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EX-31.1 - EXHIBIT 31.1 - NERIUM BIOTECHNOLOGY INCex31_1.htm
EX-32.2 - EXHIBIT 32.2 - NERIUM BIOTECHNOLOGY INCex32_2.htm
EX-32.1 - EXHIBIT 32.1 - NERIUM BIOTECHNOLOGY INCex32_1.htm
EX-31.2 - EXHIBIT 31.2 - NERIUM BIOTECHNOLOGY INCex31_2.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
x  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended: September 30, 2012
 
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from: _____________to _____________
 
NERIUM BIOTECHNOLOGY, INC.
(Exact name of registrant as specified in its charter)

Canada
000-54051
14-1987900
(State or Other Jurisdiction of Incorporation)
(Commission File Number)
(I.R.S. Employer Identification No.)
 
11467 Huebner Road, Suite 175
San Antonio, Texas, 78230
(Address of Principal Executive Office) (Zip Code)
 
(210) 822-7908
(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 o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 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 o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.

Large accelerated filer o
Accelerated filer o
Non-accelerated filer o
Smaller reporting company x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
The number of shares outstanding of the Registrant’s common stock as of December 14, 2012 is 35,667,396.
 


 
1

 
 
NERIUM BIOTECHNOLOGY, INC.
 
INDEX TO FORM 10-Q
 
FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2012
 
(EXPRESSED IN UNITED STATES FUNDS)

Part I
FINANCIAL INFORMATION
 
Item 1
Financial Statements
 
 
3
 
 
 
 
  Interim Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)  
 
 
 
 
Item 2
18
Item 3
22
Item 4
23
Part II
OTHER INFORMATION
 
Item 1
24
Item 1A
24
Item 2
27
Item 3
27
Item 4
27
Item 5
28
Item 6
28

 
2


Nerium Biotechnology, Inc.

Part I
Financial Statements
Interim Condensed Consolidated Balance Sheets
(Unaudited)
   
September 30
2012
   
December 31
2011
 
Assets
           
Current assets
           
Cash and cash equivalents
  $ 857,866     $ 217,034  
Accounts receivable
    25,544       3,934  
Accounts receivable from related party (note 10)
    1,777,403       -  
Inventory (note 4)
    1,308,692       368,696  
Prepaid expenses and deposits
    1,450,995       89,481  
Total current assets
    5,420,500       679,145  
Prepaid expenses relating to patents
    82,051       68,507  
Equipment, net (note 5)
    401,230       213,851  
Equity investment (note 6)
    2,111,508       -  
Total assets
  $ 8,015,289     $ 961,503  
                 
Liabilities
               
Current liabilities
               
Accounts payable
    510,253       -  
Accrued liabilities
    124,075       266,081  
Advance from related party
    -       3,914  
Customer deposits
    80,000       75,000  
Income taxes payable (note 15)
    1,800,000       -  
Total liabilities
    2,514,328       344,995  
                 
Stockholders’ Equity
               
Preferred stock, no par value, unlimited, none issued and      outstanding
    -       -  
Common stock, no par value, unlimited authorized, 35,667,396 (December 31, 2011 – 32,617,105) shares issued and outstanding (note 7)
    9,327,630       7,077,077  
Additional paid in capital
    3,126,252       2,082,988  
Accumulated comprehensive (loss) income
    (4,889 )     2,922  
Accumulated deficit
    (6,936,842 )     (8,535,754 )
                 
Nerium Biotechnology, Inc. stockholders’ equity
    5,512,151       627,233  
Non-controlling interests
    (11,190 )     (10,725 )
Total stockholders’ equity
    5,500,961       616,508  
Total liabilities and stockholders’ equity
  $ 8,015,289     $ 961,503  

Going Concern and Economic Dependence (note 2)
Commitments (note 11)
Subsequent Events (note 16)
 
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
 
 
3

 
Nerium Biotechnology, Inc.


Interim Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
  For the three and nine month periods ended September 30, 2012
  (Unaudited)

   
Three months ended
September 30
   
Nine months ended
September 30
 
   
2012
   
2011
   
2012
   
2011
 
Revenue
                       
Sales (note 10)
  $ 5,479,079     $ 487,652     $ 8,645,745     $ 713,312  
Other
    2,664       1,769       8,048       5,180  
      5,481,743       489,421       8,653,793       718,492  
Cost of sales (note 11)
    2,462,645       286,654       4,389,639       345,513  
Gross profit
    3,019,098       202,767       4,264,154       372,979  
Operating expenses
                               
General and administrative (note 10)
    582,198       271,935       1,302,836       868,116  
Research and development
    121,886       37,698       219,530       325,870  
Stock-based compensation
(note 8)
    43,870       300,079       1,426,525       804,122  
Depreciation
    8,862       9,202       28,024       27,755  
Foreign exchange loss (gain)
    296       (3,375 )     -       1,387  
Total operating expenses
    757,112       615,539       2,976,915       2,027,250  
Income (loss) from operations
    2,261,986       (412,772 )     1,287,239       (1,654,271 )
Earnings from equity investment (note 6)
    1,805,227       -       2,111,208       -  
                                 
Net income (loss) before income taxes
    4,067,213       (412,772 )     3,398,447       (1,654,271 )
Provision for income taxes (note 15)
    1,560,000       -       1,800,000       -  
Net income (loss) for the period
    2,507,213       (412,772 )     1,598,447       (1,654,271 )
Exchange difference on translating foreign operations
    (2,202 )     53       (7,811 )     7,342  
Comprehensive income (loss) for the period
  $ 2,505,011     $ (412,719 )   $ 1,590,636     $ (1,646,929 )
                                 
Basic earnings (loss) per common share
  $ 0.07     $ (0.01 )   $ 0.05     $ (0.05 )
Diluted earnings (loss) per common share
  $ 0.07     $ (0.01 )   $ 0.05     $ (0.05 )
                                 
Weighted-average common shares outstanding- basic
    34,257,404       32,353,904       33,667,664       31,996,980  
Weighted-average common shares outstanding- diluted
    34,932,404       32,353,904       34,342,664       31,996,980  
 
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
 
 
4


Nerium Biotechnology, Inc.

 
Interim Condensed Consolidated Statements of Changes in Stockholders’ Equity
For the nine month period ended September 30, 2012
(Unaudited)

   
Common Stock
   
Preferred Stock
   
Additional Paid -in
   
Accumulated Other Comprehensive
   
Non-controlling
   
Accumulated
   
Total Stockholders’
 
 
 
Shares
   
Amount
   
Shares
   
Amount
   
Capital
   
Income (Loss)
   
Interest
   
Deficit
   
Equity
 
At December 31, 2011
    32,617,105     $ 7,077,077       -     $ -     $ 2,082,988     $ 2,922     $ (10,725 )   $ (8,535,754 )   $ 616,508  
Exercise of options (note 7(b)(i))
    870,000       87,000       -       -       -       -       -       -       87,000  
Fair value of options exercised
    -       68,262       -       -       (68,262 )     -       -       -       -  
Issued on private placements
(note 7(b)(ii))
    120,071       120,071       -       -       -       -       -       -       120,071  
Fair value of options (note 8 (i), (ii) and (iii))
    -       -       -       -       1,426,526       -       -       -       1,426,526  
Issued on private placements
(note 7(b)(iii))
    120,000       120,000       -       -       -       -       -       -       120,000  
Issued on private placements
(note 7(b)(iv))
    81,000       81,000       -       -       -       -       -       -       81,000  
Exercise of options (note 7(b)(v))
    800,000       400,000       -       -       -       -       -       -       400,000  
Fair value of options exercised
    -       315,000       -       -       (315,000 )     -       -       -       -  
Issued on private placements
(note 7(b)(vi))
    386,626       386,626       -       -       -       -       -       -       386,626  
Issued on private placements
(note 7(b)(vii))
    161,612       161,612       -       -       -       -       -       -       161,612  
Issued on private placements
(note 7(b)(viii))
    510,982       510,982       -       -       -       -       -       -       510,982  
Comprehensive income (loss) for the period
    -       -       -       -       -       (7,811 )     (465 )     1,598,912       1,590,636  
At September 30, 2012
    35,667,396     $ 9,327,630       -     $ -     $ 3,126,252     $ (4,889 )   $ (11,190 )   $ (6,936,842 )   $ (5,500,961 )
 
The accompanying notes are an integral part of these interim condensed consolidated financial statements.
 
 
5

 
Nerium Biotechnology, Inc.


Interim Condensed Consolidated Statements of Cash Flows
For the nine month periods ended September 30, 2012 and 2011
(Unaudited)

   
September 30
2012
   
September 30
2011
 
Cash flow from operating activities
           
Net income (loss) for the period
  $ 1,598,447     $ (1,654,271 )
Items not affecting cash:
               
Depreciation
    28,024       27,755  
Depreciation included in research and development
    13,045       11,370  
Gain on disposal of equipment
    (1,043 )     -  
Stock-based compensation
    1,426,526       804,122  
Earnings from equity investment, net
    (2,111,508 )     -  
Changes in non-cash working capital balances:
               
Accounts receivable
    (21,610 )     (203,980 )
Accounts receivable from related party
    (1,777,403 )     -  
Inventory
    (939,996 )     (224,994 )
Prepaid expenses and deposits
    (1,361,514 )     (87,256 )
Accounts payable
    510,253       113,317  
Accrued liabilities
    (142,006 )     -  
Advanced from related party
    (3,914 )     -  
Customer deposits
    5,000       -  
Income taxes payable
    1,800,000       -  
      (977,699 )     (1,213,937 )
                 
Cash flow from investing activities
               
Purchase of equipment
    (239,838 )     (3,724 )
Proceeds from disposal of equipment
    12,433       -  
Prepaid expenses relating to patents
    (13,544 )     -  
      (240,949 )     (3,724 )
Cash flow from financing activities
               
Issuance of common shares
    1,380,291       1,259,090  
Proceeds from options exercised
    487,000       15,000  
      1,867,291       1,274,090  
Effect of exchange rate changes on cash and cash equivalents
    (7,811 )     (4,435 )
Increase in cash and cash equivalents
    640,832       51,994  
Cash and cash equivalents, beginning of the period
    217,034       186,823  
Cash and cash equivalents, end of the period
  $ 857,866     $ 238,817  
                 
Included in cash and cash equivalents is:
               
Cash
  $ 229,181     $ 170,736  
Money market instruments
    628,685       68,081  
    $ 857,866     $ 238,817  

The accompanying notes are an integral part of these interim condensed consolidated financial statements.
 
 
6


Nerium Biotechnology, Inc.


Notes to the Interim Condensed Consolidated Financial Statements
September 30, 2012 (Unaudited)
 
1.
Basis of Presentation
 
The accompanying interim condensed consolidated financial statements of Nerium Biotechnology, Inc. and its subsidiaries (the “Company”) have been prepared following generally accepted accounting principles in the United States (“US GAAP”), and are expressed in United States dollars, unless otherwise noted.

Pursuant to the rules and regulations of the Securities and Exchange Commission for Form 10-Q, the interim condensed consolidated financial statements, footnote disclosures and other information normally included in consolidated financial statements prepared in accordance with US GAAP have been condensed or omitted. The interim condensed consolidated financial statements contained in this report are unaudited but, in the opinion of management, reflect all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the interim condensed consolidated financial statements.  All significant inter-company accounts and transactions have been eliminated on consolidation. The results of operations for any interim period are not necessarily indicative of results for the full year. The interim condensed consolidated balance sheet at December 31, 2011 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by US GAAP for complete financial statements.

For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Form 10-K for the year ended December 31, 2011.

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management reviews these estimates and assumptions on an ongoing basis using currently available information. Actual results could differ from those estimates.
 
2.
Going Concern and Economic Dependence
 
These interim condensed consolidated financial statements have been prepared in accordance with US GAAP applicable to a going concern, which assumes that the Company will be able to meet its obligations and continue its operations for its next twelve months.
 
During the three and nine month periods ended September 30, 2012, the Company incurred a net income of $2,507,213  and $1,598,447  respectively. In addition, for the nine month period ended September 30, 2012 the Company utilised cash in operations of $977,699.  At September 30, 2012 the Company had an accumulated deficit of $6,936,842, cash and cash equivalents of $857,866  and working capital of $3,270,039.
 
The Company’s profitability during the three and nine month period ended September 30, 2012 is primarily the result of sales to a related party upon which the Company is economically dependent (see note 10).
 
 
7

 
Nerium Biotechnology, Inc.


Notes to the Interim Condensed Consolidated Financial Statements
September 30, 2012 (Unaudited)
 
3.
Significant Accounting Policies
 
Adoption of new accounting principles
 
During the nine month period ended September 30, 2012 the Company adopted the following Accounting Standards Updates (“ASU”) to the Financial Accounting Standard Board (“FASB”) Accounting Standards Codification (the “ASC”) issued by the FASB.
 
In May 2011, the FASB issued Accounting Standards Update ("ASU") No. 2011-04—Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in US GAAP and IFRSs ("ASU No. 2011-04"). This authoritative guidance changes the wording used to describe the requirements in US GAAP for measuring fair value and for disclosing information about fair value measurements. ASU No. 2011-04 is effective for interim and annual periods beginning after December 15, 2011. The implementation of this guidance did not have a significant impact on our financial condition, results of operations or cash flows. Refer to note 12 for the related disclosures.
 
In connection with ASU 2011-05, on December 23, 2011, the FASB issued ASU 2011-12 “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05” an amendment of ASC topic 220 “Comprehensive Income” to allow FASB time to redeliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. While FASB  is considering this matter, entities should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before ASU 2011-05. The ASU is effective for fiscal years, and interim periods, beginning after December 15, 2011. The implementation of this guidance did not have any impact on our financial condition, results of operations or cash flows.
 
Recently issued accounting pronouncements
 
On December 16, 2011, the FASB issued ASU No. 2011-11 “Disclosures about Offsetting Assets and Liabilities” an amendment of ASC topic 210 “Balance Sheet.” The objective of this ASU is to improve disclosures about offsetting and related arrangements to enable users of financial statements to understand the effect of those arrangements on its financial position. Entities are required to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. This scope would include derivatives, sale and repurchase agreements and reverse sale and repurchase agreements, and securities borrowing and securities lending arrangements. The objective of this disclosure is to facilitate comparison between those entities that prepare their financial statements on the basis of US GAAP and those entities that prepare their financial statements on the basis of IFRS.   This ASU is effective for annual periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented.
 
4.
Inventory

   
September 30
2012
   
December 31
2011
 
             
Raw materials and consumables
  $ 1,235,709     $ 289,722  
Supplies
    22,190       47,873  
Medicine (finished goods)
    50,793       31,101  
    $ 1,308,692     $ 368,696  

 
8

 
Nerium Biotechnology, Inc.


Notes to the Interim Condensed Consolidated Financial Statements
September 30, 2012 (Unaudited)

5.
Equipment, net

 
             
September 30
2012
   
December 31
2011
 
   
Cost
   
Accumulated
Depreciation
   
Net Book
Value
   
Net Book Value
 
                         
Lab furniture and equipment
  $ 268,894     $ 168,458     $ 100,436     $ 117,275  
Clinic, office furniture and equipment
    92,688       68,675       24,013       30,787  
Computer equipment
    12,919       6,340       6,579       7,676  
Machinery equipment
    223,459       -       223,459       -  
Research and development
    75,800       29,057       46,743       58,113  
    $ 673,760     $ 272,530     $ 401,230     $ 213,851  

6.
Equity Investment

Nerium Biotechnology, Inc. owns a wholly-owned subsidiary, Nerium SkinCare, Inc. (“NSC”), a Texas corporation, which owns a 30% residual interest in Nerium International, LLC (“NI”).  Actual income distributions range from 20% to 30% depending on the nature of products sold. No distributions have been received to September 30, 2012.

   
September 30
2012
 
       
Carrying value of equity investment at December 31, 2011
  $ -  
Reversal of investment impairment to original cost
    300  
Income from equity investment to September 30, 2012
    2,111,208  
Carrying value of investment at September 30, 2012
  $ 2,111,508  

Summarized unaudited financial data of NI for the three and nine month periods ended September 30:

   
Three months ended September 30
   
Nine months ending September 30
 
   
2012
   
2011
   
2012
   
2011
 
                         
Revenue
  $ 33,438,701     $ 264,920     $ 52,781,824     $ 264,942  
Gross profit
  $ 9,960,324     $ 92,067     $ 15,097,514     $ 92,023  
Net income (loss)
  $ 6,708,926     $ (449,382 )   $ 9,094,742     $ (774,615 )

 
9

 
Nerium Biotechnology, Inc.


Notes to the Interim Condensed Consolidated Financial Statements
September 30, 2012 (Unaudited)

7.
Capital Stock

(a) Authorized
           
Unlimited Common stock
           
Unlimited Preferred stock, non-voting, issuable in series
           
             
(b) Issued
           
Common stock
 
Shares
   
Amount
 
             
As at December 31, 2011
    32,617,105       7,077,077  
Stock option exercise (i)
    870,000       87,000  
Fair value of options exercised (i)
    -       68,262  
Private placement (ii)
    120,071       120,071  
Private placement (iii)
    120,000       120,000  
Private placement (iv)
    81,000       81,000  
Stock option exercise (v)
    800,000       400,000  
Fair value of options exercised (v)
    -       315,000  
Private placement (vi)
    386,626       386,626  
Private placement (vii)
    161,612       161,612  
Private placement (viii)
    510,982       510,982  
As at September 30, 2012
    35,667,396     $ 9,327,630  
 
 
(i)
On January 17, 2012, 870,000 stock options were exercised at $0.10 per option for gross proceeds of $87,000.  The fair value of the options was $68,262.
 
 
(ii)
In February 2012, the Company's Board of Directors approved a private placement of up to 2,000,000 common shares of the Company at a subscription price of $1.00 per common share.  On March 30, 2012, the Company completed the first closing of its non-brokered private placement by issuing 120,071 common shares at $1.00 per share for gross proceeds of $120,071.
 
 
(iii)
On April 25, 2012, the Company completed the second closing of its non-brokered private placement by issuing 120,000 common shares at $1.00 per share for gross proceeds of $120,000.
 
 
(iv)
On May 10, 2012, the Company completed the third closing of its non-brokered private placement by issuing 81,000 common shares at $1.00 per share for gross proceeds of $81,000.
 
 
(v)
On July 9, 2012, 800,000 stock options were exercised at $0.50 per option for gross proceeds of $400,000.  The fair value of the options was $315,000.
 
 
(vi)
On July 20, 2012, the Company completed the fourth closing of its non-brokered private placement by issuing 386,468 common shares for $1.00 for gross proceeds of $386,468.
 
 
(vii)
On August 15, 2012, the Company completed the fifth closing of its non-brokered private placement by issuing 161,612 common shares for $1.00 for gross proceeds of $161,612.
 
 
(viii)
On September 24, 2012, the Company completed the sixth closing of its non-brokered private placement by issuing 510,982 common shares for $1.00 for gross proceeds of $510,982.
 
 
10

 
Nerium Biotechnology, Inc.


Notes to the Interim Condensed Consolidated Financial Statements
September 30, 2012 (Unaudited)

7.
Capital Stock – continued

(c)
Warrants
 
A summary of the Company’s warrant activity is as follows:

   
September 30, 2012
   
December 31, 2011
 
   
Number of Warrants
   
Exercise
Price
   
Number of Warrants
   
Exercise
Price
 
Outstanding, beginning
    500,000     $ 1.25       500,000     $ 1.25  
Expired (i)
    (500,000 )     1.25       (500,000 )     1.25  
Issued
    -       -       500,000       1.25  
Outstanding, ending
    -     $ -       500,000     $ 1.25  
 
(i)     On May 5, 2012, the 500,000 warrants expired.
 
8.
Stock-Based Compensation
 
The Company has reserved and set aside up to 6,256,000 common shares for the granting of options to directors, officers, employees and consultants.  On June 22, 2012, the plan was replaced by two plans.  In one plan the Company has reserved 3,128,000 common shares for the granting of options to employees, and in the second plan the Company has reserved 3,128,000 common shares for the granting of options to directors, officers and consultants.  The terms of the awards under both plans are determined by the Board of Directors.
 
A summary of the status of the Company's outstanding stock options as of September 30, 2012 and December 31, 2011, and changes during the periods is presented in the following table.
 
   
September 30, 2012
   
December 31, 2011
 
   
Stock
Options
   
Weighted-
average
exercise
price
   
Stock
options
   
Weighted-
average
exercise
price
 
Outstanding, beginning
    3,630,000     $ 0.47       3,180,000     $ 0.47  
Exercised (i)
    (1,670,000 )     (0.29 )     -       -  
Granted (ii) and (iii)
    150,000       1.50       450,000       1.50  
Expired
    -       -       -       -  
Outstanding, ending
    2,110,000     $ 0.90       3,630,000     $ 0.47  

 
11

 
Nerium Biotechnology, Inc.


Notes to the Interim Condensed Consolidated Financial Statements
September 30, 2012 (Unaudited)
 
8.
Stock-Based Compensation- continued
 
The weighted-average remaining contractual life and weighted-average exercise price of options outstanding and of options exercisable as at September 30, 2012 are as follows:

           
Options Outstanding
   
Options Exercisable
 
                                 
Exercise
Prices
   
Outstanding
   
Weighted-
Average
 Exercise
Price
   
Weighted-
Average
Remaining
Contractual
Life
   
Exercisable
   
Weighted-
Average
Exercise
Price
 
        #          
Years
      #        
                                     
CDN$0.10
      750,000    
CDN $0.10
      2.30       750,000    
CDN$0.10
 
CDN$1.22
      310,000    
CDN $1.22
      0.78       310,000    
CDN$1.22
 
$1.22       450,000     $1.22       2.90       450,000     $1.22  
$1.50       600,000     $1.50       3.79       262,500     $1.50  
                                           
        2,110,000     $0.90       2.63       1,772,500     $0.79  
 
 
(i)
1,950,000 stock options with an exercise price of CDN$0.10 were granted to various directors, employees and consultants on January 17, 2007, which vested immediately and expire January 17, 2012.  The fair value was determined to be $153,000 at $0.08 per option, using the Black-Scholes model for pricing options. This amount was recorded as stock-based compensation expense and an increase to accumulated paid in capital.  The following assumptions were used: risk free interest rate of return of 4.3%, expected stock volatility of 105%, dividend yield of 0% and expected life of 5 years.  In January 2012, 870,000 of these options were exercised for $87,000.  The fair value of these options was $68,262.  On January 17, 2012 the remaining un-exercised options were amended to expire January 17, 2015.  The fair value of the amended options is $1,084,252 at $1.45 per option, using the Black-Scholes model for pricing options.  The following assumptions were used: risk free interest rate of return of 1.06%, expected stock volatility of 148%, dividend yield of 0% and expected life of 3 years.  This amount was recorded as stock-based compensation expense and an increase to accumulated paid in capital.
 
 
(ii)
450,000 stock options were granted to certain employees on June 27, 2011 with an exercise price of $1.50, which vest 25% on June 27, 2012; 25% on June 27, 2013; 25% on June 27, 2014 and 25% on June 27, 2015 and expire June 27, 2016.  The fair value was determined to be $647,925 at $1.44 per option, using the Black-Scholes model for pricing options.  $43,870 and $212,600 was recorded as an increase to stock-based compensation expense and an increase to accumulated paid in capital for the three-month and nine-month periods ended September 30, 2012 respectively. The following assumptions were used:  risk free interest rate of return of 2.79%; expected volatility of 181%; dividend yield of 0% and expected life of 5 years.
 
 
(iii)
150,000 stock options were granted to a consultant on February 14, 2012 with an exercise price of $1.50, which vest immediately and expire on August 29, 2016.  The fair value was determined to be $129,674 at $0.86 per option, using the Black-Scholes model for pricing options.  The following assumptions were used:  risk free interest rate of return of 1.44%; expected volatility of 148%; dividend yield of 0% and expected life of 5 years.
 
 
12

 
Nerium Biotechnology, Inc.

 
Notes to the Interim Condensed Consolidated Financial Statements
September 30, 2012 (Unaudited)
 
9. 
Earnings (loss) per Share
 
Potential common shares of 3,630,000 related to the Company’s outstanding stock options and 500,000 shares related to the Company’s outstanding warrants; were excluded from the computation of diluted loss per share for the three and nine month period ended September 30, 2011 because the inclusion of these shares would be anti-dilutive.
 
Consequently, for the three and nine month period ended September 30, 2011 basic and diluted loss per share are equal.  The reconciliation of the number of shares to calculate the diluted loss per share is calculated as follows:
 
   
Three months ended
September 30
   
Nine months ended
September 30
 
   
2012
   
2011
   
2012
   
2011
 
NUMERATOR
                       
Net income (loss) for the period
  $ 2,507,213     $ (412,772 )   $ 1,598,447     $ (1,654,271 )
                                 
DENOMINATOR
                               
Weighted average number of shares outstanding
    34,257,404       32,353,904       33,667,664       31,996,980  
Dilutive effect of:
                               
Stock options
    675,000       -       675,000       -  
Warrants
    -       -       -       -  
Diluted weighted average shares outstanding
    34,932,404       32,353,904       34,342,664       31,996,980  
 
10.
Related Party Transactions and Balances
 
During the three and nine month periods ended September 30, 2012, the Company entered into the following related party transactions:
 
The Company incurred consulting fees of  $15,000  and $30,000 for the three and nine month periods ended September 30, 2012 (three and nine month periods ended September 30, 2011 - $15,000 and $45,000 respectively), for services provided by a director of the Company.  These amounts are included in general and administrative expenses.
 
In the three and nine month periods ended September 30, 2012, total sales by the Company to NI were $5,218,288 and $8,408,188  respectively (three and nine month periods ended September 30, 2011 - $nil).   The unrealized profit of $363,867 associated with these sales to the related party has been eliminated.
 
As at September 30, 2012, accounts receivable from NI was $1,777,403 (December 31, 2011 - $nil), which is reflected net of the unrealised profit noted above.
 
 
13

 
Nerium Biotechnology, Inc.

 
Notes to the Interim Condensed Consolidated Financial Statements
September 30, 2012 (Unaudited)

11.
Commitments
 
Operating leases
 
At September 30, 2012, the Company was committed to operating lease payments for its various premises in the following amounts:
 
2012
  $ 19,998  
2013
    58,144  
2014
    48,588  
2015
    16,424  
    $ 137,891  
 
In addition, the Company is committed to the following:
 
 
(a)
The Company has 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. The commissions paid are not significant and are included in cost of sales.
 
 
(b)
Prior to 2004, the Company 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.  The commissions paid are not significant and are included in cost of sales.
 
 
(c)
During 2011, the Company entered into a consulting agreement which entitles the consultant to receive a 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 commission incurred is $68,388 and $109,052 for the three-month and nine-month periods ended September 30, 2012 respectively and are included in cost of sales.
 
 
14

 
Nerium Biotechnology, Inc.

 
Notes to the Interim Condensed Consolidated Financial Statements
September 30, 2012 (Unaudited)

12.
Financial Instruments
 
Fair value
 
The Company's financial instruments include cash and cash equivalents, accounts receivable, accounts receivable from related party, accounts payable, accrued liabilities and customer deposits.  The carrying value of the financial instruments approximates their fair value because of the short-term maturities of these items.
 
The Company's risk exposure and the impact on its financial instruments are summarized below:
 
Credit risk
 
Credit risk is the risk of loss associated with a counterparty's inability to fulfill its contractual obligations.  The Company is exposed to credit risk on its cash and cash equivalents, accounts receivable and accounts receivable from related party.
 
The Company has deposited the cash and cash equivalents with reputable financial institutions, from which management believes the risk of loss is minimal.  The Company's cash and cash equivalents are not subject to any external restrictions.
 
Credit risk exists in that a significant majority of the Company’s receivables are concentrated to one related party.  The Company’s management considers this to be a low risk given the related party nature of the balance and the payment history of the related party to date.
 
Liquidity risk
 
The Company's approach to managing liquidity risk is to ensure that it will have sufficient liquidity to meet liabilities when due.  As at September 30, 2012 the Company held cash and cash equivalents of $857,866 and has positive working capital of $2,906,172.  The Company does not have any long-term debt.  The Company also has commitments discussed in Note 11.
 
Interest rate risk
 
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate due to changes in market interest rates.
 
The Company is exposed to interest rate risk arising from fluctuations in interest rates received on its cash and cash equivalents.  Fluctuations in market interest rates do not have a significant impact on the Company's results of operations due to the short-term nature of interest bearing cash and cash equivalents.
 
Currency risk
 
The Company is exposed to currency fluctuations as a significant amount of its accrued liabilities are denominated in Canadian dollars and Honduran Lempira totalling $86,411 and $221,056 respectively in US dollars.  The Company does not use derivative instruments to reduce its exposure to foreign currency risk.
 
13. 
Capital Management
 
The Company's primary objective with respect to its capital management is to ensure that it has sufficient cash resources to maintain its ongoing operations.  The Company includes stockholders’ equity in the definition of capital.
 
Management reviews its capital management approach on an ongoing basis and believes that this approach, given the relative size of the Company, is reasonable.
 
There were no changes to the Company's approach to capital management during three and nine month periods ended September 30, 2012.  The Company is not subject to externally imposed capital requirements.

 
15

 
Nerium Biotechnology, Inc.


Notes to the Interim Condensed Consolidated Financial Statements
September 30, 2012 (Unaudited)
 
14.
Segmented Information
 
The Company uses a management approach for determining segments.  The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the source of the Company’s reportable segments.  The Company’s management reporting structure provides for only one segment: healthcare.

The regions and countries in which the Company had identifiable assets and revenues are presented in the following table.  Identifiable assets are those that can be directly associated with a geographic area.

As at September 30, 2012
 
United States
   
Honduras
   
Total
 
   
 
   
 
   
 
 
Equipment
  $ 282,176     $ 119,054     $ 401,230  
Total assets
  $ 7,728,563     $ 286,726     $ 8,015,289  
                         
Nine month period ended September 30, 2012
 
United States
   
Honduras
   
Total
 
                         
Revenues
  $ 8,403,198     $ 250,595     $ 8,653,793  
Net income (loss) for the period
  $ 1,675,127     $ (76,680 )   $ 1,598,447  
                         
Three month period ended September 30, 2012
 
United States
   
Honduras
   
Total
 
                         
Revenues
  $ 5,421,638     $ 60,105     $ 5,481,743  
Net income (loss) for the period
  $ 2,538,790     $ (31,577 )   $ 2,507,213  
                         
As at December 31, 2011
 
United States
   
Honduras
   
Total
 
                         
Equipment
  $ 72,421     $ 141,430     $ 213,851  
Total assets
  $ 655,065     $ 306,438     $ 961,503  
                         
Nine month period ended September 30, 2011
 
United States
   
Honduras
   
Total
 
                         
Revenues
  $ 356,379     $ 356,933     $ 713,312  
Net (loss) income for the period
  $ (1,698,866 )   $ 44,595     $ (1,654,271 )
                         
Three month period ended September 30, 2011
 
United States
   
Honduras
   
Total
 
                         
Revenues
  $ 356,379     $ 131,273     $ 487,652  
Net (loss) income for the period
  $ (433,512 )   $ 20,740     $ (412,772 )
 
 
16

 
Nerium Biotechnology, Inc.


Notes to the Interim Condensed Consolidated Financial Statements
September 30, 2012 (Unaudited)

15.
Income Taxes

NSC is a US company and it is subject to US income tax at an estimated rate of 35%.
 
16
Subsequent Events

On October 26, 2012, the Company purchased 106 acres of farmland adjacent to the site of the original and current oleander farm using cash on hand of $636,385.  This acreage will be used for future expansion of the oleander farming operations.
 
 
17

 
Nerium Biotechnology, Inc.

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

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 the 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

 
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

Sales for the nine months ended September 30, 2012 increased by $7,934,433 to $8,645,745 from $713,312 for the nine month period ended September 30, 2011.   This increase can be attributed to net sales totaling $8,403,198 for the nine month period by NSC. Sales of other Nerium products totaled $242,547 for the nine month period ended September 30, 2012.

Other income comprises of income from administrative services performed by our Honduran subsidiary. Other income for the nine month period ended September 30, 2012 increased by $2,868 to $8,048 from $5,180 for nine month period ended September 30, 2011. This increase resulted from billed record keeping services.

Cost of sales for nine month period ended September 30, 2012 increased by $4,044,126 to $4,389,639 from $345,513 for the nine month period ended September 30, 2011.  This increase is attributed to the increase in sales by NSC. Our gross margin for the nine months ended September 30, 2012 was 49.3% compared to 51,9% 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 nine month period ended September 30, 2012 totaled $1,426,525 compared to $804,122 for the corresponding period of the prior year.  In the current period $1,084,252 represents the amended value of the 750,000 options which expiry date was extended to January 17, 2015; $212,599 for the 450,000 stock options granted to certain employees on June 27, 2011 and $129,674 which represents the fair value of 150,000 options granted to a consultant.

General and administrative expenses for the nine month period ended September 30, 2012 increased by $434,720 to $1,302,836 from $868,116 for the nine month period ended September 30, 2011.  This increase is attributed to the additional expenses associated with the launch of the skin-care line.

Research and development expenses totaled $219,530 for nine month period ended September 30, 2012, which is a decrease of $106,340 from $325,870 for the nine month period ended September 30, 2011.  The Company focused on the production and sales of the skincare line in the nine month period ended September 30, 2012.

Depreciation expense totaled $28,024 for nine month period ended September 30, 2012, slightly more than the $27,755 for the nine-month period ended September 30, 2011. The increase resulted from additional items being depreciated in the current period due to additions of furniture and equipment.

The gain on foreign exchange nine month period ended September 30, 2012 totaled $nil compared to a loss of $1,387 for the corresponding period of the prior year. This result for the nine month period ended September 30, 2012 resulted from the US Dollar and the Canadian dollar being at par for most of the period.

 
19

 
Nerium Biotechnology, Inc.

 
As a result of the forgoing, we incurred a profit for the nine month period ended September 30, 2012 of $1,598,447 ($0.05 per share) compared to a loss for the 2011 nine month period of $1,654,271 ($0.05 per share).  Most of this profit can be attributed to the sales of skincare products in NSC.

We had a loss on the exchange on translating foreign operations for the nine month period ended September 30, 2012 of $7,811 compared to a gain of $7,342 in the nine month period ended September 30, 2011.  The difference is a result of the exchange of the Honduran Lempira against the US Dollar.

As a result of the above, we incurred a comprehensive income of $1,590,636 for the nine month period ended September 30, 2012 compared to a comprehensive loss for the nine month period ended September 30, 2011 of $1,646,929.

Summary of Quarterly Results

The following table sets forth selected results of operations for our eight most recently completed quarters.

 
 
Quarter Ended
 
Accounting
Policies
 
Total
Revenues
($)
   
 
Net Income
(Loss)
($)
   
Basic and Diluted
Net Income
(Loss) Per
Common Share
 
September 30, 2012
US GAAP
    5,481,743       2,507,213     $ 0.07  
June 30, 2012
US GAAP
    2,482,757       633,766     $ 0.02  
March 31, 2012
US GAAP
    689,293       (1,542,532 )   $ (0.05 )
December 31, 2011
US GAAP
    133,980       (210,795 )   $ (0.01 )
September 30, 2011
IFRS
    489,421       (412,772 )   $ (0.01 )
June 30, 2011
IFRS
    104,216       (1,022,309 )   $ (0.03 )
March 31, 2011
IFRS
    124,785       (219,190 )   $ (0.01 )
December 31, 2010
Canadian GAAP
    88,780       (369,143 )   $ (0.01 )

We have experienced an increase in revenues in the third quarter (“Q3”) in 2012 compared to Q3 2011 by $4,991,427. During the last half of 2011, NI launched its skin care line, which is formulated and sold by our wholly owned subsidiary, NSC.  Also, a stronger demand for Anvirzel was reflected in an increase in the number of units sold while at a lower average price per unit.

Loss per quarter has been in the range of $219,190 in the first quarter (“Q1”) of 2011 to the Q1 of 2012 quarter high of $1,542,532.    These losses fluctuate primarily due to research and development expenditures and share-based compensation charges. A share-based compensation charge in third quarter (“Q3”) of 2011 was $300,079 in the Q3 of 2011 and $504,043 in Q2 of 2011.  It was $nil in the other quarters of 2010, and the Q1 of 2011.  Due to the large increase in sales in Q3 2012, we experienced net income at $2,507,213 which increased substantially over the income of $633,766 in the second quarter of 2012.

Liquidity

As at September 30, 2012 we had cash and cash equivalents of $857,866 and working capital of $2,906,172. 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, we have generated the cash required for operations, as well as research projects, through the private placement issuances of common shares.   During the nine month period ended September 30, 2012 we received $1,380,291 in cash from the sale of 1,380,291 shares of common stock; 870,000 stock options were exercised at $0.10 for gross proceeds of $87,000 and 800,000 stock options were exercised at $0.50 for gross proceeds of $400,000.

 
20

 
Nerium Biotechnology, Inc.


Based upon prior year operations, we had insufficient cash flow to fund our operation and to execute our business plan for the next twelve months. However, revenue for the nine month period ended September 30, 2012 has far exceeded that of the entire year of 2011.  This growth is expected to continue, and if necessary, could be combined with sales of common stock to provide the funds necessary to allow us to execute our business plan for the next twelve months.

Capital Resources

We had no long-term debt financing arrangements and do not anticipate incurring any such debt. Since incorporation, the majority of cash has been raised through private placement issuances of common shares. It is expected that further cash will be received through continuing product sales, and will be sufficient to meet capital requirements for the remainder of 2012 and into 2013. There were no commitments for capital expenditures as at September 30, 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.

Commitments
 
Operating leases
 
At September 30, 2012, we committed to operating lease payments for its various premises in the following amounts:

2012
  $ 19,998  
2013
    58,144  
2014
    48,588  
2015
    16,424  
    $ 137,891  

 
21

 
Nerium Biotechnology, Inc.

 
In addition, we are committed to the following:
 
 
(a)
The Company has 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. The commissions paid are not significant and are included in cost of sales.
 
 
(b)
Prior to 2004, the Company 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.  The commissions paid are not significant and are included in cost of sales.
 
 
(c)
During 2011, the Company entered into a consulting agreement which entitles the consultant to receive a 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 commission incurred is $68,388 and $109,052 for the three-month and nine-month period ended September 30, 2012 respectively 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 September 30, 2012, as required by Canadian securities law.  Based on that evaluation, the CEO and CFO have concluded that, as at September 30, 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 September 30, 2012 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.  As of September 30, 2012, the Company’s internal control over financial reporting was effective.

Quantitative and Qualitative Disclosures About Market Risk

There are no disclosures as our stock does not trade.
 
 
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Nerium Biotechnology, Inc.


Controls and Procedures
 
(a)      Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and the principal financial officer, we are responsible for conducting an evaluation of the effectiveness of the design and operation of our internal controls and procedures, as defined in rules 13a-15(e) under the Securities Exchange Act of 1934, as of the end of the fiscal year covered by this report. Disclosure controls and procedures means that the material information required to be included in our Securities and Exchange Commission (“SEC”) reports is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms relating to our company, including any consolidating subsidiaries, and was made known to us by others within those entities, particularly during the period when this report was being prepared. Based on this evaluation, our principal executive officer and principal financial officer concluded as of the evaluation date that our disclosure controls and procedures were effective as of September 30, 2012.

Management’s Annual Report on Internal Control over Financial Reporting

As of September 30, 2012, management assessed the effectiveness of our internal control over financial reporting. The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting is defined in rule 13a-15(f) or 15d-15(f) promulgated under the Securities and Exchange Act of 1934, as amended, as a process designed by, or under the supervision of, the Company’s Chief Executive Officer and Chief Financial Officer and effected by the Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with US GAAP and includes those policies and procedures that:

(i) Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and dispositions of our assets;

(ii) Provide reasonable assurance our transactions are recorded as necessary to permit preparation of our financial statements in accordance with US GAAP, and that receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

(iii) Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statement.

In evaluating the effectiveness of our internal control over financial reporting, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control – Integrated Framework. Based on that evaluation, completed by Dennis R. Knocke, our President and Chief Executive Officer, and Joseph B. Nester, our Chief Financial Officer, management concluded that, during the period covered by this report, such internal controls and procedures were not effective to detect the inappropriate application of US GAAP rules as more fully described below.

This was due to deficiencies that existed in the design or operation of our internal controls over financial reporting that adversely affected our internal controls and that may be considered to be material weaknesses.

The matters involving internal controls and procedures that our management considered to be material weaknesses under the standards of the Public Company Accounting Oversight Board was inadequate segregation of duties consistent with control objectives. The aforementioned material weakness was identified by our President and Chief Executive Officer, and our Chief Financial Officer, in connection with the review of our interim condensed consolidated financial statements as of September 30, 2012.

Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting that occurred during the three and nine month periods ended September 30, 2012 that have materially affected, or that are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 
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Nerium Biotechnology, Inc.


Limitations on the effectiveness of controls

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparations and presentations. Also projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Part II

Legal Proceedings

As of December 14, 2012, we had no outstanding legal proceedings.

Risk Factors
 
Going Concern Opinion
Under United States reporting standards the Company’s auditors issue a going concern footnote to the annual audited financial statement.

Anvirzel™ is Not a Cure for Cancer
Anvirzel™ is not a cure for cancer. Anvirzel™ may or may not have the desired effect of inhibiting the growth of tumors or causing the elimination or reduction of tumors. Effectiveness has not been demonstrated in clinical trials.

Lack of Approval in Major North American Markets
While Anvirzel™ has been approved for sale by the health ministry in Honduras (through the issuance of a Sanitary Register), neither Health Canada nor the USFDA have approved Anvirzel™ for use in Canada or the United States, respectively.

Outside of individual use, the granting of which is at the discretion of the respective agencies, sales of Anvirzel™ in the United States and Canada is limited, the result of which will be limited revenue from major North American markets. We have no regulatory exemptions in either the US or Canada.

While we intend to seek Health Canada and USFDA approval for some of its developmental stage products, there can be no assurance that such approval will ever be granted. Failure to receive such approval may have a material impact on revenue generation by the Company.

Use of Cardiac Glycosides May Cause Unwanted Side Effects
Possible side effects that may be associated with the administration of a cardiac glycoside, such as Anvirzel™, include allergic reaction, nausea, vomiting and atrioventricular block. Such potential side effects may deter some patients from undergoing treatment with Anvirzel™. The Company is not aware of any reports of life-threatening side-effects associated with the use of Anvirzel™.

Combining Therapeutic Dosages of Different Cardiac Glycoside Could Be Dangerous
Cardiac glycosides are well known to be toxic to humans. Overdosing of cardiac glycosides can lead to cardiac arrhythmia, cardiac toxicity and death. Anvirzel™ contains cardiac glycosides in sub-therapeutic amounts. Clinical testing on humans and animals has demonstrated Anvirzel™ and its cardiac glycoside components are below toxic levels and are safe. However, when used in combination with other cardiac glycosides (such as digoxin) for congestive heart failure, Anvirzel™ may have a toxic effect due to the patient exceeding the maximum tolerated dosage for cardiac glycosides.

Positive Immune Response Not Independently Proven
Positive immune response after treatment with our antiviral drugs is based on evidence gathered from internal clinical trials and has not been verified by independent third parties. A positive immune response does not equal a cure. There is no evidence that oleandrin has cured, or has the ability to cure, any viral-related diseases. The Company does not claim that use of the antiviral drugs will cause a positive immune response.
 
 
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Nerium Biotechnology, Inc.

 
Lack of Physician Acceptance
Physician education and acceptance of a medical product in the major markets is limited to scientific journals, news media, and experience with treating patients that have chosen to add alternative treatment to their therapies until a product is approved in their respective countries. As Anvirzel™ has not been approved by either Health Canada or the USFDA, the ability for the Company to educate physicians as to the potential benefits of Anvirzel™ may be limited.

The Company’s Products, including Anvirzel™, May Become Obsolete
The biotechnology industry has been characterized by the frequent introduction of new products. Accordingly, we may be adversely affected by the new products and technology developed by our competitors. In addition, as the potential benefits of oleander extract enter the public domain, our competitors may seek to develop, on an expedited basis, products which compete with our products.

GENERAL RISK FACTORS

An investment in securities of the Company should be considered highly speculative due to the nature of our business and its stage of development and should be considered only by investors who can afford the total loss of their investment.

An investment in securities of the Company involves a significant degree of risk. The risks related to the Company and its business includes the following:

Marketability
There is no market for the common shares and shareholders may not be able to resell them.

Necessity for Additional Capital
 
Although we have been successful in raising funds to date, and we have reported profit for just since the second quarter since inception, there is no assurance that this will continue over the next twelve months and we may need to raise additional funds through the issuance of common stock or similar equity instruments if required.

Speculative Nature of Securities
There is no assurance that we will be successful in implementing our business plan. We have limited funds available for it and one source of future funds presently available to us is through the sale of equity capital. The shares of the Company are speculative.

Currency Risk
We are exposed to currency risk as a part of the Subsidiaries' business is carried out in Honduran Lempira and we maintain Honduran Lempira denominated bank accounts but use US dollars as our reporting currency. Unfavorable changes in the exchange rate between Honduran Lempira and US dollars may materially affect the foreign exchange gain/losses. We do not use derivative instruments to reduce our exposure to foreign currency risk.

Reliance on Key Personnel
Our success depends, in large part, upon the continuing contributions of its key technical, marketing, sales and management personnel. The loss of the service of several key people within a short period of time could have a material adverse effect upon our financial condition and operations. Our future success is also dependent upon its continuing ability to attract and retain other highly qualified personnel. Competition for such personnel is intense, and our inability to attract and retain additional key employees could have a material adverse effect on our financial condition and operations.

Dependence on Ability to Obtain Technical and Administrative Staff
We anticipate that we will require more administrative, executive, scientific, engineering and manufacturing employees. We have no binding arrangements to fulfill our staffing requirements and there is no assurance we will be able to successfully accomplish this requirement. If the Company is not able to do so, it will diminish the Company’s ability to operate effectively.

The Company Operates in a Competitive Market Sector
The medical, drug and biotechnology businesses are highly competitive. The Company and its products will be competing with various other manufacturers with existing technological support and acceptance in the same markets the Company will target. Many of these other products are well-established, have substantial sales volume, and are produced and marketed by companies with much greater financial resources, facilities, organization and experience than the Company. If the potential benefits of oleander extract enter the public domain, competitive companies with substantially more resources than the Company may try to develop products competitive with the Company’s products.
 
 
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Nerium Biotechnology, Inc.

 
Intellectual Property Protection may be Uncertain
In respect of certain of its proprietary rights, the Company may need to secure licenses from third parties and/or assignments of rights from independent contractors. This is particularly applicable to intellectual property which may arise under sponsored research agreements with public universities. While no licensing agreements have been entered in to to-date, there is no assurance that the Company will secure the necessary licenses or assignments to execute on its business plan. The loss of any proprietary rights which may be protected or protectable under any of the foregoing future intellectual property safeguards may result in the loss of a competitive advantage over present or potential competitors.

The Company has registered the mark Anvirzel™ in certain jurisdictions in Latin America and the Caribbean and plans to apply for additional protection as funds allow, but does not have the rights to use the mark in the United States and Canada. Neither the Company nor its licensors have registered all of its trademarks or copyrights. The Company may decide not to take additional steps to secure its rights in certain copyrights, trademarks and/or patents to which it may be entitled. Failure to do so, in the case of copyrights and trademarks, may reduce the access of the Company to the courts, and to certain remedies of statutory damages and attorneys’ fees, to which it may be entitled in the event of a violation of the Company’s proprietary and intellectual rights by third parties. Similarly, the failure to seek protections of any patentable materials to which the Company may be entitled may result in loss of patent protection should a third party copy the patentable technology or process.

The loss of any proprietary rights which are protectable under any of the foregoing intellectual property safeguards may result in the loss of a competitive advantage over present or potential competitors, with a resulting decrease in the profitability for the Company. There is no guarantee that such a loss of competitive advantage could be remedied or overcome by the Company at a price which the Company would be willing or able to pay.

There has not been any action brought against the Company alleging intellectual property violations.

High Start-up and Operating Risks During Initial Operations
The Company incurred start-up losses during its development period and initial period of operations and will experience lower revenues and operating margins than an established company until the customer base grows to a more optimal operating level. There can be no assurance that we will be able to achieve satisfactory operating results within the expected period of time or develop and have in operation sufficient level of employees to operate the facility.

The Company May Not Be Able to Successfully Develop its Current Product Line
Although the Company believes that its products can be profitably developed and manufactured, there may be unanticipated technological, regulatory and marketing issues that may make the products unfeasible to produce or to market. In addition, delays in the production and release testing of Anvirzel™ in the Company’s pharmaceutical clean room facilities can occur due to unforeseen development obstacles, some of which are beyond the Company’s control. If the Company is unable to complete the products as planned, its revenue and earnings growth could be materially adversely affected.
 
 
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Nerium Biotechnology, Inc.


Failure of Promotional Activities
Although there are certain expectations with respect to the projected results of promotion activities, particular promotions may not reach anticipated levels of success. If early advertising and promotion is not successful, the likelihood of the Company expending all of its funds prior to the Company reaching a level of profitability will be increased.

The Company May Be Unable to Manage Rapid Growth
The Company’s business plan will, if successfully implemented, result in the rapid expansion of its business on a widespread basis. Rapid expansion of the Company’s operations may place a significant strain on the Company’s management, financial and other resources. The ability to manage future growth will depend upon the Company’s ability to monitor operations, control costs, maintain regulatory compliance, maintain effective quality controls and significantly expand internal management and technical, information and accounting systems, and to attract, assimilate and retain additional qualified personnel.

The Company Does Not Carry Product Liability Insurance
Insurance carriers are currently reluctant to provide product liability insurance for biotechnology products due to the limited claims history for such products. The Company has insurance for products sold by NSC only, but not for products sold by the Salud Integral Group.  In the event of major product liability litigation or a major award against the Company during a time when the Company has no available insurance, the Company may sustain significant losses of its operating capital.

The Company is Subject to Extensive Regulation
The healthcare industry is subject to extensive regulation relating to licensure, conduct of operations, ownership of facilities, addition of facilities and services and prices for services. Currently, the Company and many of its patients rely on regulatory guidance applicable to individual use importation of Anvirzel.

Each jurisdiction in which the Company may operate has its own regulatory scheme addressing the development, testing, labeling, manufacturing, registration, notification, clearance or approval, marketing, distribution, record-keeping and reporting requirements for human drugs.

While the Company currently has a Sanitary Register issued by the Ministry of Health of the Republic of Honduras for the manufacture, sale and distribution of Anvirzel™, HIviral and HEP-viral, as well as approvals for sale and distribution in the Republics of El Salvador and Guatemala for Anvirzel™, there can be no assurances that the Sanitary Register will be extended.
Rules and regulations governing the sales of pharmaceuticals are subject to the laws of the issuing countries, as well as the terms and conditions of international treaties. Given that the Company’s pharmaceutical operations take place only in Honduras, the Sanitary Register only shows approval under Honduran regulations for manufacturing, sale, and distribution in Honduras. Additional regulatory approval may be required for some or all products developed by the Company if the Company expands operations to other jurisdictions. Failure to achieve initial approval will require modification and redesign of the Company’s products or, at worst, elimination of the product. The Company may not have the financial resources to modify its products or implement new designs.

Risks Applicable to Selling Products in Foreign Countries
Sales of products in foreign countries expose the Company to certain risks, including the difficulty and expense of maintaining foreign sales distribution channels, barriers to trade, potential fluctuations in foreign currency exchange rates, political and economic instability, availability of suitable export financing, accounts receivable collections, tariff regulations, foreign taxes, export licensing requirements and other foreign regulations that may apply to the export of its products. In addition, the Company may experience difficulties in providing prompt and cost-effective service of its products in foreign countries.
 
Item 2. 
Unregistered Sales of Equity Securities and Use of Proceeds
 
During the nine months ended September 30, 2012, we issued 1,380,291 shares of our common stock for $1,380,291; exercised 870,000 stock options at $.10 per share for $87,000 and exercised 800,000 stock options at $0.50 per share for $400,000. The $1,867,291 received was used for general working capital.
 
Item 3.
Defaults upon Senior Securities

None
 
Item 4.
Mine Safety Disclosures

None
 
 
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Nerium Biotechnology, Inc.


Item 5. Other Information
 
None
 
Item 6. Exhibits
 
Exhibit No.
Name of Exhibit
 
 
Certification of Chief Executive Officer pursuant to Securities Exchange Act of 1934 Rule 13a-14(a) or 15d-14(a)
Certification of Chief Financial Officer pursuant to Securities Exchange Act of 1934 Rule 13a-14(a) or 15d-14(a)
Certifications pursuant to Securities Exchange Act of 1934 Rule13a-14(b) or 15d-14(b) and 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Certifications pursuant to Securities Exchange Act of 1934 Rule 13a-14(b) or 15d-14(b) and 18 U.S.C. SecSection 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
SIGNATURES
 
In accordance with the requirements of the Securities Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
NERIUM BIOTECHNOLOGY, INC
 
  By:  
/s/ Dennis R. Knocke
   
 Dennis R. Knocke
   
       President and Chief Executive Officer
     
Dated: December 14, 2012    
     
   By: 
 /s/ Joseph B. Nester
   
      Joseph B. Nester
   
      Vice-President, Chief Financial Officer
     
Dated: December 14, 2012    
 
 
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