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NERIUM BIOTECHNOLOGY INC - 10-Q - Management's Interim Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) Forward-looking Statements Statements made in this Form 10-Q that are not historical or current facts are "forward-looking statements" made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements often can be identified by the use of terms such as "may," "will," "expect," "believe," "anticipate," "estimate," "approximate," or "continue," or the negative thereof. We intend that such forward-looking statements be subject to the safe harbor processes for such statements. We wish to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. Any forward-looking statements represent management's best judgment as to what may occur in the future. However, forward-looking statements are subject to risks, uncertainties and important factors beyond our control that could cause actual results and events to differ materially from historical results of operations and events and those presently anticipated or projected. Except as required by law, we disclaim any obligation subsequently to revise any forward-looking statements to reflect events or circumstances after the date of such statement or to reflect the occurrence of anticipated or unanticipated events. All references herein to the terms "we," "our," "us," "Nerium," and "the Company" refer to Nerium Biotechnology, Inc. and its subsidiaries. Overview Nerium Biotechnology, Inc. ("Nerium" or the "Company") is a biotechnology company involved in the development of Nerium oleander-based products for the treatment of certain forms of proliferative diseases and viral infections. We are also involved in the development of a skincare/cosmetic line of products based on the patent pending aloe-oleander extract. Our existing product line includes Anvirzel™, HIviral, HEP-viral, and NeriumAD. Nerium was incorporated pursuant to the Canada Business Corporations Act on June 1, 2006 to acquire Phoenix Biotech, LTD (Phoenix BVI), a British Virgin Islands corporation, and its five majority-owned Latin American subsidiaries, from Phoenix Biotechnology, Inc., a Texas corporation (Phoenix US). Nerium currently owns, indirectly, four Latin American corporations, collectively known as "The Salud Integral Group", located in Honduras and El Salvador, which integrate the manufacturing, marketing, and sales of our treatment products, while the cosmetic line is being developed by the wholly owned subsidiary, Nerium SkinCare, Inc. Nerium utilizes a proprietary method to grind the Nerium oleander plant cuttings into the biomass used for manufacturing of its products. Drogueria Salud Integral, one of the subsidiaries within the "Salud Integral Group", has a manufacturing facility in Tegucigalpa, Honduras, that operates under Honduran "current Good Manufacturing Practices" (cGMP) standards and is inspected by the Honduran health ministry to confirm compliance with such standards. Drogueria Salud Integral is located inside the pharmaceutical manufacturing plant of Francelia Laboratories, whose cGMP clean room is fully operational and is currently producing our existing line of treatment products. Through its Latin American subsidiaries, our drug products are available to international patients who import them under personal use exemption rules of their respective countries. Anvirzel™, our lead product, is intended to treat certain forms of cancer, and has successfully completed a United States Food and Drug Administration Phase I Study which was limited to establishing safety and dosage. The study was conducted at the Cleveland Clinic in Cleveland, Ohio. In addition to Anvirzel™, Nerium currently has three other marketable products, HIviral, HEP-viral and NeriumAD. HIviral is for use as an adjuvant therapy in the treatment of HIV/AIDS, HEP-viral is for use as an adjuvant therapy in the treatment of hepatitis C and NeriumAD is a skin cream for age-defying treatment. NeriumAD is manufactured by a third party company in Texas and marketed by Nerium International, LLC ("NI") based in Dallas, TX. 18 -------------------------------------------------------------------------------- Index Nerium Biotechnology, Inc. -------------------------------------------------------------------------------- Anvirzel™ is available as a prescription drug through the Salud Integral Clinic in Honduras. While it has historically been administered by intramuscular injection (IM), many users are now administering it sublingually ("SL") by placing drops under the tongue. The SL method of administration may soon be clinically tested as we received, on April 29, 2012, an approval from the US FDA to commence a Phase 1 study of the combination of Carboplatin, Docetaxel and increasing doses of sublingual Anvirzel in advanced non-small cell lung cancer patients at MD Anderson Cancer Center in Houston, Texas. A successful Phase 1 may result in a better understanding of the bioavailability of Anvirzel when administered sublingually. The success of the study could also lead to a multi-site Phase II clinical study. Anvirzel is currently provided in a 10ml vial as 150mg of freeze-dried oleander extract powder that is reconstituted with 10ml of water. In the proposed clinical study, Sublingual Anvirzel will be provided in a 30ml vial as 300mg of freeze-dried oleander extract powder. We believe that in the future Anvirzel may be provided in a quick dissolving strip or tablet which can be placed under the tongue in order to make administration more user friendly than it presently is. HIviral and HEP-viral are provided in a 30ml vial as 300mg of freeze-dried oleander extract powder that is reconstituted with 20ml of water. No further development of either product is planned until after completion of the proposed cancer study. HIviral is for use as an adjuvant therapy in the treatment of HIV/AIDS and HEP-viral is for use as an adjuvant therapy in the treatment of hepatitis C. NeriumAD is a cosmetic product designed for use on wrinkled and/or aging skin. It has been developed by Nerium SkinCare, Inc. It is anticipated that additional skincare type products will be developed. Results of Operations - Three months Ended March 31, 2012 Compared to March 31, 2011 Sales for the three months ended March 31, 2012 increased by $565,192, or 461.2% to $687,734 from $122,542 for the three-month period ended March 31, 2011. This increase can be attributed to the increase in sales of $585,464 by NSC. Sales of other Nerium products decreased by $20,272 for the three months ended March 31, 2012 from the corresponding period of the prior year. Other income comprises income from administrative services performed by our Honduran subsidiary. Other income for the three months ended March 31, 2012 decreased by $684, or 43.9% to 1,559 from $2,243 for the three-month period ended March 31, 2011. This decrease resulted from fewer billed record keeping services. Cost of sales for the three months ended March 31, 2012 increased by $430,965, or 1,106.9% to $469,900 from $38,935 for the three-month period ended March 31, 2011. This increase is attributed to the increase in sales by NSC. Our gross margin for the three months ended March 31, 2012 was 31.7% compared to 68.2% for the corresponding period of the prior year. This decrease in margins resulted from fewer sales of Anvirzel as a percentage of the total and the advent of the sale of skin care products. Stock-based compensation expense for the quarter ended March 31, 2012 totaled $1,298,290 compared to $nil for the corresponding period of the prior year. In addition, the 750,000 remaining outstanding options from the 2007 grant were amended and extended for an additional three years at an exercise price of $0.10. General and administrative expenses for the three months ended March 31, 2012 increased by $159,795, or 69.6% to $389,468 from $229,673 for the three-month period ended March 31, 2011. This increase is attributed to the additional expenses associated with the lauch of the skin care line. Research and development expenses totaled $64,856 for the three-month period ended March 31, 2012, consistent with the $62,138 for the three-month period ended March 31, 2011. Depreciation expense totaled $9,311 for the three-month period ended March 31, 2012, slightly less than the $10,490 for three-month period ended March 31, 2011. The decrease resulted from additional items being fully depreciated. The loss on foreign exchange for the three-month period ended March 31, 2012 totaled $nil compared to $2,739 for the corresponding period of the prior year.. This zero loss for the three months ended March 31, 2012 resulted from the US Dollar and the Canadian dollar being at par for most of the quarter. 19 -------------------------------------------------------------------------------- Index Nerium Biotechnology, Inc. -------------------------------------------------------------------------------- As a result of the forgoing, we incurred a loss for the three-month period ended March 31, 2012 of $1,542,532 ($0.05 per share) compared to a loss for the 2011 three-month period of $219,190 ($0.01 per share). Most of this increase can be attributed to the stock-based compensation. We had a gain on the exchange loss on translating foreign operations for the three-month period ended March 31, 2012 of $5,612 compared to a gain of $6,683 in the three-month period ended March 31, 2011. The difference is a result of the exchange of the Honduran Lempira against the US Dollar. As a result of the forgoing, we incurred a comprehensive loss of $1,548,144 for the three-month period ended March 31, 2012 compared to a comprehensive loss for the three-month period ended March 31, 2011 of $212,507. We had a loss attributable to non-controlling interest of $179 for the three-month period ended March 31, 2012 compared to a loss attributable to non-controlling interest of $145 in the same period in 2011. Liquidity As at March 31, 2012 we had cash and cash equivalents of $666,735 and working capital of $300,332. This compares with cash and cash equivalents of $217,034 and working capital of $334,150 as of December 31, 2011. Most cash equivalents are held in a money market fund, earning a variable rate of market interest, at Texas Capital Bank. The balance of cash equivalents are held in various operating accounts at Texas Capital Bank, Banco Ficohsa (located in Honduras) and Banco Credomatic (located in Honduras). Historically, the Company has generate the cash required for operations, as well as its research projects, through the private placement issuances of common shares. During the three month period ended March 31, 2012 the Company received $120,071 in cash from the sale of 120,071 shares of its common stock and 870,000 stock options were exercised at $0.10 for gross proceeds of $87,000. Based upon prior year operations, the Company has insufficient cash flow to fund its operation and to execute its business plan for the next twelve months. However, revenue for the three months ended March 31, 2012 has nearly exceeded that of the entire year 2011. This growth is expected to continue, and when combined with anticipated sales of common stock, should provide the funds necessary to allow the Company to execute its business plan for the next twelve months. However, if the Company is unable to sustain this revenue growth and/or sell shares at a sufficient price, it will be unable to continue as a going concern. Capital Resources We had no long-term debt financing arrangements and do not anticipate incurring any such debt. Since incorporation, a majority of cash has been raised through private placement issuances of common shares. It is expected that further cash will be raised through the private placement of common shares, which, along with cash received through continuing product sales, will be sufficient to meet capital requirements for 2012. However, given the uncertain state of the capital markets, we have developed a contingency plan in the event that we are unable to generate cash through the sale of equity, which plan includes the scaling back of certain research and development projects. There were no commitments for capital expenditures as at March 31, 2012. Off Balance Sheet Arrangements As at the date of this filing, we did not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on the results of operations or financial condition of the Company, including, and without limitation, such considerations as liquidity and capital resources. 20 -------------------------------------------------------------------------------- Index Nerium Biotechnology, Inc. -------------------------------------------------------------------------------- Commitments Operating leases At March 31, 2012, we committed to operating lease payments for its various premises in the following amounts: 2012 $ 163,166 2013 220,094 2014 199,686 2015 196,691 $ 779,637 In addition, we committed to the following: (a) We entered into two separate agreements with one individual. The first agreement, a production and purchasing agreement effective June 2004, entitles the individual to receive $3.25 per vial of Anvirzel sold to third parties in exchange for the use of facilities and production supervision. The second agreement, a consulting agreement effective January 2007, entitles the individual to receive an additional $3.25 per vial of Anvirzel sold to third parties in exchange for consulting services in relation to the production of Anvirzel. Both agreements remain in effect for as long as Anvirzel is produced in Honduras. (b) Prior to 2004, we entered into a consulting agreement which entitles the consultant to receive $1.00 per vial of Anvirzel sold to third parties in Central America and $2.00 per vial for patients coming from countries other than Central America, to a maximum of $20,000 per month, expiring in 2018. (c) During 2011, the Company entered into a consulting agreement which entitles the consultant to receive 5% commission, based on a per unit price charged on each product produced for commercial sale to the end consumer, that was formulated by the consultant. The agreement expires in 2031 The commissions paid are not significant and are included in cost of sales. Disclosure Controls and Procedures Evaluation of Disclosure Controls and Procedures Disclosure controls and procedures are designed to provide reasonable assurance that all relevant information is gathered and reported to senior management, including the Company's Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), on a timely basis so that appropriate decisions can be made regarding public disclosure. Management of the Company, with the participation of the CEO and CFO, has evaluated the effectiveness of the Company's disclosure controls and procedures as at March 31, 2012, as required by Canadian securities law. Based on that evaluation, the CEO and CFO have concluded that, as at March 31, 2012, the disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the Company's annual filings and interim filings (as such terms are defined under Multilateral Instrument 52-109 Certification of Disclosure in Issuers Annual and Interim Filings) and other reports filed or submitted under Canadian securities laws were recorded, processed, summarized and reported within the time period specified by those laws and that material information was accumulated and communicated to management of the Company, including the CEO and CFO, as appropriate to allow for accurate disclosure to be made on a timely basis. Internal Controls over Financial Reporting Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with US GAAP. The CEO and CFO have concluded that there has been no change in the Company's internal control over financial reporting during the three-month period ended March 31, 2012 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. As of March 31, 2012, the Company's internal control over financial reporting was effective. |