGlow’s additional capital raise, the Company contributed an additional $27,000 to maintain its 30% interest in NuGlow and entered into a Third Amendment to the Amended and Restated Operating Agreement with NuGlow to amend the allocation and distribution of this additional capital contribution prior to other allocations or distributions thereunder.

The Company’s cumulative investment in NuGlow is accounted for as an equity investment and is adjusted at each reporting period to reflect the Company’s share of NuGlow’s net earnings, losses, contributions and any profit distributions. The Company accounts for the Purchase Option at fair value on the balance sheet with changes in value recognized in the statement of operations over the life the of the Purchase Option. Additionally, at each reporting period, the Company assesses its investment in NuGlow to determine whether any events or changes in circumstances have occurred to indicate impairment to this asset. The primary factors the Company considers in its determination are NuGlow’s financial condition and operating performance. The Company would recognize an impairment loss if there was a decline in value that was deemed other than temporary.

At December 31, 2011, the carrying value of the Company’s investment in NuGlow was $223,255. For the three and six months ended June 30, 2012, the Company recorded a loss $29,942 and $47,590, respectively, to account for its share of NuGlow’s net loss during these respective periods. The equity loss for the first six months of 2012, together with the additional investment made in April 2012, reduced the value of the Company’s investment in NuGlow to $202,665 as of June 30, 2012.

NuGlow’s condensed balance sheets at June 30, 2012 and December 31, 2011 and statements of operations for the three and six months ended June 30, 2012 and 2011 are as follows:

NuGlow’s Condensed Balance Sheets	June 30, 2012 (Unaudited)			December 31, 2011 (Unaudited)
Assets
Cash	$	14,459		$	200
Accounts receivable, net		7,013			18,276
Inventory		178,539			275,838
Prepaid expenses and other current assets		15,770			9,513
Total assets	$	215,781		$	303,827
Liabilities and members’ equity
Accounts payable and current liabilities	$	261,456		$	280,867
Members’ equity and accumulated deficit		(45,675	)		22,960
Total liabilities and members’ equity	$	215,781		$	303,827

HELIX BIOMEDIX, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
NuGlow’s Condensed Statements of Operations (Unaudited)	2012			2011			2012			2011
Revenue	$	251,741		$	311,164		$	485,112		$	491,884
Cost of goods sold		(129,923	)		(110,774	)		(228,150	)		(198,364	)
Operating expenses		(221,628	)		(397,273	)		(415,597	)		(463,762	)
Net loss	$	(99,810	)	$	(196,883	)	$	(158,635	)	$	(170,242	)

Amortization expense for intangible assets was $16,942 and $16,943 during the three months ended September 30, 2012 and 2011, respectively, and was $50,827 and $50,828 during the nine months ended September 30, 2012 and 2011, respectively.

Note 7. Investment in Affiliated Company

The Company’s cumulative investment in NuGlow is accounted for as an equity investment and is adjusted at each reporting period to reflect the Company’s share of NuGlow’s net earnings, losses, contributions and any profit distributions. The Company accounts for the Purchase Option at fair value on the balance sheet with changes in value recognized in the statement of operations over the life of the Purchase Option. Additionally, at each reporting period, the Company assesses its investment in NuGlow to determine whether any events or changes in circumstances have occurred to indicate impairment of this asset. The primary factors the Company considers in its determination are NuGlow’s financial condition and operating performance. The Company would recognize an impairment loss if there was a decline in value that was deemed other than temporary.

At December 31, 2011, the carrying value of the Company’s investment in NuGlow was $223,255. For the three and nine months ended September 30, 2012, the Company recorded its share of NuGlow’s income of $14,674 and its share of NuGlow’s loss of $32,916, respectively. The equity loss for the first nine months of 2012, together with the additional investment made in April 2012, reduced the value of the Company’s investment in NuGlow to $217,339 as of September 30, 2012.

NuGlow’s condensed balance sheets at September 30, 2012 and December 31, 2011 and statements of operations for the three and nine months ended September 30, 2012 and 2011 are as follows:

NuGlow’s Condensed Balance Sheets (Unaudited)	September 30, 2012		December 31, 2011

Assets
Cash	$	4,891	$	200
Accounts receivable, net		33,807		18,276
Inventory		162,157		275,838
Prepaid expenses and other current assets		8,169		9,513
Total assets	$	209,024	$	303,827

Liabilities and members’ equity
Accounts payable and current liabilities	$	205,785	$	280,867
Members’ equity and accumulated deficit		3,239		22,960
Total liabilities and members’ equity	$	209,024	$	303,827

	Three Months Ended September 30,						Nine Months Ended September 30,
NuGlow’s Condensed Statements of Operations (Unaudited)	2012			2011			2012			2011
Revenue	$	184,976		$	264,139		$	670,088		$	756,023
Cost of goods sold		(80,807	)		(118,660	)		(308,957	)		(317,024	)
Operating expenses		(55,255	)		(223,388	)		(470,852	)		(687,150	)
Net profit (loss)	$	48,914		$	(77,909	)	$	(109,721	)	$	(248,151	)

Note 8. Other Assets

Other assets consisted of the following as of ~~June~~September 30, 2012 and December 31, 2011:

	June 30, 2012		December 31, 2011
	September 30, 2012		December 31, 2011
Deposits	$	8,522	$	8,522
Option to purchase interest in affiliated company		~~1,145~~—		12,362
Other assets	$	98,~~667~~522	$	20,884

HELIX BIOMEDIX, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

Note 9. Deferred Gross Profit, Affiliated Company

Deferred gross profit from an affiliated company consisted of the following as of ~~June~~September 30, 2012 and December 31, 2011:

	June 30, 2012		December 31, 2011
	September 30, 2012		December 31, 2011
Deferred revenue, affiliated company	$	~~139~~122,~~720~~960	$	254,826
Deferred cost of revenue, affiliated company		7060,~~002~~451		119,984
Deferred gross profit, affiliated company	$	6962,~~718~~509	$	134,842

Note 10. Stock-Based Compensation

2011 Stock Option Plan

On February 10, 2011, the Company’s board of directors adopted, and on May 25, 2011, the Company’s stockholders approved, the Helix BioMedix, Inc. 2011 Stock Option Plan (the 2011 Plan). The 2011 Plan provides for the grant of incentive stock options to employees and non-statutory stock options to employees, ~~non-employee~~ directors and consultants. The 2011 Plan is administered by the board of directors, which has the authority to select the individuals to whom awards are to be granted, the number of awards granted, and the vesting schedule. A total of 12,000,000 shares of common stock are reserved for issuance under the 2011 Plan. Options granted under the 2011 Plan to employees generally vest over a three-year period with 1/3 of the shares vesting after one year from the date of grant and 1/36 of the shares vesting monthly thereafter. Option awards to non-employee directors may vest fully upon grant or quarterly over one year. All option awards have a maximum term of ten years and exercise prices equal to the closing market price of the Company’s common stock on the grant date.

2000 Stock Option Plan

In 2000, the Company’s stockholders approved the Helix BioMedix 2000 Stock Option Plan (the 2000 Plan). The 2000 Plan provided for the granting of incentive stock options and nonqualified stock options to employees, directors and consultants. Options granted under the 2000 Plan generally became exercisable over periods ranging from one to three years, ~~had~~have a maximum term of ten years and exercise prices equal to the closing market price of the Company’s common stock on the grant date. Effective November 6, 2010, additional option awards under the 2000 Plan were discontinued. The 2000 Plan will remain in effect as to outstanding options granted prior to November 6, 2010.

8Stock Option Activities

During the three months ended September 30, 2012, the Company did not grant any options. During the three months ended September 30, 2011, the Company granted options under the 2011 Plan to purchase an aggregate of 87,000 shares of common stock with a grant date fair value of $0.13 per share. For the nine months ended September 30, 2012 and 2011, the Company granted options under the 2011 Plan to purchase an aggregate of 1,200,000 and 257,000 shares of common stock, respectively, with a grant date fair value of $0.23 and $0.21 per share, respectively. Fair value for options granted were calculated using the Black-Scholes option pricing model with the following assumptions:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012		2011				2012				2011
Risk-free interest rate		—		0.90%	–	1.17%		0.87%	–	1.14%		0.90%	–	2.17%
Expected dividend yield		—			0				0				0
Expected terms in years		—		5.0	–	6.0		5.0	–	6.0		5.0	–	6.0
Expected volatility		—			116%			147%	–	157%		112%	–	118%

The risk-free rate is based on the implied yield available on U.S. Treasury zero–coupon issues with a remaining term equal to the expected term of options issued. The Company does not anticipate declaring dividends in the foreseeable future. For the three and nine months ended September 30, 2012 and 2011, the Company calculated expected volatility based on the annualized daily historical volatility of the Company’s stock price commensurate with the expected term of the option and other factors, including peer company data. The Company estimates the expected term as the average of the vesting period and the contractual term. The Company will continue to use this method of estimation until it has sufficient historical data to provide reasonable estimates of expected lives of stock options. The Company’s stock price volatility and option term involves management’s best estimates at that time, both of which impact the fair value of the option calculated under the Black-Scholes pricing model and, ultimately, the expense that will be recognized over the life of the option. The Company recognizes compensation expense for only the portion of options that is expected to vest. Therefore, the Company applies an estimated forfeiture rate that is derived from historical employee termination behavior. Forfeiture rates are revised in subsequent periods if actual forfeitures differ from those estimates.

HELIX BIOMEDIX, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

Stock-based ~~Option~~compensation ~~Activities~~expense was $33,171 and $14,015 for the three months ended September 30, 2012 and 2011, respectively, and was $185,109 and $132,964 for the nine months ended September 30, 2012 and 2011, respectively. For the nine months ended September 30, 2012, stock-based compensation included $92,240 of expenses related to fully vested options granted to the Company’s executives in February 2012. As of September 30, 2012, total unrecognized stock-based compensation related to non-vested stock options was approximately $180,344, which is expected to be recognized over a weighted-average period of approximately 2.1 years.

~~During~~A ~~the~~summary ~~three~~of ~~months ended June 30, 2012,~~ the Company’s ~~did~~stock-based ~~not~~compensation ~~grant~~expense ~~any~~for ~~options. For~~ the three ~~months~~and ~~ended~~nine ~~June 30, 2011, the Company granted options under the 2011 Plan to purchase an aggregate of 35,000 shares of common stock with a grant date fair value of $0.22 per share. For the six~~ months ended ~~June~~September 30, 2012 and 2011, ~~the~~is ~~Company~~as granted options under the 2011 Plan to purchase an aggregate of 1,200,000 and 170,000 shares of common stock, respectively, with a grant date fair value of $0.23 and $0.25 per share, respectively. Fair value for options granted were calculated using the Black-Scholes option pricing model with the following assumptionsfollows:

	Three Months Ended June 30,				Six months Ended June 30,
	Three Months Ended September 30,				Nine Months Ended September 30,
	2012		2011		2012			2011	~~2011~~
Risk-free interest rate		—		2.14%	0.87%	–	1.14%		2.14%	–	2.17%
Research and development	$	4,169	$	607	$	12,416		$	39,091
Expected dividend yield		—		0		0				0
Marketing and business development		6,551		4,150		65,180			12,919
Expected terms in years		—		6.0	5.0	–	6.0		5.5	–	6.0
General and administrative		22,451		9,258		107,513			80,954
Expected volatility		—		112%	147%	–	157%		112%	–	118%
Total stock-based compensation expense	$	33,171	$	14,015	$	185,109		$	132,964

~~The~~A ~~risk-free~~summary ~~rate is based on the implied yield available on U.S. Treasury zero–coupon issues with a remaining term equal to the expected term~~ of ~~options issued. The Company does not anticipate declaring dividends in~~ the ~~foreseeable future. For the three and six months ended June 30, 2012 and 2011, the~~ Company ~~calculated expected volatility based on the annualized daily historical volatility of the Company~~’s stock ~~price commensurate with the expected term of the~~ option ~~and~~activity other factors, including peer company data. The Company estimates the expected term as the average of the vesting period and the contractual term. The Company will continue to use this method of estimation until it has sufficient historical data to provide reasonable estimates of expected lives of stock options. The Company’s stock price volatility and option term involves management’s best estimates at that time, both of which impact the fair value of the option calculated under the Black-Scholes pricing model and, ultimately, the expense that will be recognized over the life of the option. The Company recognizes compensation expense for ~~only~~ the ~~portion~~nine ofmonths ~~options~~ended ~~that~~September ~~is expected to vest. Therefore~~30, ~~the~~2012 ~~Company applies an estimated forfeiture rate that~~ is ~~derived~~presented ~~from historical employee termination behavior. Forfeiture rates are revised~~ in ~~subsequent~~the ~~periods~~following ~~if actual forfeitures differ from those estimates.~~table:

Stock-based compensation expense was $33,333 and $67,821 for the three months ended June 30, 2012 and 2011, respectively. For the three months ended June 30, 2011, general and administrative expenses included $52,478 of stock compensation expense related to the modification of options held by three members of the board of directors who were not reelected in May 2011. Stock-based compensation expense for the six months ended June 30, 2012 and 2011 was $151,938 and $118,949, respectively. For the six months ended June 30, 2012, stock-based compensation included $92,240 of expenses related to fully vested options granted to the Company’s executives in February 2012. As of June 30, 2012, total unrecognized stock-based compensation related to non-vested stock options was approximately $213,515, which is expected to be recognized over a weighted-average period of approximately 2.2 years.

	Shares Subject to Options			Weighted Average Exercise Price per Share		Weighted Average Remaining Contractual Life (Years)		Aggregate Intrinsic Value
Outstanding, December 31, 2011		3,264,207		$	0.65
Granted		1,200,000		$	0.25
Exercised		—			—
Forfeited		—			—
Expired		(540,000	)	$	0.91
Outstanding, September 30, 2012		3,924,207		$	0.49		5.87	$	7,960
Exercisable, September 30, 2012		2,955,982		$	0.57		4.78	$	4,391

AThe ~~summary~~aggregate ofintrinsic value in the table above is based on the Company’s closing stock ~~compensation~~price ~~expense~~of ~~for~~$0.23 on September 30, 2012. The intrinsic value is calculated as the ~~three~~difference between the closing stock price and ~~six~~the ~~months~~exercise ~~ended~~price ~~June~~of the stock options as of September 30, 2012, ~~and~~had ~~2011~~all isof asthe ~~follows:~~options with exercise prices less than $0.23 been exercised on that date.

	Three Months Ended June 30,				Six Months Ended June 30,
	2012		2011		2012		2011
Research and development	$	4,123	$	382	$	8,247	$	38,484
Marketing and business development		7,003		4,380		58,629		8,769
General and administrative		22,207		63,059		85,062		71,696
Total stock-based compensation	$	33,333	$	67,821	$	151,938	$	118,949

As of September 30, 2012, there were 12,000,000 shares of common stock reserved for issuance pursuant to the 2011 Plan, of which 10,393,000 shares remained available for future grants. Additional information regarding options outstanding as of September 30, 2012, is as follows:

A summary of the Company’s stock option activity for the six months ended June 30, 2012 is presented in the following table:

			Options Outstanding						Options Exercisable
Range of Exercise Prices			Shares		Weighted Average Remaining Contractual Life (Years)		Weighted Average Exercise Price		Shares		Weighted Average Exercise Price
$0.15	–	$0.37		2,223,957		7.99	$	0.28		1,255,732	$	0.28
$0.40	–	$0.57		795,000		4.04	$	0.49		795,000	$	0.49
$0.70	–	$1.00		724,000		2.35	$	0.88		724,000	$	0.88
$1.20	–	$1.80		181,250		2.03	$	1.56		181,250	$	1.56
$0.15	–	$1.80		3,924,207		5.87	$	0.49		2,955,982	$	0.57

	Shares Subject to Options			Weighted Average Exercise Price per Share		Weighted Average Remaining Contractual Life (Years)		Aggregate Intrinsic Value
Outstanding, December 31, 2011		3,264,207		$	0.65
Granted		1,200,000		$	0.25
Exercised		—			—
Forfeited		—			—
Expired		(395,000	)	$	0.87
Outstanding, June 30, 2012		4,069,207		$	0.51		5.91	$	274,644
Exercisable, June 30, 2012		3,009,677		$	0.60		4.68	$	128,033

HELIX BIOMEDIX, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

The aggregate intrinsic value in the table above is based on the Company’s closing stock price of $0.40 on June 30, 2012. The intrinsic value is calculated as the difference between the closing stock price and the exercise price of the stock options as of June 30, 2012, had all of the options with exercise prices less than $0.40 been exercised on that date.

As of June 30, 2012, there were 12,000,000 shares of common stock reserved for issuance pursuant to the 2011 Plan, of which 10,393,000 shares remained available for future grants. Additional information regarding options outstanding as of June 30, 2012, is as follows:

			Options Outstanding						Options Exercisable
Range of Exercise Prices			Shares		Weighted Average Remaining Contractual Life (Years)		Weighted Average Exercise Price		Shares		Weighted Average Exercise Price
$0.15	–	$0.37		2,223,957		8.24	$	0.28		1,164,427	$	0.29
$0.40	–	$0.57		795,000		4.29	$	0.49		795,000	$	0.49
$0.70	–	$1.00		869,000		2.18	$	0.90		869,000	$	0.90
$1.20	–	$1.80		181,250		2.28	$	1.56		181,250	$	1.56
$0.15	–	$1.80		4,069,207		5.91	$	0.51		3,009,677	$	0.60

Note 11. Net Loss per Share

Net loss per share has been computed by dividing net loss by 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. 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:

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

2012

2011

2012

2011

Weighted average outstanding options

43,~~069~~974,~~207~~642

3,~~908~~368,~~305~~522

3,~~887~~916,~~366~~671

3,~~905~~724,~~988~~864

Weighted average outstanding warrants

32,~~013~~904,~~643~~769

21,~~331~~793,~~917~~530

2,~~309~~509,~~978~~937

2,~~412~~203,~~427~~861

Note 12. Concentration of Risks

The Company maintains a portion of its cash balance in one financial institution, which at times may exceed federally insured limits. As of ~~June~~September 30, 2012, the Company maintained approximately $~~435~~35,000 at major financial institutions in money market accounts insured by the Federal Deposit Insurance Corporation up to $250,000 per account or the Securities Investor Protection Corporation up to $500,000 per account. To date, the Company has not experienced any losses in its money market ~~account~~accounts.

A significant portion of the Company’s revenue is derived from a concentrated number of customers. The following individual customers accounted for 10% or more of revenue for the three and ~~six~~nine months ended ~~June~~September 30, 2012 and 2011:

	Three Months Ended June 30,						Six Months Ended June 30,
	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Customer A		2623	%		1326	%		2122	%		2122	%
Customer B		3351	%		2936	%		4345	%		3233	%
Customer C		—			27—	%		—			1813	%
Customer D		2611	%		2730	%		2018	%		2325	%

Note 13. ~~Liquidity~~Other ~~and Capital Resources~~Transactions

~~For~~On September 11, 2012, the ~~six~~Company ~~months~~announced ~~ended~~its ~~June~~plan ~~30,~~for ~~2012~~the voluntary suspension of its public company reporting obligations, ~~the~~which ~~Company~~would ~~incurred~~be accomplished through a ~~net~~proposed ~~loss~~1–for–300 reverse stock split of ~~$1,250,137~~the Company’s common stock. AtIf ~~June~~the ~~30,~~proposed ~~2012~~reverse stock split is approved and consummated, each share of the Company’s ~~had~~common stock held of record by a stockholder owning fewer than 300 shares immediately prior to the effective time of the reverse stock split will be converted into the right to receive $~~739,108~~0.60 in cash ~~and~~per ~~cash~~pre-split ~~equivalents~~share of common stock, subject to any applicable U.S. ~~For~~federal, ~~the~~state ~~six~~and ~~months~~local ~~ended~~withholding ~~June~~tax, and without interest. However, as of September 30, 2012, ~~cash~~there ~~used~~was inno ~~operations~~certainty ~~was~~that ~~$922~~such proposed transaction would be approved and consummated,~~837~~ and ~~cash~~therefore ~~used~~no inamounts ~~investing~~have ~~activities~~been ~~was~~recorded ~~$27,000~~in ~~which~~connection ~~reflected~~with the ~~additional~~fractional ~~investment~~share inbuy ~~NuGlow~~back.

10Note 14. Liquidity and Capital Resources

For the nine months ended September 30, 2012, the Company incurred a net loss of $2,035,321. At September 30, 2012, the Company had $216,534 in cash and cash equivalents. For the nine months ended September 30, 2012, cash used in operations was $1,434,680 and cash used in investing activities was $37,731, which included the additional investment in NuGlow of $27,000 in April 2012 and aggregate purchases of assets of $10,731. On October 12, 2012, the Company drew $750,000 against the LOC with JPMorgan for working capital purposes.

HELIX BIOMEDIX, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS – (Continued)

(Unaudited)

Based on the current status of the Company’s operating and product commercialization development plans, the Company estimates that its existing cash and cash equivalents, together with the remaining balance available under the LOC with JPMorgan, will be sufficient to fund its operations, continue with work towards its prescription (Rx) product development and support the continued expansion of its consumer products program through the remainder of 2012. The Company will need substantial additional capital in order to maintain the current level of operations, continue commercialization of its technology and advance its pharmaceutical programs beyond 2012. In addition, the Company anticipates incurring significant expenses in connection with its proposed “going private” transaction. Accordingly, the Company will need to draw down onadditional amounts against the LOC and/or raise additional funding, which may include debt and/or equity financing. However, there is no assurance that additional funding will be available on favorable terms, if at all. If the Company is unable to obtain the necessary additional funding, the Company may not be able to satisfy its existing obligations or may be required to severely reduce the scope of its operations, which would significantly impede its ability to proceed with current operational plans and could lead to the discontinuation of its business.

The amount of capital the Company will need in the future will depend on many factors, including the amount of revenue generated by the Company, capital expenditures and hiring plans to accommodate future growth, research and development plans, future demand for the Company’s products and technology, and general economic conditions.

1112

ITEM 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Forward-Looking Statements

Our disclosure and analysis in this Quarterly Report on Form 10-Q contain forward-looking statements, which provide our current expectations or forecasts of future events. Forward-looking statements include, without limitation:

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

●• statements about our product development schedule;

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

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

●• other statements that are not historical facts.

Words such as “may,” “should,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “could,” “future,” “target,” and similar expressions may identify forward-looking statements, but the absence of these words does not necessarily mean that a statement is not forward-looking. Our actual results could differ materially from those anticipated in the forward-looking statements for many reasons, including the factors described in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2011. You should carefully consider these factors in evaluating our forward-looking statements.

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

This information should be read in conjunction with the unaudited condensed financial statements and the notes included in Item 1 of Part I of this Quarterly Report and the audited financial statements and notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2011.

Business Overview

We are a biopharmaceutical company with an extensive proprietary library of structurally diverse bioactive peptides and patents covering hundreds of thousands of peptide sequences. Our mission is to enrich clinical practice and the patient/consumer experience by developing and commercializing topically applied products which offer the benefits of our advanced bioactive small molecule peptide technology. Our vision is to be recognized as the world leader in the identification, qualification and commercialization of natural and synthetic peptides.

Our business strategy is to develop our peptide and small molecule portfolio to derive revenue from a broad base of opportunities including licensing to third parties rights to use select proprietary peptides in specific fields of application and commercializing our own branded products. Over the longer term, we intend to pursue applications for products using our technology in medical devices and pharmaceutical preparations. We have developed numerous peptides with unique sequences for use in the following two areas of application:

●• Consumer skin care products — we have developed a range of peptides and small molecule technologies capable of improving different aspects of the skin’s appearance, texture, tone and barrier function and are marketing these peptides as innovative ingredients for cosmetic use; and

●• Prescription (Rx) products — certain of our peptides have demonstrated promising results in the areas of infection control, wound healing and immune modulation and are being developed for Rx applications.

Our Rx focus is on prescription-only topical preparations that would be subject to a shorter regulatory approval process under Section 510(k) of the Food, Drug and Cosmetic Act (510(k) devices). We continue to explore possible sources of funding to support further in-house development work on our pharmaceutical programs, which we believe will enhance potential partnership opportunities with pharmaceutical companies.

We generate revenue through license agreements with skin care product manufacturers as well as by selling proprietary branded skin care products through distribution channels and through our dedicated e-commerce websites.

1213

Critical Accounting Policies and Estimates

The preparation of our financial statements in conformity with United States Generally Accepted Accounting Principles (U.S. GAAP) requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosure of contingent assets and liabilities as of the dates of the balance sheets and the reported amounts of revenue and expenses during the reporting period. Actual results may differ from those estimates and judgments under different assumptions and conditions. We have discussed the critical accounting policies and estimates that we used in the preparation of our financial statements in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of the Operations – Critical Accounting Policies and Estimates,” in our Annual Report on Form 10-K for the year ended December 31, 2011 filed with the SEC on March 27, 2012. There have been no material changes to those critical accounting policies or the underlying accounting estimates or judgments, other than the fact that we have used similar concepts, judgments and estimates underlying our policy related to stock options issued to employees and with respect to warrants issued in connection with ~~our~~the ~~line~~LOC ofAgreement ~~credit~~we ~~agreement~~entered into on March 9, 2012, as described below.

~~Second~~Proposed ~~Quarter Overview~~Transaction

~~Our~~On ~~total~~September ~~revenue~~11, 2012, we announced our plan for the ~~three~~voluntary ~~months~~suspension ~~ended~~of ~~June~~our 30public company reporting obligations, ~~2012~~which ~~decreased~~would bybe ~~32.~~accomplished through a proposed 1%–for–300 ~~compared~~reverse stock split of our common stock. We concurrently filed a Schedule 13E-3 and preliminary proxy statement with respect to the ~~same~~proposed ~~period~~reverse instock ~~the~~split, ~~prior~~which ~~year~~are subject to SEC review. STOCKHOLDERS ARE URGED TO READ CAREFULLY AND IN THEIR ENTIRETY THE PRELIMINARY PROXY STATEMENT AND SCHEDULE 13E-3 FILED WITH THE SEC, ~~driven~~AND, ~~primarily~~WHEN byTHEY BECOME AVAILABLE, THE DEFINITIVE PROXY STATEMENT AND OTHER RELEVANT MATERIALS, BECAUSE THEY DO AND WILL CONTAIN IMPORTANT INFORMATION ABOUT US AND THE PROPOSED REVERSE STOCK SPLIT. The definitive proxy statement and Schedule 13E-3 will be mailed to stockholders as of a ~~decline~~record indate ~~sales~~to be established for voting on the proposed transaction. Stockholders may obtain free copies of ~~private~~our preliminary proxy statement, Schedule 13E-~~labeled~~3, ~~products~~definitive toproxy ~~international~~statement ~~distributors~~(when asavailable) ~~well~~and asour other SEC filings electronically by accessing the SEC’s home page at http://www.sec.gov. Copies can also be obtained, free of charge, upon written request to anHelix ~~affiliated~~BioMedix, ~~company~~Inc., Attn: R. Stephen Beatty, President and Chief Executive Officer.

~~Operating~~If ~~expenses~~the ~~increased~~proposed ~~0.9%~~reverse ~~during~~stock ~~the~~split ~~three~~is ~~months~~approved ~~ended~~and ~~June 30~~consummated, ~~2012,~~each asshare ~~compared~~of our common stock held of record by a stockholder owning fewer than 300 shares immediately prior to the ~~same~~effective ~~period~~time inof ~~2011,~~the ~~principally~~reverse ~~attributable~~stock split will be converted into the right to ~~higher~~receive ~~spending~~$0.60 in ~~marketing~~cash ~~activities~~per ~~and~~pre-split ~~legal~~share ~~fees~~of ~~related~~common stock, subject to ~~patents~~any applicable U.S. federal, state and ~~other~~local ~~general~~withholding ~~corporate~~tax, ~~matters~~and without interest. However, ~~partially~~as ~~offset~~of bySeptember a30, ~~decrease~~2012, there was no certainty that such proposed transaction would be approved and consummated, and therefore no amounts have been recorded in ~~stock-based~~connection ~~compensation~~with ~~expenses~~the fractional share buy back.

~~Our~~Third ~~net~~Quarter ~~loss for the three months ended June 30, 2012 increased by 6.9% compared to the same period in 2011, due primarily to lower revenue and gross profit.~~Overview

AsOur oftotal ~~June~~revenue ~~30,~~for ~~2012,~~the ~~our~~three ~~accumulated~~months ~~deficit~~ended ~~was~~September ~~approximately $47~~30,~~307,000.~~ We2012 ~~may~~increased ~~continue~~by to18.8% ~~incur~~compared ~~substantial~~to ~~operating losses over~~ the ~~next~~same ~~several~~period ~~years~~in ~~based on~~ the ~~estimated~~prior ~~costs~~year, ~~associated~~driven ~~with~~primarily ~~our~~by ~~current~~stronger ~~level~~royalty ~~of operations and continued commercialization of our technology being greater than our anticipated~~ revenue.

Operating expenses increased by 26.1% during the three months ended September 30, 2012, as compared to the same period in 2011, principally attributable to higher spending in marketing activities, external studies, patent maintenance expenses and professional fees related to our proposed reverse stock split and “going private” transaction (see Note 13 of our Notes to Condensed Financial Statements).

Our net loss for the three months ended September 30, 2012 increased by 29.7% compared to the same period in 2011, due primarily to higher operating expenses incurred.

As of September 30, 2012, our accumulated deficit was approximately $48.1 million. We may continue to incur substantial operating losses over the next several years based on the estimated costs associated with our current level of operations and continued commercialization of our technology being greater than our anticipated revenue.

Results of Operations

Revenue

Revenue in the three and ~~six~~nine months ended ~~June~~September 30, 2012 and 2011 consisted primarily of license fees, peptide sales and consumer product sales as summarized in the table below.

	Three Months Ended June 30,							Six Months Ended June 30,
	Three Months Ended September 30,							Nine Months Ended September 30,
	2012		2011		Change			2012		2011		Change
License fees	$	~~173~~240,~~453~~550	$	~~164~~176,~~975~~922		536.10	%	$	~~488~~729,~~545~~095	$	~~336~~513,~~400~~322		4542.20	%
Peptide and consumer product sales		~~175~~176,~~794~~669		~~340~~100,~~349~~884		~~(48~~75.31	)%		~~428~~605,~~521~~190		~~475~~576,~~281~~165		(95.80	)%
Consumer product sales to affiliated company		~~121~~51,~~275~~852		~~187~~116,~~779~~901		(3555.46	)%		~~233~~285,~~878~~730		~~239~~355,~~050~~951		(219.27	)%
Total revenue	$	~~470~~469,~~522~~071	$	~~693~~394,~~103~~707		~~(32~~18.18	)%	$	1,~~150~~620,~~944~~015	$	1,~~050~~445,~~731~~438		912.51	%

Total revenue ~~decreased~~increased by approximately $~~223~~74,000, or 3218.18%, for the three months ended ~~June~~September 30, 2012 compared to the same period in the previous year, and increased by approximately $~~100~~175,000, or 912.51%, for the first ~~six~~nine months of 2012 compared to the first ~~six~~nine months of 2011. License fees, which are derived from royalty arrangements, increased by approximately $864,000, or 536.10%, for the ~~second~~third quarter of 2012 compared to the same period in 2011, and increased by $~~152~~216,000, or 4542.20%, for the first ~~six~~nine months of 2012 compared to the same period in 2011. The ~~fluctuations~~increase in our royalty revenue for the three and ~~six~~nine months ended ~~June~~September 30, 2012 reflected ~~the~~higher ~~variation in levels of~~ product sales from our licensees.

Peptide and consumer product sales ~~decreased~~increased by approximately $~~165~~76,000, or 4875.31%, for the ~~second~~third quarter of 2012 compared to the same period in the previous year and by approximately $4729,000, or 95.80%, for the first ~~six~~nine months of 2012 compared to the same period in the previous year. ~~The~~Peptide ~~variability in peptide~~ sales, ~~which~~grew ~~decreased~~ by 1068.8% for the ~~second~~third quarter of 2012 and ~~increased~~ by 1427.31% for the first ~~six~~nine months of 2012, in each case as compared to the same respective periods in the prior year, ~~resulted~~stemming from ~~fluctuations~~higher ofdemand ~~sales~~from to our bulk ingredient customers. The ~~decreases~~increase in consumer product sales of 7393.79% for the third quarter of 2012 and 35decrease of 22.67% for the ~~three~~nine ~~and six~~ months ended ~~June~~September 30, 2012, ~~respectively,~~in each case as compared to the same respective periods in the prior year, resulted primarily from ~~lower~~fluctuations in sales to both our international and domestic distributors.

Consumer product sales to affiliated company, which consisted of products sold under private labels to NuGlow Cosmaceuticals, LLC (NuGlow), decreased by approximately $6765,000, or 3555.46%, for the ~~second~~third quarter of 2012 and by $570,000, or 219.27%, for the first ~~six~~nine months of 2012 compared to the respective periods in the previous year. As NuGlow is an affiliated company, our revenue to NuGlow is recognized based on NuGlow’s sales to third-party customers or NuGlow’s usage of products for marketing purposes.

Cost of Revenue and Gross Margin

Cost of revenue consists of cost of peptides and materials associated with consumer products sold. Gross profit is the difference between revenue and cost of revenue, and gross margin is gross profit expressed as a percentage of total revenue. Revenue mix affects our gross margin because our margins from license fees are higher than our margins from peptide and consumer products sales.

Cost of revenue and gross profit for the three and ~~six~~nine months ended ~~June~~September 30, 2012 and 2011 are summarized in the table below.

	Three Months Ended June 30,									Six Months Ended June 30,
	Three Months Ended September 30,									Nine Months Ended September 30,
	2012			2011			Change			2012			2011			Change
Cost of peptides and consumer product sales	$	~~109~~113,~~363~~407		$	~~247~~70,~~698~~834			~~(55~~60.81	)%	$	~~267~~380,~~136~~543		$	~~338~~409,~~995~~829			(217.21	)%
Percentage of total revenue		2324.2	%		3517.79	%					23.25	%		3228.34	%
Cost of consumer product sales to affiliated company		5521,~~094~~832			~~104~~56,~~995~~961			(4761.57	)%		~~106~~128,~~852~~684			~~134~~191,~~525~~486			(2032.68	)%
Percentage of total revenue		114.7	%		1514.14	%					97.39	%		1213.82	%
Total cost of revenue	$	~~164~~135,~~457~~239		$	~~352~~127,~~693~~795			~~(53~~5.48	)%	$	~~373~~509,~~988~~227		$	~~473~~601,~~520~~315			(2115.03	)%
Gross profit	$	~~306~~333,~~065~~832		$	~~340~~266,~~410~~912			~~(10~~25.1	)%	$	~~776~~1,~~956~~110,788		$	~~577~~844,~~211~~123			3431.6	%

Cost of peptide and consumer product sales ~~decreased~~increased by approximately $~~138~~43,000, or 5560.81%, for the three months ended ~~June~~September 30, 2012 compared to the three months ended ~~June~~September 30, 2011, and decreased by approximately $7229,000, or 217.21%, for the first ~~six~~nine months of 2012 compared to the same period in the previous year. Cost of peptides and consumer product sales for the three and ~~six~~nine months ended ~~June~~September 30, 2012 ~~declined~~rose at ~~higher~~different rates compared to the ~~decreases~~increases in peptide and consumer product revenue during those periods due primarily to the product mix. Cost of consumer product sales to an affiliated company decreased by approximately $5035,000, or 4761.57%, for the three months ended ~~June~~September 30, 2012 compared to the three months ended ~~June~~September 30, 2011, and by approximately $2863,000, or 2032.68%, for the first ~~six~~nine months of 2012 compared to the same period in the previous year, due primarily to a ~~drop~~decline in NuGlow’s sales volume to third-party customers and use of our products for marketing purposes.

Gross margin on peptide and consumer product sales was 37.8% for the three months ended June 30, 2012 compared to 27.2% for the three months ended June 30, 2011, and increased to 37.7% for the six months ended June 30, 2012 compared to 28.7% for the same period in the prior year. The higher gross margin related to peptide and consumer product sales was due primarily to the product mix and customer mix. Consumer product sales typically generate a higher gross margin than peptide sales. Gross margin on sales of consumer products to an affiliated company also grew to 54.6% during the second quarter of 2012 compared to 44.1% for the second quarter of 2011, and increased to 54.3% for the first six months of 2012 compared to 43.7% for the same period in the previous year. The improved gross margin was influenced principally by product mix.15

Gross margin on peptide and consumer product sales was 35.8% for the three months ended September 30, 2012 compared to 29.8% for the three months ended September 30, 2011, and increased to 37.1% for the nine months ended September 30, 2012 compared to 28.9% for the same period in the prior year. The higher gross margin related to peptide and consumer product sales was due primarily to the product mix and customer mix. Consumer product sales typically generate a higher gross margin than peptide sales. Gross margin on sales of consumer products to an affiliated company also increased to 57.9% for the third quarter of 2012 compared to 51.3% for the third quarter of 2011, and increased to 55.0% for the first nine months of 2012 compared to 46.2% for the same period in the previous year. The improved gross margin was influenced principally by product mix.

Research and Development

Research and development (R&D) expenses consist primarily of compensation and benefit expenses, stock-based compensation expense, cost of external studies and trials, and contract and other outside service fees related to our R&D activities. R&D expenses for the three and ~~six~~nine months ended ~~June~~September 30, 2012 and 2011 are summarized in the table below.

	Three Months Ended June 30,									Six Months Ended June 30,
	Three Months Ended September 30,									Nine Months Ended September 30,
	2012			2011			Change			2012			2011			Change
Research and development	$	87133,~~942~~009		$	90109,~~747~~221			(321.18	)%	$	~~175~~308,~~027~~036		$	~~315~~425,~~910~~131			(4427.65	)%
Percentage of total revenue		1828.74	%		1327.17	%					1519.20	%		3029.14	%

R&D expenses ~~decreased~~increased by approximately $324,000, or 321.18%, for the three months ended ~~June~~September 30, 2012 compared to the three months ended ~~June~~September 30, 2011, and decreased by approximately $~~141~~117,000, or 4427.65%, for the ~~six~~nine months ended ~~June~~September 30, 2012 compared to the same period in 2011. The ~~decrease~~increase in R&D expenses for the three ~~and six~~ months ended ~~June~~ September 30, 2012 was primarily attributable to ~~lower~~higher spending onin external trials and studies ~~and~~while the decrease in R&D expenses for the nine months ended September 30, 2012 was principally due to reduced expenses related to external studies and employee compensation resulting from the departure of our former Vice President and Chief Scientific Officer in February 2011. For the remainder of 2012, we anticipate R&D expenses to ~~increase~~be ~~compared~~consistent towith the level experienced in the first ~~half~~nine ofmonths ~~2012 as we expect to incur additional spending on external testing and studies related to the product development~~ of ~~our consumer products and Rx programs~~2012.

Marketing and Business Development

Marketing and business development (M&BD) expenses consist primarily of compensation and benefit expenses, stock-based compensation expense, consulting fees and various marketing costs. M&BD expenses for the three and ~~six~~nine months ended ~~June~~September 30, 2012 and 2011 are summarized in the table below.

	Three Months Ended September 30,									Nine Months Ended September 30,
	2012			2011			Change			2012			2011			Change
Marketing and business development	$	302,040		$	225,732			33.8	%	$	874,791		$	674,187			29.8	%
Percentage of total revenue		64.4	%		57.2	%					54.0	%		46.6	%

	Three Months Ended June 30,									Six Months Ended June 30,
	2012			2011			Change			2012			2011			Change
Marketing and business development	$	269,645		$	244,018			10.5	%	$	572,751		$	448,455			27.7	%
Percentage of total revenue		57.3	%		35.2	%					49.8	%		42.7	%

M&BD expenses increased by approximately $76,000, or 33.8%, for the three months ended September 30, 2012 compared to the three months ended September 30, 2011, and by approximately $201,000, or 29.8%, for the nine months ended September 30, 2012 compared to the same period in 2011. The increase for the three and nine months ended September 30, 2012 was primarily driven by higher advertising expense, consulting fees and stock-based compensation expenses. For the remainder of 2012, we anticipate M&BD expenses to be consistent with the level experienced in the first nine months of 2012 in absolute dollars. We expect that the quarterly stock-based compensation expense will be reduced but that we will continue to incur expenses in market testing and advertising to promote our products.

M&BD expenses increased by approximately $26,000, or 10.5%, for the three months ended June 30, 2012 compared to the three months ended June 30, 2011, and by approximately $124,000, or 27.7%, for the six months ended June 30, 2012 compared to the same period in 2011. The increase for the three and six months ended June 30, 2012 was primarily driven by higher advertising expense and stock-based compensation expense. For the remainder of 2012, we anticipate M&BD expenses to be consistent with the level experienced in the first half of 2012 in absolute dollars. We expect that stock-based compensation expense will be reduced but that we will incur higher expenses on advertising, market testing and promotions for our current products as well as for new skin care products we plan to introduce in 201216

General and Administrative

General and administrative (G&A) expenses consist primarily of salaries and benefit expenses, stock-based compensation expense, consulting fees and general corporate expenditures. G&A expenses for the three and ~~six~~nine months ended ~~June~~September 30, 2012 and 2011 are summarized in the table below.

	Three Months Ended June 30,									Six Months Ended June 30,
	Three Months Ended September 30,									Nine Months Ended September 30,
	2012			2011			Change			2012			2011			Change
General and administrative	$	~~329~~418,~~235~~868		$	~~374~~327,~~889~~162			~~(12~~28.20	)%	$	~~713~~1,~~811~~132,679		$	~~716~~1,~~681~~043,843			(08.45	)%
Percentage of total revenue		7089.03	%		5482.19	%					6269.09	%		6872.2	%

G&A expenses ~~decreased~~increased by approximately $4692,000, or 1228.20%, for the three months ended ~~June~~September 30, 2012 compared to the three months ended ~~June~~September 30, 2011, and by approximately $389,000, or 08.45%, for the ~~six~~nine months ended ~~June~~September 30, 2012 compared to the same period in 2011. The ~~decrease~~increase for the three and nine months ended ~~June~~September 30, 2012 was primarily due to ahigher ~~one-time~~patent ~~charge~~maintenance tofees and stock-based compensation inexpense, ~~the~~as ~~second~~well ~~quarter~~as ofadditional ~~2011~~expenses incurred related to ~~option~~our ~~grant~~proposed ~~modifications~~reverse ~~for~~stock ~~three~~split ~~board~~and ~~members~~“going ~~who~~private” ~~were not reelected in May 2011~~transaction. ~~The decrease for the six months ended June 30, 2012 was due primarily to lower spending in general corporate expenses, partially offset by an increase in stock-based compensation expense.~~ For the remainder of 2012, we anticipate G&A expenses to increase from the level experienced in the first ~~half~~nine months of 2012 as we expect to incur higher ~~consulting~~professional fees and general corporate expenses.

Accounting, Legal and Professional Fees

Accounting, legal and professional fees for the three and ~~six~~nine months ended ~~June~~September 30, 2012 and 2011 are summarized in the table below.

	Three Months Ended June 30,									Six Months Ended June 30,
	Three Months Ended September 30,									Nine Months Ended September 30,
	2012			2011			Change			2012			2011			Change
Accounting, legal and professional fees	$	~~181~~205,~~201~~192		$	~~144~~168,~~196~~043			2522.71	%	$	~~400~~605,~~423~~615		$	~~309~~477,~~633~~676			2926.38	%
Percentage of total revenue		3843.57	%		2042.86	%					3437.84	%		2933.50	%

Accounting, legal and professional fees increased by approximately $37,000, or 2522.71%, for the three months ended ~~June~~September 30, 2012 compared to the three months ended ~~June~~September 30, 2011, and by approximately $91128,000, or 2926.38%, for the ~~six~~nine months ended ~~June~~September 30, 2012 compared to the same period in 2011. The increase for the three and nine months ended ~~June~~September 30, 2012 was due primarily to higher legal fees associated with ~~patent~~our ~~protection~~proposed reverse stock split and ~~general~~“going ~~corporate~~private” ~~matters~~transaction. The increase for the ~~six~~nine months ended ~~June~~September 30, 2012 ~~was~~also ~~principally~~included ~~attributable~~higher ~~to increases in accounting fees and~~ legal fees associated with patent protection~~, partially offset by a decrease in legal fees related to general corporate matters~~.

For the remainder of 2012, we anticipate accounting, legal and professional fees will increase significantly as we expect to incur a much higher level of spending on legal fees related to the protection of our intellectual property and increased professional fees associated with our proposed reverse stock split and “going private” transaction.

Depreciation and Amortization

Depreciation and amortization expenses for the three and ~~six~~nine months ended ~~June~~September 30, 2012 and 2011 are summarized in the table below.

	Three Months Ended June 30,									Six Months Ended June 30,
	Three Months Ended September 30,									Nine Months Ended September 30,
	2012			2011			Change			2012			2011			Change
Depreciation and amortization	$	22,~~063~~896		$	2827,~~147~~845			(2117.68	)%	$	4568,~~158~~054		$	5482,~~764~~609			(17.56	)%
Percentage of total revenue		4.79	%		47.1	%					34.92	%		5.27	%

Depreciation and amortization expenses decreased by approximately $5,000, or 17.8%, for the three months ended September 30, 2012 compared to the three months ended September 30, 2011, and by approximately $15,000, or 17.6%, for the nine months ended September 30, 2012 compared to the same period in 2011. The decrease for the three and nine months ended September 30, 2012 was primarily due to reduced depreciation from assets becoming fully depreciated. For the remainder of 2012, we expect depreciation and amortization expenses to be consistent with the levels experienced in the first nine months of 2012.

Depreciation and amortization expenses decreased by approximately $6,000, or 21.6%, for the three months ended June 30, 2012 compared to the three months ended June 30, 2011, and by approximately $10,000, or 17.5%, for the six months ended June 30, 2012 compared to the same period in 2011. The decrease for the three and six months ended June 30, 2012 was primarily due to reduced depreciation from assets becoming fully depreciated. For the remainder of 2012, we expect depreciation and amortization expenses to be consistent with the levels experienced in the first half of 2012.

Other Income (Expense), Net

Other income (expense), net consists of interest income, ~~interest~~amortization ~~expense~~of ~~related~~debt toissuance ~~our~~costs, ~~outstanding~~equity ~~convertible~~in ~~notes~~gain ~~payable~~(loss) of NuGlow and ~~accretion~~change ofin ~~discount~~fair onvalue of the ~~convertible~~purchase ~~notes~~option ~~payable~~of interest in NuGlow.

Other income (expense), net for the three and ~~six~~nine months ended ~~June~~September 30, 2012 and 2011 is summarized in the table below.

	Three Months Ended June 30,									Six Months Ended June 30,
	Three Months Ended September 30,									Nine Months Ended September 30,
	2012			2011			Change			2012			2011			Change
Interest income	$	~~384~~133		$	~~928~~704			(5881.61	)%	$	1,~~124~~257		$	2,~~132~~836			(4755.36	)%
Amortization of debt issuance costs		(50,~~123~~673	)		—		NM				(62112,~~240~~913	)		—		NM
Equity in loss of affiliated company		(29,942	)		(59,065	)		(49.3	)%		(47,590	)		(51,073	)		(6.8	)%
Equity in gain (loss) of affiliated company		14,674			(23,373	)		162.8	%		(32,916	)		(74,446	)		(55.8	)%
Change in fair value of option to purchase interest in affiliated company		(41,~~597~~145	)		~~(25~~8,~~151~~143	)		(81114.71	)%		(1112,~~217~~362	)		(179,~~436~~293	)		(3533.70	)%
Total other income (expense), net	$	(8437,~~278~~011	)	$	(8314,~~288~~526	)		1(154.28	)%	$	(~~119~~156,~~923~~934	)	$	(6680,~~377~~903	)		80(94.70	)%

Interest Income. Interest income for the three months ended June 30, 2012 and 2011 was not significant due to our low cash balance and prevailing interest rates. Interest income for the six months ended June 30, 2012 decreased by $1,000 compared to the same period in 2011, due primarily to a lower average cash balance on hand. For the remainder of 2012, we expect interest income to be lower than the level experienced in the first half of 2012 due to our decreasing balance in cash and cash equivalents. ____________________________

~~Amortization~~NM of– ~~Debt~~Not Issuance Costs. For the three and six months ended June 30, 2012, we recorded expenses of approximately $50,000 and $62,000, respectively, related to the letter of credit established on our behalf by our largest stockholder on March 9, 2012. These amounts represented the amortization of the fair value of the warrants issued in connection with the letter of credit for the periods presented.meaningful

Equity in Loss of Affiliated Company. The equity in loss of affiliated company represented our share of NuGlow’s net loss for the reported periods. Equity in loss of affiliated company decreased by approximately $29,000, or 49.3%, for the three months ended June 30, 2012 compared to the three months ended June 30, 2011, and by approximately $3,000, or 6.8%, for the six months ended June 30, 2012 compared to the same period in 2011.17

~~Change~~Interest inIncome. ~~Value~~Interest ofincome ~~Option~~for the three months ended September 30, 2012 and 2011 was not significant due to ~~Purchase~~our ~~Interest~~low incash ~~Affiliated~~balance ~~Company~~and prevailing interest rates. ~~For~~Interest ~~the~~income ~~three~~for ~~and~~the ~~six~~nine months ended ~~June~~September 30, 2012, wedecreased ~~recorded~~by a$2,000 ~~loss~~compared ofto ~~approximately~~the ~~$5,000~~same ~~and~~period ~~$11,000,~~in ~~respectively~~2011, ~~compared~~due primarily to a ~~loss~~lower ofaverage ~~approximately~~cash ~~$25,000~~balance ~~and~~on ~~$17,000~~hand. ~~for~~For the ~~three~~remainder ~~and~~of ~~six~~2012, ~~months~~we ~~ended~~expect ~~June~~interest ~~30,~~income ~~2011,~~to ~~respectively,~~be ~~which~~lower ~~reflected~~than the ~~change~~level experienced in ~~fair~~the ~~value~~first nine months of ~~the~~2012 ~~option~~due to ~~purchase~~our ~~the~~decreasing ~~remainder~~balance of ~~NuGlow~~cash ~~under~~and ~~certain~~cash ~~circumstances~~equivalents.

Amortization of Debt Issuance Costs. For the three and nine months ended September 30, 2012, we recorded expenses of approximately $51,000 and $113,000, respectively, related to the letter of credit established on our behalf by our largest stockholder on March 9, 2012. These amounts represented the amortization of the fair value of the warrants issued in connection with the letter of credit for the periods presented.

Equity in Loss of Affiliated Company. The equity in gain/loss of affiliated company represented our 30% share of NuGlow’s net income or loss for the reported periods. For the third quarter of 2012, we recorded a gain in equity of an affiliated company of approximately $15,000 compared to a loss of $23,000 for the same period in 2011. For the nine months ended September 30, 2012, equity in loss of affiliated company decreased by approximately $42,000, or 55.8%, compared to the same period in 2011.

Change in Value of Option to Purchase Interest in Affiliated Company. For the three months ended September 30, 2012, we recorded a loss of approximately $1,000 related to the change in fair value of the option to purchase the remainder of NuGlow under certain circumstances, compared to a gain of $8,000 for the three months ended September 30, 2011. For the nine months ended September of 2012, we recorded a loss of approximately $12,000 related to the change in fair value of the option to purchase the remainder of NuGlow, compared to a loss of approximately $9,000 for the nine months ended in September 30, 2011.

Liquidity and Capital Resources

Since inception, we have financed our operations primarily through the private sale of debt and equity securities. Our principal sources of liquidity are cash and cash equivalents. As of ~~June~~September 30, 2012, we had approximately $~~739~~217,000 in cash and cash equivalents, compared to approximately $1.7 million in cash and cash equivalents at December 31, 2011. The decrease in cash and cash equivalents from December 31, 2011 was primarily attributable to cash used in operations, ~~and~~ investment in an affiliated company and purchases of capital assets.

Cash Flows from Operating Activities

Cash used in operating activities for the ~~six~~nine months ended ~~June~~September 30, 2012 and 2011 was approximately $~~923,000~~1.43 million and $1.91 million,~~361,000,~~ respectively, and in each case derived primarily from the net loss for the period plus the net effect of non-cash expenses. Our operating cash flows are also influenced by our working capital needs to support growth, in particular fluctuations in inventory, accounts receivable, accounts payable and other current assets and liabilities. We continue to experience negative cash flows from operating activities due to the cash requirements to maintain our current level of operations while supporting activities to expand our product lines and revenue base.

For the ~~six~~nine months ended ~~June~~September 30, 2012, changes in accounts receivable, inventory, accounts payable and deferred revenue provided approximately $~~186~~279,000 of cash, while changes in ~~prepaid expenses and other assets, accounts payable,~~ accrued expenses and deferred gross profit from an affiliated company used approximately $~~177~~90,000 of cash during that period. ~~During~~For the ~~six~~nine months ended ~~June~~September 30, 2011, changes in accounts receivable, inventory, ~~prepaid~~accounts ~~expenses~~payable and ~~other assets, and~~ accrued expenses used approximately $~~372~~416,000 of cash, while changes in ~~accounts~~prepaid ~~payable~~expenses, accrued compensation and benefits, and deferred gross profit from an affiliated company provided approximately $~~103~~146,000 of cash during that period.

Cash Flows from Investing Activities

For the ~~six~~nine months ended ~~June~~September 30, 2012, cash used in investing activities was approximately $2738,000, which reflected ~~the~~an additional investment in NuGlow and purchases of capital assets, while cash used ofin ~~approximately~~investing ~~$23,000~~activities during the same period in 2011 of approximately $65,000 was ~~due~~related to an additional capital contribution in NuGlow, payments for website development costs and purchases of capital assets.

Cash Flows from Financing Activities

For the ~~six~~nine months ended ~~June~~September 30, 2012 and 2011, there was no cash provided by financing activities.

On March 9, 2012, we entered into an LOC Agreement (the LOC Agreement) with Frank T. Nickell, who beneficially owned approximately 40% of our outstanding common stock as of March 26, 2012, pursuant to which Mr. Nickell established an irrevocable standby letter of credit (LOC) by JPMorgan Chase Bank, N.A. (JPMorgan) in the amount of $2.0 million on our behalf and deposited $2.0 million with JPMorgan as collateral. Bank administrative fees for the ~~letter~~LOC ~~of credit~~ are expected to be 0.75% per year and borrowings under this ~~line of credit (~~LOC), if not immediately repaid by the collateral, will accrue interest at a rate of 4% per year. The LOC will expire on July 1, 2013 but will automatically renew until July 1, 2014 unless terminated by JPMorgan at least 14 days prior to the end of the current term, at which time we may draw up to the balance remaining on the LOC. Pursuant to the LOC Agreement, we agreed to use commercially reasonable efforts to consummate an equity financing prior to the termination date of the LOC in which we would sell and issue shares of our common stock at a price per share of at least $0.60 for aggregate proceeds of at least $3.0 million, upon consummation of which all amounts outstanding under the LOC shall be immediately repaid. In connection with the LOC Agreement, we issued to Mr. Nickell a five-year fully vested warrant to purchase 2,000,000 shares of our common stock at an exercise price of $0.25 per share and agreed to reimburse Mr. Nickell for his reasonable expenses in connection with the LOC, including any interest and bank fees. As of ~~June~~September 30, 2012, we had no borrowings outstanding under the LOC and reimbursements to Mr. Nickell had not been significant. On October 15, 2012, we drew $750,000 against the LOC for working capital purposes.

Based on the current status of our operating and product commercialization development plans, we estimate that our existing cash and cash equivalents, together with the LOC with JPMorgan, will be sufficient to fund our operations, continue with work towards our Rx product development and support the continued expansion of our consumer program through the remainder of 2012. We will need substantial additional capital in order to maintain the current level of operations, continue commercialization of our technology and advance our pharmaceutical programs beyond 2012. Accordingly, we will need to draw down on the LOC and/or raise additional funding, which may include debt and/or equity financing. However, there is no assurance that additional funding will be available on favorable terms, if at all. If we are unable to obtain the necessary additional funding, we may not be able to satisfy our existing obligations or may be required to severely reduce the scope of our operations, which would significantly impede our ability to proceed with current operational plans and could lead to the discontinuation of our business.18

Based on the current status of our operating and product commercialization development plans, we estimate that our existing cash and cash equivalents, together with the remaining balance available under the LOC with JPMorgan, will be sufficient to fund our operations, continue with work towards our Rx product development and support the continued expansion of our consumer products program through the remainder of 2012. We will need substantial additional capital in order to maintain the current level of operations, continue commercialization of our technology and advance our pharmaceutical programs beyond 2012. In addition, we anticipate incurring significant expenses in connection with our proposed “going private” transaction (see Note 13 of our Notes to Condensed Financial Statements). Accordingly, we will need to draw down additional amounts against the LOC and/or raise additional funding, which may include debt and/or equity financing. However, there is no assurance that additional funding will be available on favorable terms, if at all. If we are unable to obtain the necessary additional funding, we may not be able to satisfy our existing obligations or may be required to severely reduce the scope of our operations, which would significantly impede our ability to proceed with current operational plans and could lead to the discontinuation of our business.

The amount of capital we will need in the future will depend on many factors, including the amount of revenue we generate, capital expenditures and hiring plans to accommodate future growth, research and development plans, future demand for our products and technology, and general economic conditions.

Contractual Obligations

The following table summarizes our contractual obligations and the effect such obligations are expected to have on liquidity in future periods as of ~~June~~September 30, 2012:

Contractual Obligations	Remainder of 2012		2013 through 2014		2015 through 2016		2017 through 2018		Total
Operating lease	$	3919,~~528~~764	$	156,306	$	172,816	$	136,140	$	~~504~~485,~~790~~026
Purchase order commitments (1)		~~187~~17,~~012~~720		—		—		—		~~187~~17,~~012~~720
Total contractual obligations	$	~~226~~37,~~540~~484	$	156,306	$	172,816	$	136,140	$	~~691~~502,~~802~~746

(1)	Purchase order commitments primarily consist of open orders for inventory.

Recent Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2011-04 (ASU 2011-04), Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs to provide a uniform framework for fair value measurements and related disclosures between U.S. GAAP and International Financial Reporting Standards (“IFRS”). Additional disclosure requirements in the update include: (1) for Level 3 fair value measurements, quantitative information about unobservable inputs used, a description of the valuation processes used by the entity, and a qualitative discussion about the sensitivity of the measurements to changes in the unobservable inputs; (2) for an entity’s use of a nonfinancial asset that is different from the asset’s highest and best use, the reason for the difference; (3) for financial instruments not measured at fair value but for which disclosure of fair value is required, the fair value hierarchy level in which the fair value measurements were determined; and (4) the disclosure of all transfers between Level 1 and Level 2 of the fair value hierarchy. ASU 2011-04 requires prospective application for interim and annual periods beginning on or after December 15, 2011. WeThe ~~are~~adoption ~~currently~~of ~~evaluating the impact that~~ ASU 2011-04 ~~will~~did not have on a material impact on our financial position and results of operations.

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ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.

Not applicable.

ITEM 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Acting Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Based on that evaluation, the Chief Executive Officer and Acting Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Acting Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Change in Internal Control over Financial Reporting

No change in our internal control over financial reporting occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION

ITEM 1A. Risk Factors.

There are numerous factors that affect our business and results of operations, many of which are beyond our control. Please see our Annual Report on Form 10-K for the year ended December 31, 2011 for a description of some of the risks and uncertainties that we face. There have been no material changes in our risk factors from those described in that Annual Report, except as set forth below. If any of those risks were to occur, our business, operating results and financial condition could be seriously harmed.

20We have incurred significant expenses in connection with our proposed reverse stock split and “going private” transaction, and if the costs of the proposed transaction increase, it could have a material adverse effect on our business and operations and we may not be able to proceed with the transaction as proposed, if at all.

We have incurred significant expenses in connection with our proposed reverse stock split and “going private” transaction, and the anticipated costs may increase before the transaction is completed, which will reduce the amount of capital resources otherwise available to conduct our business operations and grow our business. In addition, the actual costs of the transaction may exceed the cost estimates on which we relied in determining to proceed with the proposed transaction, in part because of the greater number of shares which we may have to cash-out in connection with the transaction. To the extent that the costs of the proposed transaction are too excessive, we may not be able to proceed with the transaction or we may be required to proceed with the transaction on different terms and conditions than originally proposed.

ITEM 6.

Exhibits.

			Incorporated by Reference
Exhibit Number	Exhibit Description	Filed Herewith	Form	Period Ending	Exhibit	Filing Date
2.1	Proposal for Approval of Reincorporation of Helix BioMedix, Inc., a Colorado corporation, from Colorado to Delaware		10-KSB	12/31/00	2	4/16/01
3.1	Certificate of Ownership and Merger of Helix BioMedix, Inc. a Delaware corporation and Helix BioMedix, Inc., a Louisiana corporation		10-KSB/A	12/31/02	3.1	4/30/03
3.2	Certificate of Incorporation of Helix BioMedix, Inc.		10-KSB/A	12/31/00	3-A	5/18/01
3.3	Certificate of Amendment to the Certificate of Incorporation of Helix BioMedix, Inc.		10-KSB/A	12/31/02	3.3	4/30/03
3.4	Bylaws of Helix BioMedix, Inc.		10-KSB/A	12/31/00	3-B	5/18/01
4.1	Rights Agreement dated August 21, 2003		10-KSB	12/31/03	10.27	3/26/04
4.2	Acceptance and Acknowledgement of Appointment dated January 4, 2004		10-KSB	12/31/03	10.28	3/26/04
10.11(c)	Third Amendment dated April 9, 2012 to Amended and Restated Operating Agreement of NuGlow Cosmaceuticals, LLC among the Company, NuGlow Cosmaceuticals, LLC and Camden Street Partners, LLC	X
31.1	Certification of the Company’s Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934	X
31.2	Certification of the Company’s Acting Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934	X
32.1	Certification of the Company’s Chief Executive Officer pursuant to 18 U.S.C. Section 1350	X
32.2	Certification of the Company’s Acting Chief Financial Officer pursuant to 18 U.S.C. Section 1350	X
101.INS*	XBRL Instance Document	X
101.SCH*	XBRL Taxonomy Extension Schema Document	X
101.CAL*	XBRL Taxonomy Extension Calculation Linkbase Document	X
101.DEF*	XBRL Taxonomy Extension Definition Linkbase Document	X
101.LAB*	XBRL Taxonomy Extension Label Linkbase Document	X
101.PRE*	XBRL Taxonomy Extension Presentation Linkbase Document	X

___________

* XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

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SIGNATURES

Pursuant to the requirements 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.

~~August~~November 28, 2012

	HELIX BIOMEDIX, INC. (Registrant)

	By:	/s/ R. Stephen Beatty
	R. Stephen Beatty
	President and Chief Executive Officer and
	Acting Chief Financial Officer
	(Principal Executive Officer and
	Acting Principal Financial Officer)

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Filing Compare · HELIX BIOMEDIX INC