Forward-Looking Statements

Our disclosure and analysis in this Quarterly Report 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

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 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, 2008.

Business Overview

Helix BioMedix, Inc. is a biopharmaceutical company with an extensive 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. We have a proprietary library containing a broad array of these synthetic bioactive peptides. Our business strategy is to develop and out-license to third parties the rights to use these proprietary peptides in diverse fields of application and to commercialize our own branded products. We have developed numerous peptides with unique sequences in the following two broad areas of application:

• Consumer (skin care) - we have developed a wide range of peptides 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.

• Prescription products (Rx) - 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 objective is also to increase our focus on our pharmaceutical drug programs and initiate clinical development of our lead drug candidates. Due to the pre-clinical stage of development of each of our peptide sequences in our pharmaceutical drug programs, we are unable to estimate the total costs and timing to complete development, and we do not separately track these costs due to the cost burden associated with accounting at such levels of detail and our limited resources. However, the majority of our research and development spending is on the two areas of application discussed above. Further development of our pharmaceutical drug programs will require additional funding to support these programs.

We generate revenue through license agreements with skin care product manufacturers and through collaborative development agreements, as well as by selling proprietary branded skin care products through distribution channels in the United States.

We make available on our website at www.helixbiomedix.com, free of charge, copies of our Annual Reports on Forms 10-K and 10-KSB, Quarterly Reports on Forms 10-Q and 10-QSB, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after filing or furnishing the information to the SEC. Information contained on our website is not part of, and is not incorporated into, this Quarterly Report. Our filings with the SEC are also available to the public at the SEC's website at www.sec.gov.

Critical Accounting Policies and Estimates

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

Revenue Recognition. We derive our revenue from technology licenses, joint development agreements, sales of peptides and consumer products, and administrative services provided to a related party. Revenue under technology licenses may include up-front payments and royalties from third-party product manufacturing and sales. Revenue associated with joint development agreements primarily consists of payments for completion of development milestones. We account for revenue recognition of our agreements with multiple elements by determining whether each element can be separated into a unit of accounting based on the following criteria: (1) the delivered items have value to the customer on a stand-alone basis; (2) there is objective and reliable evidence of fair value of the undelivered items; and (3) the arrangement includes a right of return relative to the delivered item(s) or delivery or performance of the undelivered item(s) that is probable and within our control. If there is objective and reliable evidence of fair value for all units of accounting in an arrangement, we allocate revenue among the separate units of accounting based on their estimated fair values. If the criteria are not met, elements included in an arrangement are accounted for as a single unit of accounting and revenue is deferred until the period in which the final deliverable is provided. When the period of deferral cannot be specifically identified from the agreement, we estimate the period based upon other factors contained within the agreement. Our management continually reviews these estimates, which could result in a change in the deferral period and the timing and the amount of revenue recognized.

• Licensing Fees. We recognize up-front payments when persuasive evidence of an agreement exists, delivery has occurred or services have been performed, the price is fixed and determinable and collection is reasonably assured. We recognize royalty revenue in the period the royalty is earned based on reports received from licensees or other information available through the date of issuance of the financial statements. Our management must occasionally make estimates on certain royalty revenue amounts due to the timing of securing information from our customers. While our management believes it can make reliable estimates for certain royalty revenue, these estimates are inherently subjective. Accordingly, our estimates of royalty revenue could differ from actual events, thus impacting our financial position or results of operations.

• Development Fees. We record revenue associated with performance milestones as earned when we have completed the specific milestones as defined in the joint development agreements and there are no uncertainties or contingencies regarding collection of the related payment. Payments received for which the earnings process is not complete are recorded as deferred revenue.

• Peptide and Consumer Product Sales. We recognize revenue from sales of our skin care products and peptides when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable and collection is reasonably assured.

• Administrative Services Revenue, Related Party. Our administrative services revenue consists of fees received from DermaVentures, LLC (DermaVentures), a related party, for marketing campaign costs associated with DermaVentures' product line and other out-of-pocket expenses we incurred on DermaVentures' behalf. Administrative services revenue is invoiced to DermaVentures at or near cost and is recorded as earned when services have been rendered, no obligations remain outstanding and collection is reasonably assured. Fees received from DermaVentures are reported as administrative services revenue, while related costs are included in cost of revenue in the statements of operations.

On September 18, 2009, we entered into an amendment to the DermaVentures, LLC Operating Agreement, Management Agreement and License Agreement with DermaVentures and RMS Group, LLC (the DV Amendment) pursuant to which the parties agreed, among other things, to terminate the Management Services Agreement dated effective as of April 18, 2007. As a result, we have no further management or administrative responsibilities related to DermaVentures from which our administrative services revenue was derived (see Note 14 of our Notes to Condensed Financial Statements).

Research and Development Costs. Our research and development costs are expensed as incurred. Research and development expenses include, but are not limited to, payroll and benefit expenses, lab supplies and expenses, and external trials and studies. In instances where we enter into agreements with third parties for research and development activities, which may include personnel costs, supplies and other costs associated with such collaborative agreements, we expense these items as incurred.

Capitalization of Patent Costs. We capitalize the third-party costs associated with patents that have been issued. Our policy for the capitalization of patent costs is to begin amortization of these costs at the time they are incurred. We periodically review our patent portfolio to determine whether any such costs have been impaired and are no longer being used in our research and development activities. To the extent we no longer use certain patents, the associated costs will be written-off at that time.

Valuation of Stock Options Granted to Employees, Officers and Non-Employee Directors for Board Service. The fair value of each option granted to employees, officers and non-employee directors for board service is estimated on the date of grant using the Black-Scholes option valuation model. The assumptions used to calculate the fair value of options granted are evaluated and revised, as necessary, to reflect market conditions and our experience. Options granted are valued using the single option valuation approach, and the resulting expense is recognized using the cliff, straight-line attribution method, consistent with the single option valuation approach. Compensation expense is recognized only for those options expected to vest.

Valuation of Warrants and Non-Employee Stock Options Unrelated to Convertible Note Payable, Related Party, Issued in 2008. Our warrants and non-employee stock options are required to be classified as permanent equity, temporary equity or as assets or liabilities. In general, warrants and non-employee stock options that either require net-cash settlement or are presumed to require net-cash settlement are recorded as assets and liabilities at fair value, and warrants that require settlement in shares are recorded as equity instruments.

We estimate the fair value of these derivative liabilities and equity instruments using a Black-Scholes model and use estimates for an expected dividend yield, a risk-free interest rate, and expected volatility. At each reporting period, as long as the derivative liabilities were outstanding and there was a potential for an insufficient number of authorized shares available to settle these instruments, they were revalued and any difference from the previous valuation date would be recognized as a change in fair value in our statement of operations.

Valuation of Warrant Related to Convertible Note Payable, Related Party, Issued in 2008. In connection with the convertible note payable to a related party issued in February 2008 and amended in June 2008, we issued warrants to purchase up to 750,000 shares of our common stock at an exercise price of $1.00 per share. We accounted for these warrants as an equity instrument.

Valuation of Warrants Related to Convertible Notes Payable Issued in 2009. In connection with the convertible notes payable issued in the first quarter of 2009, we issued warrants to purchase up to 868,500 shares of our common stock at an exercise price of $1.00 per share. Because these warrants are legally detachable and are separately exercisable from the debt and its related embedded options, they are considered to be freestanding financial instruments from these convertible notes payable. We accounted for these warrants as an equity instrument and allocated the value of the warrants based on a relative-fair-value basis between the convertible notes payable issued and the warrants.

Valuation of Conversion Features Related to Convertible Notes Payable, Including Related Party. In connection with the issuance of the convertible note payable to a related party in February 2008, we were required to separately account for the fair value of our right to automatically convert the note payable to equity at the price of equity securities issued in any sale of shares of our equity securities that raised an aggregate amount of at least $5,000,000 on or before June 29, 2008 (see Note 2 of our Notes to Condensed Financial Statements).

On June 27, 2008, we entered into an amendment to the convertible note payable which effectively extinguished the original convertible note payable, including its embedded derivative instruments. The June 27, 2008 fair value of the separately-accounted-for embedded derivative instruments was credited to additional paid-in capital as part of recording the capital transaction resulting from the extinguishment of the original convertible note payable.

The conversion rights of the amended convertible note payable issued in June 2008 and the convertible notes payable issued in the first quarter of 2009 are not required to be accounted for separately.

Valuation of Call Option Related to Convertible Note Payable, Related Party, Issued in 2008. The convertible note payable issued on February 14, 2008 and subsequently amended on June 27, 2008 includes a call option which gives the holder the right to demand repayment in the case of default. We are required to separately account for the fair value of the embedded call option. We determined that the call option related to this convertible note payable had no value at either the issuance date or any of the subsequent reporting dates based on an analysis of the right and the likelihood of its exercise.

Valuation of Prepayment Right Related to Convertible Note Payable, Related Party, Issued in 2008. The convertible note payable issued on February 14, 2008 and subsequently amended on June 27, 2008 allows us to prepay the unpaid balance of the convertible note and accrued interest at any time and without penalty. We are required to separately account for the fair value of the prepayment right. We determined that this prepayment right had no value at either the issuance date or any of the subsequent reporting dates based on an analysis of the right and the likelihood of its exercise.

Results of Operations

As of September 30, 2009, our accumulated deficit was approximately $34,958,400. We may continue to incur substantial operating losses over the next several years, due principally to the costs associated with our current level of operations, continued commercialization of our technology, and initiation of our Rx programs. For the three and nine months ended September 30, 2009, our total revenue decreased by approximately $58,700, or 37.5%, and approximately $160,600, or 33.2%, respectively, compared to the same periods in 2008. The decreased revenue for the three and nine months ended September 30, 2009 was due primarily to decreases in royalties earned from licensees and development fees. Our net loss for the three months ended September 30, 2009 was approximately $932,800, or $0.04 per share, reflecting an increase of approximately $165,100 from a net loss of approximately $767,700, or $0.03 per share, for the same period in 2008. The increase in net loss for the third quarter of 2009 compared to the same period in 2008 was due to a decrease in gross profit, coupled with increases in operating expenses, interest expense and accretion of debt discount.

Our net loss for the nine months ended September 30, 2009 was approximately $2,876,000, or $0.11 per share, representing a decrease of $615,000 from a net loss of approximately $3,491,000, or $0.14 per share, for the same period in 2008. The decrease in net loss for the first nine months of 2009 compared to the same period in 2008 was primarily attributable to decreases in operating expenses and non-operating expenses, partially offset by a decrease in gross profit.

Revenue

Revenue in the three and nine months ended September 30, 2009 and 2008 consisted
primarily of license fees, development fees, peptide sales, consumer product
sales and administrative services revenue as summarized in the table below.



                                          Three Months Ended                    Nine Months Ended
                                            September 30,                         September 30,
                                           2009        2008      Change         2009        2008      Change
License and development fees            $   28,979   $  56,859    (49.0 )%    $  93,551   $ 263,251    (64.5 )%
Peptide and consumer product sales          68,867      89,131    (22.7 )%      209,837     188,582     11.3 %
Administrative services revenue,
related party                                   -       10,549        *          20,196      32,321    (37.5 )%

Total revenue                           $   97,846   $ 156,539    (37.5 )%    $ 323,584   $ 484,154    (33.2 )%

* Percentage not meaningful

Revenue, excluding administrative services revenue from DermaVentures, a related party, decreased by approximately $48,100, or 33.0%, in the three months ended September 30, 2009 from approximately $146,000 in the three months ended September 30, 2008, and decreased by approximately $148,400, or 32.9%, in the nine months ended September 30, 2009 from approximately $451,800 in the nine months ended September 30, 2008.

For the three months ended September 30, 2009, license and development fees decreased by approximately $27,900, or 49.0%, compared to the three months ended September 30, 2008. For the nine months ended September 30, 2009, license and development fees decreased by approximately $169,700, or 64.5%, compared to the same period in 2008. The decrease in license and development fees for both the three and nine months ended September 30, 2009 reflected decreases in both development fees and royalty revenue. The decrease in development fees in the three and nine months ended September 30, 2009 was attributable to decreased projects obtained from development engagements. In addition, the decrease in development fees for the nine months ended September 30, 2009 was partially due to the fact that the nine months ended September 30, 2008 included from the recognition of $130,000 of deferred revenue associated with a certain 2007 transaction. The decrease in royalties was due primarily to the decreased volume of the manufacturing and sales of products containing our peptides by third-party licensees.

For the three months ended September 30, 2009, peptide and consumer product sales decreased by approximately $20,300, or 22.7%, compared to the three months ended September 30, 2008, due primarily to a decrease in peptide sales. For the nine months ended September 30, 2009, peptide and consumer product sales increased by approximately $21,300, or 11.3%, compared to the same period in 2008. The increase in peptide and consumer product sales during the nine months ended September 30, 2009 was primarily due to sales of our consumer products. Sales of consumer products for the three and nine months ended September 30, 2009 were approximately 4.7% and 5.7% of total revenue for the respective periods. As these new products were launched in the fourth quarter of 2008, we expect consumer product sales will increase in the future.

Administrative services revenue, which consisted of revenue received from DermaVentures, a related party, for marketing costs associated with DermaVentures' product line and other out-of-pocket expenses we incurred on DermaVentures' behalf, was typically invoiced to DermaVentures at or near cost and therefore had no material net effect on our gross profit or net loss. During the third quarter of 2009, we terminated our Management Services Agreement with DermaVentures by mutual agreement and, as a result, we did not derive any administrative services revenue for the three months ended September 30, 2009, compared to approximately $10,500 for the same period in 2008. For the nine months ended September 30, 2009, administrative services revenue decreased by approximately $12,100, or 37.5%, compared to the same period in 2008, principally due to the termination of the Management Services Agreement in the third quarter of 2009.

Cost of Revenue and Gross Margin

Cost of revenue consists of (1) cost of licensing and development fees, which includes cost of materials associated with development activities as well as professional fees incurred related to development agreements, (2) cost of peptides and materials associated with consumer products, and (3) cost of administrative services revenue from DermaVentures, a related party, which includes primarily marketing campaign costs associated with DermaVentures' product line and other out-of-pocket expenses we

incurred on DermaVentures' behalf. 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 and development fees are higher than our margins from consumer product sales, peptide sales and administrative services revenue.

Cost of revenue and gross margin for the three and nine months ended September 30, 2009 and 2008 are summarized in the table below.

                                        Three Months Ended                         Nine Months Ended
                                           September 30,                             September 30,
                                        2009           2008        Change         2009           2008         Change
Cost of licensing and development
fees                                         -       $     30           *       $      -       $  38,811           *
Percentage of total revenue                  -              *                          -             8.0 %
Percentage of related revenue                -              *                          -            14.7 %
Cost of peptides and consumer
product sales                         $  52,751      $ 88,062       (40.1 )%    $ 174,332      $ 163,531         6.6 %
Percentage of total revenue                53.9 %        56.3 %                      53.9 %         33.8 %
Percentage of related revenue              76.6 %        98.8 %                      83.1 %         86.7 %
Cost of administrative services
revenue, related party                $      -       $ 10,549           *       $  19,800      $  32,321       (38.7 )%
Percentage of total revenue                  -            6.7 %                       6.1 %          6.7 %
Percentage of related revenue                -          100.0 %                      98.0 %        100.0 %

* Percentage not meaningful

For the three months ended September 30, 2009 and 2008, cost of licensing and development fees was immaterial. For the nine months ended September 30, 2009, cost of licensing and development fees was $0 compared to approximately $38,800 for the same period in 2008. Cost of licensing and development fees for the nine months ended September 30, 2008 consisted primarily of professional fees for services performed in connection with a joint development agreement.

For the three months ended September 30, 2009, cost of peptide and consumer product sales decreased by approximately $35,300, or 40.1%, compared to the three months ended September 30, 2008. Peptides and consumer products sold in the third quarter of 2009 resulted in 23.4% margin compared to 1.2% margin for the same period in 2008. For the nine months ended September 30, 2009, cost of peptide and consumer product sales increased by approximately $10,800, or 6.6%, compared to the same period in 2008. For the first nine months of 2009, peptides and consumer products sold resulted in 16.9% margin compared to 13.3% margin for the same period in 2008. The fluctuation in gross margin related to peptide and consumer product sales for the three and nine months ended September 30, 2009 was due primarily to the customer mix and product mix associated with such sales. Sales of our consumer products generally deliver a higher gross margin compared to sales of peptides; however, as our consumer products are still fairly new in the market, the sale volume for these products has not reached a level that would make a significant contribution to our total gross margin.

For the three months ended September 30, 2009, cost of administrative services revenue was $0 compared to approximately $10,500 for the three months ended September 30, 2008. For the nine months ended September 30, 2009, cost of administrative services revenue decreased by approximately $12,500, or 38.7%, compared to the same period in 2008. The decrease in cost of administrative services revenue for the three and nine months ended September 30, 2009 reflected the termination of our services to DermaVentures during the third quarter of 2009. As administrative services revenue was invoiced at or near cost, the margin related to this revenue was immaterial for all periods presented.

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