-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PwrIiPqao1oWOfL1KquoodhZQ7RyYyZ8eiojaWdKzKOIV+zvz6y04EPKlBMYhp0w +1A2cgft53IZpz5Kyf6MDA== 0001144204-05-011765.txt : 20050415 0001144204-05-011765.hdr.sgml : 20050415 20050415162238 ACCESSION NUMBER: 0001144204-05-011765 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20041231 FILED AS OF DATE: 20050415 DATE AS OF CHANGE: 20050415 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMARILLO BIOSCIENCES INC CENTRAL INDEX KEY: 0001014763 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 751974352 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: 1934 Act SEC FILE NUMBER: 333-04413 FILM NUMBER: 05753955 BUSINESS ADDRESS: STREET 1: 800 W 9TH AVE CITY: AMARILLO STATE: TX ZIP: 79101-3206 BUSINESS PHONE: 8063761741 MAIL ADDRESS: STREET 1: AMARILLO BIOSCIENCES INC STREET 2: 800 W 9TH AVE CITY: AMARILLO STATE: TX ZIP: 79101-3206 10KSB 1 v016376_10ksb.txt U.S. Securities and Exchange Commission Washington, D.C. 20549 Form 10-KSB (Mark One) [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 [Fee Required] For the Fiscal Year Ended December 31, 2004 [_] Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 [No Fee Required] Commission File Number 0-20791 AMARILLO BIOSCIENCES, INC. (Name of small business issuer in its charter) Texas 75-1974352 (State of other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 4134 Business Park Drive, Amarillo, Texas 79110-4225 (Address of principal executive offices) (Zip Code) Issuer's telephone number, including area code: (806) 376-1741 Securities registered under Section 12(b) of the Exchange Act: None. Securities registered under Section 12(g) of the Exchange Act: Common Stock, Par Value $.01 (Title of class) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X] Revenues for its most recent fiscal year were $51,506 As of December 31, 2004, there were outstanding 14,385,296 shares of the registrant's common stock, par value $.01, which is the only class of common or voting stock of the registrant. As of that date, the aggregate market value of the shares of common stock held by non-affiliates of the registrant (based on the closing price for the common stock on the OTC BB.AMAR) was approximately $3,612,138. PART I The following contains forward-looking statements that involve risks and uncertainties. The Company's actual results could differ materially from those discussed in the forward-looking statements as a result of certain factors, including those set forth in "Management's 2004 Plan of Operations" as well as those discussed elsewhere in this Form 10-KSB. The following discussion should be read in conjunction with the Financial Statements and the Notes thereto included elsewhere in this Form 10-KSB. ITEM 1. DESCRIPTION OF BUSINESS. General Amarillo Biosciences, Inc. (the "Company" or "ABI"), a Texas corporation formed in 1984, is engaged in developing biologics for the treatment of human and animal diseases. The Company is currently focusing its research on human health indications for the use of low-dose orally administered natural human interferon alpha, particularly for the treatment of Sjogren's syndrome, Behcet's disease, polycythemia vera, essential thrombocythemia, idiopathic pulmonary fibrosis and oral warts in HIV+ patients. The Company believes that significant worldwide opportunities exist for the development of low-dose orally administered natural interferon alpha as a cost-effective, non-toxic, efficacious alternative to the treatment of diseases by injection of high doses of interferon alpha. In addition, the Company believes that low-dose orally administered natural human interferon alpha will be an effective treatment for diseases or conditions for which current therapies are inadequate. The Company owns or licenses 16 United States patents relating to the use or composition of low-dose oral natural interferon alpha. Since 1992, the Company has filed with the U.S. Food and Drug Administration ("FDA"), and there now are in effect, 6 Investigational New Drug ("IND") Applications covering indicated uses for low-dose oral interferon alpha, including treatment of Behcet's disease, Sjogren's syndrome, and oral warts in HIV+ patients. The Company's objective is to exploit its proprietary technology to become a leader in the field of low-dose oral applications of interferon alpha. The Company's business strategy is to pursue those indications for low-dose oral interferon alpha treatment for which initial clinical research has indicated the treatment is efficacious and which, in the opinion of the Company, have the greatest commercial potential and are most likely to be approved by the FDA. To the extent possible, the Company will attempt to minimize the cost to the Company of obtaining FDA approval by utilizing forms of interferon alpha already approved (in other dosage forms and for different indications) by the Japanese Ministry of Health and Welfare for human or animal use. The Company believes that cost savings will result from this strategy. The Company will attempt to gain market share for approved products by forming alliances with strong marketing partners. The Company has 3 full-time and 1 half-time employees. The Company makes extensive use of consultants in business and research and development. 2 Human Health Applications Sjogren's Syndrome. Sjogren's syndrome is a chronic autoimmune disorder characterized by dryness of the eyes and mouth. It can exist as a primary disorder or in association with other autoimmune diseases such as rheumatoid arthritis, systemic lupus erythematosus and scleroderma. Patients with primary Sjogren's syndrome may have clinical signs such as rash, arthritis, pneumonitis and nephritis. Typical symptoms include the sensation of burning in the eyes, difficulty swallowing, painful throat, fatigue and dryness of the mouth, skin, nose and vagina. Oral candidiasis (a fungal infection of the mouth) may also arise as a result of reduced saliva flow. Although Sjogren's syndrome is not life threatening, it can cause extreme discomfort and seriously impair quality of life. The Sjogren's Syndrome Foundation, Inc. estimates that there are approximately two to four million people in the United States who suffer from Sjogren's syndrome. The Company believes that the incidence of Sjogren's syndrome worldwide is similar to its incidence in the United States. Women constitute 90% of Sjogren's syndrome patients. Topical use of artificial tears is the prevailing treatment for the dry eye symptom of the disease. Artificial tears must be used on a regular basis. Intensive oral hygiene is prescribed to prevent progressive oral problems that may develop as a result of the disease. Topical and systemic means of increasing salivary flow may provide transient relief of symptoms. The Company believes that oral interferon alpha therapy helps to relieve the dryness associated with Sjogren's syndrome, improves secretory function, and may effectively supplement, or be used in lieu of existing treatments. The Company has completed two 24-week Phase III clinical trials of the use of interferon alpha lozenges in the treatment of primary Sjogren's syndrome. Results of both Phase III clinical trials demonstrate an improvement in saliva production in treated patients (see Arthritis Care & Research, 49:585-593, 2003). The studies were double-blinded, placebo-controlled tests in which a total of 497 patients were treated three times daily for 24 weeks with a lozenge containing either 150 international units (IU) of interferon alpha or a placebo. Analysis of participants who completed the trials, designated as evaluable patients, found a significant (p=0.01) increase in unstimulated whole saliva (UWS) production among the interferon alpha treated patients, as compared to those who received placebo. Increases in UWS are important to the Sjogren's patient since UWS represents the basal salivary flow that is present over 90% of the day. Importantly, in interferon alpha treated subjects a significant (p#0.05) correlation was seen between increases in UWS and improvement in a number of the symptoms of Sjogren's syndrome that were assessed in the study, including oral dryness, throat dryness, nasal dryness and the ability to swallow foods. This finding suggests that patients were able to perceive a benefit of having increased salivary flow. Because UWS was a secondary, and not the primary end point of these studies, these promising findings did not result in FDA approval. Instead, the FDA suggested that the Company sponsor an additional, large-scale Phase III study that would include UWS flow as the primary endpoint. Instead, the Company proposed a study designed to demonstrate, by biopsy, improvement at the site of disease activity, the salivary glands. The Company believes that, if successful, the salivary gland study results, along with the beneficial UWS results generated in the twin Phase III studies, would form a reasonable basis for the approval of oral interferon alpha in the treatment of Sjogren's syndrome. Even though the FDA stated their belief that the data package would still be insufficient, the Company plans to conduct a biopsy study and, if successful, to file for marketing approval. 3 Oral Warts in HIV+ Patients. Oral warts are lesions in the mouth caused by the human papillomaviruses. In open-label Phase I/II clinical studies with 36 patients, complete or partial clearance of oral warts was achieved in 71% (5/7) of HIV+ subjects given interferon-(alpha) at 1500 international units (IU) per day. A double-blind, placebo-controlled Phase II study to confirm and expand these findings is planned for initiation in 2005. The Company filed with the FDA Office of Orphan Drugs and was granted (Summer 2000) orphan drug status for low dose IFN(alpha) treatment in this condition. Behcet's Disease. Behcet's disease is a severe chronic relapsing inflammatory disorder marked by oral and genital ulcers, eye inflammation (uveitis) and skin lesions, as well as varying multisystem involvement including the joints, blood vessels, central nervous system, and gastrointestinal tract. The oral lesions are an invariable sign, occurring in all patients at some time in the disease. Behcet's disease is found world-wide, and is a significant cause of partial or total disability. The US patient population has been estimated as 15,000. The Company filed with the FDA Office of Orphan Drugs and was granted (Spring 2000) orphan drug status for low dose orally administered IFN(alpha) treatment in this condition. A double-blind, placebo-controlled Phase II trial is planned for 2005. Idiopathic Pulmonary Fibrosis. Idiopathic Pulmonary Fibrosis (IPF) is a chronic inflammatory fibrotic disorder localized to the lower respiratory tract and characterized by an alveolitis dominated by alveolar macrophages, polymorphonuclear leukocytes (PMNs) and, to a lesser extent, lymphocytes and eosinophils. The disease usually presents as dyspnea on exertion, the chest x-ray shows diffuse reticulonodular infiltrates, and analysis of lung function reveals restrictive abnormalities. The disease process does not affect the upper or conducting airways, but bronchiolitis of respiratory bronchioles may be present and alveolar units are always involved. Normally, overlying or interspersed in the alveoli are a variety of immune cells, including alveolar macrophages, dendritic macrophages, interstitial monocytes, lymphocytes, and inflammatory cells, such as PMNs and eosinophils. The cellular content of normal bronchial-alveolar lavage (BAL) fluid consists of approximately 80 percent alveolar macrophages, 10 percent lymphocytes (of which 70 percent are T lymphocytes), 1 to 5 percent B lymphocytes or plasma cells, 1 to 3 percent PMNs, and 1 percent eosinophils. In the lymphocyte population, the ratio of CD4 T helper and CD8 T suppressor/cytotoxic cells is about 1.5. In the earliest, reversible forms of alveolar injury, "leakiness" of the alveolar type I cells and the adjacent capillary endothelial cells occurs, causing alveolar and interstitial edema and the formation of intra alveolar hyaline membranes. With persistence of the disease, increased alveolar-capillary permeability and desquamation of intra-alveolar cells (alveolitis), mural inflammation, and interstitial fibrosis are present on biopsy. This process is also reflected in the composition of cells and enzymes recovered in BAL fluid and in cellular components present in lung biopsy tissue. The presence and severity of the disease process are spotty in distribution; a continuum of inflammatory and fibrotic changes can be found throughout the affected lung. Fibrosis follows from an organization of inflammatory exudate within the airspaces in which fibroblasts beneath the type I epithelium proliferate and increase their production of fibronectin and collagen. Death of the patient usually occurs within 4-5 years of diagnosis. ABI's low-dose orally administered interferon alpha is being tested as a treatment for IPF under an Advanced Technology Program Grant awarded by the State of Texas to the Texas Tech University Health Sciences Center in Lubbock. 4 The $100,000 grant is being used by the Health Science Center to support a pilot study of 20 patients with IPF. ABI is collaborating on this research with Lorenz O. Lutherer, MD, PhD, professor, physiology, and Cynthia A. Jumper, MD, associate professor patient care, internal medicine, and is providing support in the form of study drug, data management and biostatistical analysis. Seventeen IPF patients have been enrolled into treatment with interferon alpha lozenges. Seven of the IPF patients have completed at least 12 months of treatment and 6 of these patients are stable, showing no sign of disease progression, according to Dr. Lutherer. Bone Marrow Disorders. ABI will commence to test low dose oral interferon alpha in forty patients with rare bone marrow proliferative disorders. The study will be conducted at a major Texas cancer center with a leading medical authority who specializes in the treatment of these myeloproliferative disorders. Twenty patients, each with either polycythemia vera (PV) or primary thrombocythemia (ET), will be given low dose oral interferon alpha daily as a treatment to relieve the signs and symptoms associated with these disorders. In 1997-1998, Amarillo Biosciences, in conjunction with the Mayo Clinic, conducted a 48-week pilot study in the treatment of PV and ET. Human interferon alpha lozenges were administered to 7 PV and 6 ET patients. Because of the benefits noted in the pilot study, and because so few good treatment alternatives exist, this follow-up study is planned to commence in the second quarter of this year. The first study treated patients once per day, but with more clinical experience and a better understanding of the mechanism of action of oral interferon, the new study will dose patients three times per day. PV and ET are stem cell disorders considered to be incurable. Treatment is directed at reducing morbidity and preventing life-threatening complications. The clinical course of both ET and PV are characterized by vasomotor disturbances (headaches, dizziness), acral dysesthesia (impaired sensations in limbs, fingers, ears), erythromelalgia (diffused redness and atrophy of skin on legs), visual symptoms, thrombohemorrahagic (inappropriate clotting) events, and the risk of transformation into acute myeloid leukemia or fibrosis of bone marrow. Treatment efforts in ET strive to reduce clotting events in patients at high-risk for thrombosis without increasing the intrinsically low risk of leukemic transformation. All patients with PV require phlebotomy (drawing blood), with the goal of reducing hematocrit levels (the concentration of red blood cells). This maneuver prolongs survival by decreasing, but not abolishing, the risk of thrombosis. The goal of therapy in PV is not only to prevent thrombosis, but also to reduce the risk of transformation into acute myeloid leukemia or myelofibrosis. In the previous 1997-1998 study, treatment response in PV patients was based on changes in hematocrit levels and phlebotomy requirement. Four of 7 subjects had a =>50% reduction in phlebotomy requirement, compared to the 6 months prior to the study, and consequently were considered partial responders. Response in the ET subjects was based on changes in platelet count. One of 6 subjects experienced normalization of platelet count (complete response), 3 were unchanged and 2 experienced a progression of disease during interferon alpha lozenge therapy. No deaths or serious adverse events occurred in this study. Influenza. Warnings have been issued that the avian influenza virus presently killing animals and people in Asia may become the new strain of pandemic flu which could potentially kill millions of people. These warnings have sparked renewed interest in ways to treat or prevent influenza. Clinical observations from thousands of influenza patients in Russia, Ukraine, Bulgaria, China, and Japan claim significant clinical benefits to patients intranasally given low-dose (a few hundred to 10,000 units) interferon during natural outbreaks 5 of influenza. In contrast, in experimental influenza virus challenge studies with human volunteers, those volunteers given 800,000 to 70 million units of interferon by intranasal delivery did not experience a clinical benefit. Data generated using low dose interferon was rejected by Western scientists because of the impure nature of the interferon used in early studies and because the low dose interferon did not seem to make any sense. This review proposes that the subject of low dose interferon for influenza be revisited. Intranasal and oral administration of low-dose interferon deliver interferon to the same receptors in the oral-pharyngeal cavity. Low-dose oral interferon may represent an inexpensive, safe way to modulate the immune system during, or before, influenza infection. ABI has opened a blog site (http://interferonandinfluenza.blogspot.com) to discuss oral interferon and the flu. ABI has contact with flu experts and health officials in several countries in an effort to conduct testing of low dose interferon alpha for influenza. Strategic Alliance with HBL Hayashibara Biochemical Laboratories, Inc. ("HBL") was established in 1970 to engage in research and development. It is a subsidiary of Hayashibara Company, Ltd., a privately-owned Japanese holding corporation with diversified subsidiaries. For more than 100 years the Hayashibara Company, Ltd. and its predecessors have been applying microbiological technology in the starch industry for the production of maltose and other sugars. In 1981, HBL established the Fujisaki Institute to accelerate development of industrial methods for the production of biologics and to sponsor clinical trials for such products. In 1985, HBL built the Fujisaki Cell Center to support basic research. In 1987, HBL successfully accomplished the mass production of human cells in an animal host by producing human cells in hamsters. This made it possible to economically produce a natural form of human interferon alpha and other biologics. HBL also has developed and obtained patents for technology relating to the production of interferon alpha-containing lozenges by which the stability of the interferon alpha activity can be maintained for up to 24 months at room temperature and up to five years if the product is refrigerated. The Company believes that the use of such lozenges gives it advantages over competitive technologies in terms of cost, taste and ease of handling. On March 13, 1992, the Company entered into a Joint Development and Manufacturing/Supply Agreement with HBL (the "Development Agreement"). Such Development Agreement was subsequently amended on January 17, 1996 and May 10, 1996. Among other things, the Development Agreement provides the Company with a source of natural human interferon alpha for use in the Company's interferon alpha-containing products. Additional information on the Development Agreement is set forth in footnote 4 to the Consolidated Financial Statements attached to this 10-KSB. Strategic Alliance with Nobel The Company signed a licensing and supply agreement with a leading Turkish pharmaceutical company, NOBEL ILAC SANAYII VE TICARET A.S., providing the rights to oral low-dose interferon-alpha for the treatment of Behcet's disease in Turkey and in Azerbaijan, Bosnia & Herzegovina, Bulgaria, Croatia, Georgia, Kazakhstan, Kyrghyzstan, Macedonia, Romania, Russia, Saudi Arabia, Slovenia, Tajikistan, Turkmenistan, Uzbekistan, and Federal Republic of Yugoslavia. 6 The license agreement covers a territory whose population is approximately 365 million. In Turkey, where the disease is more than 600 times more prevalent than in the United States, there are from 56,000 to 259,000 people who are afflicted with the disease, according to a review published in the New England Journal of Medicine. The U.S. Food and Drug Administration (FDA) has granted Orphan Drug Designation for this product for the clinical indication of Behcet's Disease to Amarillo Biosciences. The Orphan Drug Designation is designed to promote the development of treatments for diseases rare in the United States and provides certain marketing exclusivity incentives outlined under the Orphan Drug Act. Under the terms of the agreement, ABI and NOBEL will conduct Behcet's disease studies in Turkey under an Investigating New Drug (IND) Application submitted by ABI to the U.S. FDA. U.S. FDA approval will be sought and this FDA approval will be owned by ABI, but will be used by NOBEL to seek regulatory approval in each country of the Territory. Other Agreements In 2004 the Company also entered into various other licensing and supply arrangements which could serve as a source of future revenue for the Company; however, none of these arrangements are currently contributing in a significant manner to the Company's revenue, and these arrangements are not considered by the Company's management to be material, either individually or in the aggregate. Publishing A manuscript entitled "Orally Administered Interferon Alpha has Systemic Effects" was published by the American Journal of Veterinary Research, Vol. 166, 164-176, 2005.. A chapter entitled "The Clinical Use of Low Dose Orally Administered Interferon Alpha, with Emphasis on Treatment of Patients Positive for Human Immunodeficiency Virus" appeared in the 2004 book, AIDS Vaccines and Related Topics. Publishing this information, ABI believes, will help the Company gain recognition for our technology. Animal Health Application Agroterrorism. Dr. Joseph Cummins met with scientists, livestock producers and elected officials to argue for alternatives to the government's plans to slaughter livestock if diseases are introduced by terrorists. On February 12, 2004, Dr. Joseph Cummins participated in an agroterrorism seminar held at the Texas A&M Research and Extension Center in Amarillo, Texas. Working with Dr. Albert Paszek of Cargill, a manuscript entitled "Interferon Alpha in the Feed to Control Foot-and-Mouth Disease" was presented June 23, 2004 at the 57th Reciprocal Meat Conference in Lexington, KY. At various times, Dr. Cummins met with members of the staff of US Senator Cornyn and US Senator John Rockefeller to discuss agroterrorism. Members of the Emergency Management team in Amarillo and the Randall County Judge met with Dr. Cummins on April 27, 2004, to hear his concerns that the livestock in the Texas Panhandle are completely vulnerable to an attack with foot-and-mouth disease virus. On July 20, 21, 23, 24, 26, 27, and 31, 2004 Dr. Cummins presented seminars in Japan at which agroterrorism and oral interferon were discussed; approximately 700 veterinarians attended the seminars. Our paper on FMD was published in the January 2005 International Society for Interferon & Cytokine Research newsletter. ABI continues to contact scientists and government officials to urge development of an alternative to the USDA's current policy. 7 Dr. Roger Breeze, former director of the USDA's Foreign Animal Disease Laboratory on Plum Island, New York, has written an article on agroterrorism published in December 2004 at www.biosecurityjournal.com. We agree with Dr. Breeze that the USDA's current policy to contain FMD is "fatally flawed." Working with Cargill, ABI has published a plan entitled "Orally administered interferon to prevent/treat foot-and-mouth disease" to help contain FMD. This plan can be seen on our website www.amarbio.com. On July 22, 2004 ABI announced that BioVet, Inc., a Tokyo based animal health company with whom Amarillo Biosciences has been collaborating, has been granted regulatory approval for production and marketing of oral interferon for treatment of rotavirus in cattle in Japan. Rotavirus diarrhea is a major cause of disease and death in animals and humans. The animal health approval is for low dose oral administration of human interferon alpha supplied by Hayashibara Biochemical Laboratories (HBL). The product was launched in Japan in September 2004. Amarillo Biosciences owns the distribution rights to HBL interferon for animal health outside Japan and will receive a royalty on all Japanese HBL interferon sales. Patents and Proprietary Rights No new patents were issued in 2004. Competition The pharmaceutical industry is an expanding and rapidly changing industry characterized by intense competition. The Company believes that its ability to compete will be dependent in large part upon its ability to continually enhance and improve its products and technologies. In order to do so, the Company must effectively utilize and expand its research and development capabilities and, once developed, expeditiously convert new technology into products and processes, which can be commercialized. Competition is based primarily on scientific and technological superiority, technical support, availability of patent protection, access to adequate capital, the ability to develop, acquire and market products and processes successfully, the ability to obtain governmental approvals and the ability to serve the particular needs of commercial customers. Corporations and institutions with greater resources than the Company may, therefore, have a significant competitive advantage. 8 The Company's potential competitors include entities that develop and produce therapeutic agents for treatment of human and animal disease. These include numerous public and private academic and research organizations and pharmaceutical and biotechnology companies pursuing production of, among other things, biologics from cell cultures, genetically engineered drugs and natural and chemically synthesized drugs. Almost all of these potential competitors have substantially greater capital resources, research and development capabilities, manufacturing and marketing resources and experience than the Company. The Company's competitors may succeed in developing products or processes that are more effective or less costly than any that may be developed by the Company, or that gain regulatory approval prior to the Company's products. The Company also expects that the number of its competitors and potential competitors will increase as more interferon alpha products receive commercial marketing approvals from the FDA or analogous foreign regulatory agencies. Any of these competitors may be more successful than the Company in manufacturing, marketing and distributing its products. There can be no assurance that the Company will be able to compete successfully. Government Regulation Once a new compound has been identified in the laboratory, medicines are developed as follows: Preclinical Testing. A pharmaceutical company conducts laboratory and animal studies to show biological activity of the compound against the targeted disease, and the compound is evaluated for safety. Investigational New Drug Application ("IND"). After completing preclinical testing, a company files an IND with the FDA to begin to test the drug in people. The IND becomes effective if the FDA does not disapprove it within 30 days. The IND shows results of previous experiments; how, where and by whom the new studies will be conducted; the chemical structure of the compound; how it is thought to work in the body; any toxic effects found in the animal studies; and how the compound is manufactured. All clinical trials must be reviewed and approved by the Institutional Review Board ("IRB") where the trials will be conducted. Progress reports on clinical trials must be submitted at least annually to FDA and the IRB. Clinical Trials, Phase I. These tests involve about 20 to 80 normal, healthy volunteers. The tests study a drug's safety profile, including the safe dosage range. The studies also determine how a drug is absorbed, distributed, metabolized and excreted as well as the duration of its action. Clinical Trials, Phase II. In this phase, controlled trials of approximately 100 to 300 volunteer patients (people with the disease) assess a drug's effectiveness. Clinical Trials, Phase III. This phase usually involves 1,000 to 3,000 patients in clinics and hospitals. Physicians monitor patients closely to confirm efficacy and identify adverse events. These numbers may be modified based on the disease prevalence. New Drug Application ("NDA")/Biologics License Application ("BLA"). Following the completion of all three phases of clinical trials, a company analyzes all of the data and files with FDA an NDA, in the case of a drug product, or a BLA in the case of a biologic product, if the data successfully demonstrate both safety and effectiveness. The NDA/BLA contains all of the scientific information that the Company has gathered. NDA's typically run 100,000 pages or more. By law, FDA is allowed twelve months to review a standard NDA/BLA. 9 Approval. Once FDA approves an NDA, the new medicine becomes available for physicians to prescribe. A company must continue to submit periodic reports to FDA, including any cases of adverse reactions and appropriate quality-control records. For some medicines, FDA requires additional trials (Phase IV) to evaluate long-term effects. ABI obtained an IND for oral interferon alpha in the treatment of Sjogren's syndrome in 1994. ABI successfully completed Phase I development in 1996, Phase II development in 1997 and launched the first of its Phase III trials in November 1998. All Phase III trials in the treatment of Sjogren's syndrome were completed in 2000. Our goal is to initiate a biopsy study of patients in 2004. Additionally, ABI expects to launch a Phase III trial in HIV+ patients with oral warts and a Phase II/III trial in patients with Behcet's disease. All progress on approval is dependent on funding. Research and Development During the years ended December 31, 2004 and 2003, the Company incurred expenses of $171,043 and $173,345, respectively, resulting from Company-sponsored research and development activities. Research and development is expected to remain a significant component of the Company's business. The Company has arranged for others to perform substantially all of its clinical research and intends to continue to do so while utilizing its staff for monitoring such research. See also ITEM 6, "MANAGEMENT'S 2005 PLAN OF OPERATIONS - - Research and Development". ITEM 2. DESCRIPTION OF PROPERTY. The Company's executive and administrative offices are located at 4134 Business Park Drive, Amarillo, Texas in a 1,800 square-foot facility rented by the Company. The building contains offices, and a small warehouse. The Company believes that the facility is adequate for its present use. ITEM 3. LEGAL PROCEEDINGS. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. 10 PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS. The Company is presently traded on the OTC Bulletin Board under the symbol AMAR. The range of high and low sales prices as quoted on the OTC Bulletin Board for each quarter of 2004 and 2003 was as follows: 2004 2003 --------------------- ------------------------------ Quarter High Low High Low - ----------- --------- ------------ ------------ ------------------ First $ 0.44 $ 0.27 $ 0.19 $ 0.05 Second 0.35 0.18 0.39 0.09 Third 0.32 0.20 0.51 0.22 Fourth 0.38 0.21 0.51 0.29 As of December 31, 2004, the Company had approximately 850 shareholders of record. 11 ITEM 6. MANAGEMENT DISCUSSIONS AND ANALYSIS OR PLAN OF OPERATION. The following discussion should be read in conjunction with our financial statements and the notes thereto which appear elsewhere in this report. The results shown herein are not necessarily indicative of the results to be expected in any future periods. This discussion contains forward-looking statements based on current expectations, which involve uncertainties. Actual results and the timing of events could differ materially from the forward-looking statements as a result of a number of factors. Readers should also carefully review factors set forth in other reports or documents that we file from time to time with the Securities and Exchange Commission. Overview The Company continues to engage in research and development activities focused on developing biologics for the treatment of human and animal diseases. The Company has not commenced any significant product commercialization and, until such time as it does, will not generate significant product revenues. The Company's accumulated deficit has increased, from approximately $21,912,001 at December 31, 2003 to $22,507,207 at December 31, 2004. Operating losses are expected to continue for the foreseeable future and until such time as the Company is able to attain sales levels sufficient to support its operations. In 2005 the Company will continue its research and development activities, as well as the activities necessary to develop commercial partnerships and licenses. The Company's expenditure of financial resources in 2005 will fall principally into five broad categories, as follows: Research and Development; Personnel; Consulting and Professional (except legal and accounting); Legal and Accounting; and Public Relations, Investor Relations and Shareholder Relations. The Company's expectations and goals with respect to these categories are addressed separately below, by category. In 2004, the Company sold 2,576,385 unregistered shares of its voting common stock in private placement offerings. Of these sales, 376,385 shares were sold for $0.13 per share; 150,000 shares for $0.11 per share; 100,000 shares for $0.105 per share; 1,950,000 shares for $0.10 per share; generating $270,930 in cash. ABI issued 47,380 unregistered shares of its voting common stock as payment for consulting services performed in 2004. Valuation of the stock granted was $0.203 - 0.350 per share which generated a value of $13,960. The Company signed a licensing and supply agreement in September 2004, with a leading Turkish pharmaceutical company, NOBEL ILAC SANAYII VE TICARET A.S., providing the rights to oral low-dose interferon-alpha for the treatment of Behcet's disease in Turkey and in Azerbaijan, Bosnia & Herzegovina, Bulgaria, Croatia, Georgia, Kazakhstan, Kyrghyzstan, Macedonia, Romania, Russia, Saudi Arabia, Slovenia, Tajikistan, Turkmenistan, Uzbekistan, and Federal Republic of Yugoslavia. The license agreement covers a territory whose population is approximately 365 million. In Turkey, where the disease is more than 600 times more prevalent than in the United States, there are from 56,000 to 259,000 people who are afflicted with the disease, according to a review published in the New England Journal of Medicine. The U.S. Food and Drug Administration (FDA) has granted Orphan Drug Designation for this product for the clinical indication of Behcet's Disease to Amarillo Biosciences. The Orphan Drug Designation is designed to promote the development of treatments for diseases rare in the United States and provides certain marketing exclusivity incentives outlined under the Orphan Drug Act. 12 Under the terms of the agreement, ABI and NOBEL will conduct Behcet's disease studies in Turkey under an Investigating New Drug (IND) Application submitted by ABI to the U.S. FDA in October 2004. U.S. FDA approval will be sought and this FDA approval will be owned by ABI, but will be used by NOBEL to seek regulatory approval in each country of the Territory. In June 2004, ABI reached agreement with Global Kinetics of Kent, Washington to become the US distributor of Dry Mouth Relief (DMR), replacing Natrol. Global Kinetics' sales of DMR are expected to begin in the first half of 2005. On July 22, 2004 ABI announced that BioVet, Inc., a Tokyo based animal health company with whom Amarillo Biosciences has been collaborating, has been granted regulatory approval for production and marketing of oral interferon for treatment of rotavirus in cattle in Japan. Rotavirus diarrhea is a major cause of disease and death in animals and humans. The animal health approval is for low dose oral administration of human interferon alpha supplied by HBL. The product was launched in Japan in August 2004. Amarillo Biosciences owns the distribution rights to HBL interferon for animal health outside Japan; will receive a royalty on all Japanese HBL interferon sales. ABI has opened a blog site (http://interferonandinfluenza.blogspot.com) to discuss oral interferon and the flu. ABI has contact with flu experts and health officials in several countries in an effort to conduct testing of low dose interferon alpha for influenza. Liquidity and Capital Resources At December 31, 2004, the Company had available cash of approximately $6,283, and had a working capital deficit of approximately ($712,782). Assuming there is no decrease in current accounts payable, and accounting for various one-time expenses, the Company's negative cash flow is approximately $39,000 per month. The Company's continued losses and lack of liquidity indicate that the Company may not be able to continue as a going concern for a reasonable period of time. The Company's ability to continue as a going concern is dependent upon several factors including, but not limited to, the Company's ability to generate sufficient cash flows to meet its obligations on a timely basis, obtain additional financing and continue to obtain supplies and services from its vendors. The Company will need to raise additional funds in order to fully execute its 2005 Plan. The Company is presently negotiating with human health and animal health commercial development partners in various regions of the world including the United States, South America and Southeast Asia. The Company believes that one or more of these agreements will be executed during 2005. These agreements could generally include provisions for the commercial partner to pay ABI a technology access fee, could include payments for a portion of the clinical trial expenses, could include payment obligations to ABI upon the accomplishment of certain defined tasks and/or could provide for payments relating to the future sales of commercial product. These agreements could be an important source of funds for ABI. However, there can be no assurance that the Company will be successful in obtaining additional funding from either human health and animal health commercial development partners or private investors. If the Company is not successful in raising additional funds, it will need to significantly curtail clinical trial expenditures and to further reduce staff and administrative expenses and may be forced to cease operations. 13 Total outstanding current liabilities increased to approximately $2.8 million at December 31, 2004, as compared to approximately $2.7 million at December 31, 2003. Critical Accounting Policies We believe the following critical accounting policies, among others, affect our more significant judgments and estimates used in the preparation of our financial statements: Accounting for Stock-Based Compensation The Company accounts for stock-based compensation under the intrinsic value method. Under this method, the Company recognizes no compensation expense for stock options granted when the number of underlying shares is known and exercise price of the option is greater than or equal to the fair market value of the stock on the date of grant. Basic and Diluted Net Income (Loss) Per Share We account for stock-based compensation based on the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," as amended by the Financial Accounting Standards Board Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation." Accounting Principles Board Opinion No. 25 and Financial Accounting Standards Board Interpretation No. 44 state that no compensation expense is recorded for stock options or other stock-based awards to employees that are granted with an exercise price equal to or above the estimated fair value per share of the company's common stock on the grant date. We adopted the disclosure requirements of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," which requires compensation expense to be disclosed based on the fair value of the options granted at the date of the grant. In December 2002, the Financial Accounting Standards Board issued its Statement No. 148, "Accounting for Stock-Based Compensation -- Transition and Disclosure--an amendment of Financial Accounting Standards Board Statement No. 123." This Statement amends Statement of Financial Accounting Standards No. 123, to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. It also amends the disclosure provisions of Statement of Financial Accounting Standards No. 123 to require prominent disclosure about the effects on reported net income of an entity's accounting policy decisions with respect to stock-based employee compensation. The transition and annual disclosure provisions of Statement of Financial Accounting Standards No. 148 are effective for fiscal years ending after December 15, 2002, and the interim disclosure provisions were effective for the first interim period beginning after December 15, 2002. We did not voluntarily change to the fair value based method of accounting for stock-based employee compensation, therefore, the adoption of Statement of Financial Accounting Standards No. 148 did not have a material impact on our operations and/or financial position. 14 Deferred Taxes Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax reporting purposes. A valuation allowance of $6,500,000 has been recorded to reduce the Company's deferred tax assets to the amount that is more likely than not to be realized. Consideration of estimated future taxable income and ongoing tax planning strategies is utilized in assessing the amount needed for the valuation allowance. Based on these estimates, all deferred tax assets have been reserved. If actual results differ favorably from those estimates used, the Company might be able to realize all or part of our net deferred tax assets. Such realization could positively impact operating results and cash flows from operating activities. Comparison of results for the fiscal year ended December 31, 2004, to the fiscal year ended December 31, 2003. Revenues. During the fiscal year ended December 31, 2004 $45,389 from product sales was generated compared to revenues from product sales for the fiscal year ended December 31, 2003, of $36,927, an increase of $8,462 or approximately 23%. The increase is primarily due to international orders for Maxisal(R), our dietary supplement. Selling, General and Administrative Expenses. Selling, General and Administrative expenses of $362,388 were incurred for fiscal year ended December 31, 2004, compared to $394,772 for the fiscal year ended December 31, 2003, a decrease of $32,384. There was $13,960 in non-cash expenses in recognition of stock issued to cover services provided by consultants in lieu of cash. Non-Cash Consulting Activities. During the year ended December 31, 2004, the Board of Directors authorized the issuance of shares of restricted common stock to various consultants in lieu of cash payments. Based upon the common stock trading price at the times of issuance, and FASB rules, a non-cash consulting expense of $13,960 was recorded for the issuance of these shares during the year ended December 31, 2004. Net Income (Loss). Net Loss applicable to common shareholders for the fiscal year ended December 31, 2004 was ($595,205) compared to a Net Income of $166,631 for the fiscal year ended December 31, 2003. The increase in income in 2003 was a result of the dissolution of Veldona and with legal advice, a long-term accrued contingent liability of $750,965 recorded in accounts payable that was reversed into income in September 2003. Without this reversal, the Company would have reported a consolidated Net Loss of $584,334 for the fiscal year ended December 31, 2003. RISK FACTORS You should carefully consider the risks described below before making an investment in Amarillo Biosciences, Inc. All of these risks may impair our business operations. If any of the following risks actually occurs our business, financial condition or results of operations could be materially adversely affected. In such case, the trading price of our common stock could decline, and you may lose all or part of your investment. 15 Risks Relating to our Business We may not be able to adequately protect and maintain our intellectual property. Our success will depend in part on our ability to protect and maintain our patents, intellectual property rights and licensing arrangements for our products and technology. No assurance can be given that licenses or rights used by Amarillo Biosciences, Inc. will not be challenged, infringed or circumvented, or that the rights granted thereunder will provide competitive advantages to us. Furthermore, there can be no assurance that we will be able to remain in compliance with our existing or future licensing arrangements. Consequently, there may be a risk that licensing arrangements are withdrawn with no penalties to the licensee or compensation to Amarillo Biosciences, Inc. We rely on third parties for the supply, manufacture and distribution of our products. Third parties manufacture and distribute all of our products. We do not currently have manufacturing facilities or personnel to independently manufacture our products. Currently, Marlyn Nutraceutical manufactures our nutraceutical products. Our licensed distributors, in the United States and Internationally distribute the nutraceutical products. Except for any contractual rights and remedies that we may have with our manufacturer and our distributor, we have no control over the availability of our products, their quality or cost or the actual distribution of our products. If for any reason we are unable to obtain or retain third-party manufacturers and distributors on commercially acceptable terms, we may not be able to produce and distribute our products as planned. If we encounter delays or difficulties with our contract manufacturer in producing or packaging our products or with our distributor in distributing our products, the production, distribution, marketing and subsequent sales of these products would be adversely affected, and we may have to seek alternative sources of supply or distribution or abandon or sell product lines on unsatisfactory terms. We may not be able to enter into alternative supply, production or distribution arrangements on commercially acceptable terms, if at all. There can be no assurance that the manufacturer that we have engaged will be able to provide sufficient quantities of these products or that the products supplied will meet with our specifications or that our distributor will be able to distribute our products in accordance with our requirements. We are dependant on certain key existing and future personnel. Our success will depend, to a large degree, upon the efforts and abilities of our officers and key management employees such as Joseph M. Cummins, our President, Chief Executive Officer and Chief Financial Officer; and Martin J. Cummins, our Director of Clinical and Regulatory Affairs. The loss of the services of one or more of our key employees could have a material adverse effect on our operations. We do not currently have employment agreements with any of our employees. We do not currently maintain key man life insurance on any of our key employees. In addition, as our business plan is implemented, we will need to recruit and retain additional management and key employees in virtually all phases of our operations. We cannot assure that we will be able to successfully attract and retain key personnel. 16 Our growth is dependent on our ability to successfully develop, acquire or license new drugs. We must invest substantial time, resources and capital in identifying and developing new drugs, dosage and delivery systems, either on our own or by acquiring and licensing such products from third parties. Our growth depends, in part, on our success in such process. Our planned expansion over time is founded on a simple principal of introducing two new products or line extensions each year and to expand distribution into two new territories each year. This strategy has the advantage of building brands through geographic expansion and line extensions, and establishing incremental capabilities for new product introductions. We believe that our planned expansion will require $5.0 million in total over three years, which we intend to fund out of our future revenues and, if necessary, additional financing. If we are unable to either develop new products on our own or acquire licenses for new products from third parties, our ability to grow revenues and market share will be adversely affected. In addition, we may not be able to recover our investment in the development of new drugs, given that projects may be interrupted, unsuccessful, not as profitable as initially contemplated or we may not be able to obtain necessary financing for such development if we are unable to fund such development from our future revenues. Similarly, there is no assurance that we can successfully secure such rights from third parties on an economically feasible basis. We may be subject to product liability claims in the future. We face an inherent business risk of exposure to product liability claims in the event that the use of our technologies or products are alleged to have resulted in adverse side effects. Side effects or marketing or manufacturing problems pertaining to any of our products could result in product liability claims or adverse publicity. These risks will exist for those products in clinical development and with respect to those products that receive regulatory approval for commercial sale. Furthermore, although we have not historically experienced any problems associated with claims by users of our products, we do not currently maintain product liability insurance. We plan to have a product liability insurance plan in place in 2005; however, there can be no assurance that we will be able to acquire product liability insurance with terms that are commercially feasible. Risks Relating to Ownership of Common Stock. There may not be sufficient liquidity in the market for our securities in order for investors to sell their securities. There is currently only a limited public market for our common stock, which is listed on the Nasdaq, and there can be no assurance that a trading market will develop further or be maintained in the future. ITEM 7. FINANCIAL STATEMENTS. The financial statements of the Company are set forth beginning on page F-1 immediately following the signature page of this report. 17 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT. As of December 31, 2004, the directors and executive officers of the Company were as follows: Name Age Position - ------------------------------------------------------------------------------- Joseph Cummins, DVM, PhD (1)(3).. 62 Chairman of the Board, President, Chief Executive Officer, Chief Financial Officer and Director Stephen Chen, PhD (2)(4)......... 55 Director Katsuaki Hayashibara (3)(4)(5)... 60 Director Dennis Moore, DVM (1)(4)(5)...... 58 Director James Page, MD (1)(2)(5)......... 77 Director The following is not an executive officer, but is expected by the Company to make a significant contribution to the business: Martin J. Cummins................ 38 Director of Clinical & Regulatory Affairs (1) Member of the Executive Committee. (2) Member of the Compensation Committee. (3) Member of the Finance Committee. (4) Member of the Audit Committee. (5) Member of the Stock Option Plans Administration Committee. Joseph Cummins has been the Chairman of the Board of the Company since he founded it in June 1984. Dr. Cummins has also served as President of the Company since December 1994 and as Chief Financial Officer since October 1998. Dr. Cummins has been conducting research on oral cytokines, most particularly interferon alpha, in animals and humans for 29 years. Dr. Cummins has more than 40 publications and a dozen patents that reflect his work in the field of oral interferon. He received a PhD degree in microbiology from the University of Missouri in 1978 and a doctor of veterinary medicine degree from the Ohio State University in 1966. Stephen Chen has been a director of the Company since February 1996. He has been President and Chief Executive Officer of STC International, Inc., a health care investment firm, since May 1992. From August 1989 to May 1992 he was Director of Pharmaceutical Research and Development for the Ciba Consumer Pharmaceuticals Division of Ciba-Geigy. Katsuaki Hayashibara has been a director of the Company since 1994. Mr. Hayashibara was named Director of the Overseas Business Development Division of Hayashibara Company, Ltd. in January 1997. Prior to 1997, Mr. Hayashibara served as Director of Research and Development for HBL. 18 Dennis Moore has been a director of the Company since 1986. Dr. Moore has been a doctor of veterinary medicine since 1972 and was in private practice from 1972 to 1995. Since 1995, Dr. Moore has been involved in managing his personal investments. James Page has been a director of the Company since February 1996. Prior to retiring in 1991 as a Vice President with Adria Laboratories, Inc., a pharmaceutical company specializing in therapy given to cancer and AIDS patients, Dr. Page held various upper management level positions with Carter Wallace, Inc., Merck Sharpe & Dohme Research Laboratories and Wyeth Laboratories. Martin Cummins has held several positions within the Company since joining the Company full-time in June 1992. Mr. Cummins currently oversees all research studies involving human participants as Director of Clinical and Regulatory Affairs. Martin Cummins is the son of Joseph Cummins. The Company's directors are elected at the annual meeting of shareholders to hold office until the annual meeting of shareholders for the ensuing year or until their successors have been duly elected and qualified. Directors are reimbursed for any out-of-pocket expenses in connection with their attendance at meetings. In the event of the voluntary termination of a recipient's association with the Company as a director, the options must be exercised within 90 days after such termination, and in the event they are not so exercised, will lapse. Officers are elected annually by the Board of Directors and serve at the discretion of the Board. Compliance with Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") requires directors and officers of the Company and persons who own more than 10 percent of the Company's common stock to file with the Securities and Exchange Commission (the "Commission") initial reports of ownership and reports of changes in ownership of the common stock. Directors, officers and more than 10 percent shareholders are required by the Exchange Act to furnish the Company with copies of all Section 16(a) forms they file. To the Company's knowledge based solely on a review of the copies of such reports furnished to the Company, all filings applicable to its directors, officers and more than 10% beneficial owners were timely filed. 19 ITEM 10. EXECUTIVE COMPENSATION. The following table sets forth for the three years ended December 31, 2004 compensation paid by the Company to its Chairman of the Board, President and Chief Executive Officer. None of the Company's other executive officers had annual salary and bonus in excess of $100,000 for services rendered during any of the three years ended December 31, 2004. Summary Compensation Table Annual Compensation ---------------------------------------------- Year Salary Bonus Other Securities Name and Principal Compen- Underlying Position sation Options - -------------------------- ----- ----------- ------- ---------- ----------- Dr. Joseph M. Cummins, 2004 $74,716 $ - $ - 650,000 Chairman of the Board, President and Chief Executive Officer 2003 $103,779 $ - $ - 290,000 2002 $121,338 $ - $ - 150,000 Option Grants in 2004 The following table sets forth certain information relating to options granted in 2004 to the executive officers named above, to purchase shares of common stock of the Company. Number of Shares of Common Stock % of Total Name Underlying Options Exercise Options Granted or Base Granted (#) to Employees Price Expiration in 2004 ($/Sh) Date - ------------------------------------------------------------------------------- Joseph M. Cummins......... 500,000 57% $0.23 (1) 05/31/2009 150,000 17% $0.27 (1) 08/27/2009 (1) The fair market value of the common stock on the date of the grant. Aggregated Option Exercises at December 31, 2004 And Year-End Option Values The following table sets forth information for the executive officers named above, regarding the exercise of options during 2004 and unexercised options held at the end of 2004.
Shares Number of Shares of Value of Unexercised Acquired Common Stock Underlying In-The-Money on Value Unexercised Options at Options at Exercise Realized December 31, 2004 (#) December 31, 2004 ($)(1) Name (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable - ---------------------------------------------------------------------------------------------- Joseph Cummins - - 988,486 / None $375,625/ None
(1) Calculated based on the closing price of the common stock ($0.38) as reported by OTC BB on December 31, 2004. 20 Director Compensation for Last Fiscal Year Security Cash Compensation Grants ----------------- ------ Number of Securities Name Meeting Consulting Underlying Fees (1) Fees (2) Options - -------------------------------------------------------------------------------- Stephen Chen, PhD $ - $ - 150,000 Katsuaki Hayashibara - - 150,000 Dennis Moore, DVM - - 150,000 James Page, MD - - 150,000 (1) Directors do not receive compensation for attendance at directors' meetings. (2) Each director receives $1,200 per day, prorated for partial days, for employment on special projects or assignments. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. As of December 31, 2004, there were 14,385,296 shares of the Company's common stock outstanding. The following table sets forth as of December 31, 2004, the beneficial ownership of each person who owns more than 5% of such outstanding common stock: Name and Address Number of Shares Percent of Total - -------------------------------------------------------------------------------- Hayashibara Biochemical Laboratories, Inc. 2-3 Shimoishii 1-chome Okayama 700, Japan 3,290,781 23% Hy Ochberg 102 N.E. 2nd Street, Suite 283 750,000 5% Boca Raton, Florida 33432 Cheryl A. Ulie 8843 SE 77th Place Mercer Island, Washington 98040 917,000 6% The following table sets forth the beneficial ownership of the Company's stock as of December 31, 2004 by each executive officer and director and by all executive officers and directors as a group: Directors Number of Shares Percent of Total 248,756 2% Joseph Cummins 50,174 * Dennis Moore Katsuaki Hayashibara 48,240 * Stephen Chen 50,000 * James Page - - ---------------- ---------- 397,170 3% Total Group (all directors and executive officers - 6 persons) * Less than 1% 21 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The Company has relied significantly on HBL, the largest shareholder of the Company, for a substantial portion of its capital requirements. Pursuant to the Development Agreement described at Item 1 of Part 1 above, HBL advanced $9,000,000 for funding of research. In addition, HBL has purchased substantial amounts of the Company's common stock from time to time, to the point where it now owns 23% of the issued and outstanding shares of common stock of the Company. HBL loaned $1 million to the Company on November 30, 1999 and an additional $1 million on February 29, 2000, both loans bearing interest at 4.5% per annum. The aggregate balance on both notes at December 31, 2004, including principal and accrued interest, was $2,446,351. In addition to the above, HBL and the Company are parties to various license and manufacturing and supply agreements pursuant to which the Company licenses certain technology to or from HBL. HBL supplies formulations of its interferon alpha and other products to the Company. During 2004, the Company used the law firm of SandersBaker, P.C. Mr. Edward Morris, Secretary of the Company is a partner in that firm. The Company was invoiced $8,402 by said firm in 2004. All future transactions and loans between the Company and its officers, directors and 5% shareholders will be on terms no less favorable to the Company than could be obtained from independent third parties. There can be no assurance, however, that future transactions or arrangements between the Company and its affiliates will be advantageous, that conflicts of interest will not arise with respect thereto or that if conflicts do arise, that they will be resolved in favor of the Company. 22 ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K. EXHIBIT INDEX Number Description - -------------------------------------------------------------------------------- 3.1+ Restated Articles of Incorporation of the Company, dated June 22, 1999. 3.3* Bylaws of the Company. 4.1* Specimen Common Stock Certificate. 4.2* Form of Underwriter's Warrant. 10.2* License Agreement dated as of March 22, 1988 between the Company and The Texas A&M University System. 10.5* Joint Development and Manufacturing/Supply Agreement dated March 13, 1992 between the Company and HBL, as amended. 10.7* Japan Animal Health License Agreement dated January 20, 1993 between the Company and HBL. 10.11* Manufacturing/Supply Agreement dated June 1, 1994 between the Company and HBL. 10.12* Settlement Agreement dated April 27, 1995 among the Company, ISI, Pharma Pacific Management Pty. Ltd. ("PPM"), Pharma Pacific Pty. Ltd., Pharma Pacific Ltd. and Fernz Corporation Limited. 10.14* PPM/ACC Sublicense Agreement dated April 27, 1995 between PPM and the Company. 10.18* Form of Consulting Agreement between the Company and the Underwriter. 10.20+ 1996 Employee Stock Option Plan, Amended and Restated as of May 11, 1999. 10.21+ Outside Director and Advisor Stock Option Plan, Amended and Restated as of May 11, 1999. 10.22* Form of Indemnification Agreement between the Company and officers and directors of the Company. 10.23* Indemnification Agreement between HBL and the Company. 10.26** License Agreement dated July 22, 1997 between Hoffmann-La Roche, Inc. and the Company. 10.27** Distribution Agreement dated January 12, 1998 between Global Damon Pharmaceutical and the Company. 10.28** Distribution Agreement dated September 17, 1997 between HBL and the Company (tumor necrosis factor-alpha). 10.29** Distribution Agreement dated September 17, 1997 between HBL and the Company (interferon gamma). 23 10.30*** Amendment No. 1 dated September 28, 1998 to License Agreement of March 22, 1988 between The Texas A&M University System and the Company. 10.36++ License Agreement dated February 1, 2000 between Molecular Medicine Research Institute and the Company (interferon gamma administered orally). 10.37++ a License and Supply Agreement dated April 3, 2000 with Key Oncologics (Pty) Ltd. and the Company. 10.38++ Amendment No. 1 dated April 4, 2000, to Interferon Gamma Distribution Agreement dated September 17, 1997 between HBL and the Company (interferon gamma). 10.39++ a License and Supply Agreement dated April 25, 2000 between Biopharm for Scientific Research and Drug Industry Development and the Company. 10.40++ a Sales Agreement dated May 5, 2000 between Wilke Resources, Inc. and the Company. 10.41++ Engagement Agreement dated September 26, 2000 between Hunter Wise Financial Group, LLC and the Company. 10.42++ a Supply Agreement (Anhydrous Crystalline Maltose) dated October 13, 2000 between Hayashibara Biochemical Laboratories, Inc. and the Company. 10.43++ a Supply Agreement dated December 11, 2000 between Natrol, Inc. and the Company. 10.44+++ a License Agreement dated September 7, 2001 between Atrix Laboratories, Inc. and the Company. Supply Agreement dated June 20, 2004 between Global Kinetics, Inc. 10.45++++ a and the Company. 24 10.46++++ a License and Supply Agreement dated September 13, 2004 between Nobel ILAC SANAYII VE TICARET A.S. and the Company. 21. Subsidiaries of the Company. The following sets forth the name and jurisdiction of incorporation of each subsidiary of the Company. All of such subsidiaries are wholly-owned by the Company. Name Jurisdiction of Incorporation ---- ----------------------------- Vanguard Biosciences, Inc. Texas Veldona Africa, Inc. Texas Veldona Poland, Inc. Texas ABI Taiwan, Inc. Texas Amarillo Cell of Canada, Inc. Texas 99.1 906 Certification *The Exhibit is incorporated by reference to the exhibit of the same number to the Company's Registration Statement on Form SB-2 filed with and declared effective by the Commission (File No. 333-4413) on August 8, 1996. **The Exhibit is incorporated by reference to the Company's 1997 Annual Report on Form 10-KSB filed with the Commission on or before March 31, 1998. ***The Exhibit is incorporated by reference to the Company's 1998 Annual Report on Form 10-KSB filed with the Commission on or before March 31, 1999. + The Exhibit is incorporated by reference to the Company's Report on Form 10-QSB for the quarterly period ended June 30, 1999, filed with the Commission on August 12, 1999 and subsequently amended on September 13, 1999. ++ The Exhibit is incorporated by reference to the Company's 2000 Annual Report on Form 10-KSB filed with the Commission on or before April 16, 2001. +++ The Exhibit is incorporated by reference to the Company's Report on Form 8-K filed with the Commission on September 24, 2001. ++++ The Exhibit is incorporated by reference to the Company's 2004 Annual Report on Form 10-KSB filed with the Commission on or before April 15, 2005. a Portions of this exhibit have been omitted and filed separately with the commission. 25 REPORTS ON FORM 8-K None. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AMARILLO BIOSCIENCES, INC. Date: April 15, 2005 By: /s/ Joseph M. Cummins -------------- ---------------------- Joseph M. Cummins, Chairman of the Board, President, Chief Financial Officer and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date - --------- ----- ---- /s/ Joseph M. Cummins Chairman of the Board, April 15,2005 - ---------------------- President, Chief Financial ------------- Joseph M. Cummins Officer, Director and Chief Executive Officer /s/ Stephen T. Chen Director April 13,2005 - -------------------- -------------- Stephen T. Chen /s/ Katsuaki Hayashibara Director April 14,2005 - ------------------------- ------------- Katsuaki Hayashibara /s/ Dennis Moore Director April 14,2005 - ----------------- ------------- Dennis Moore /s/ James A. Page Director April 13,2005 - ------------------ ------------- James A. Page 26 Amarillo Biosciences, Inc. and Subsidiaries Consolidated Financial Statements Year ended December 31, 2004 CONTENTS Report of Independent Auditors ......................................F-1 Audited Consolidated Financial Statements Consolidated Balance Sheet ..........................................F-2 Consolidated Statements of Operations ...............................F-3 Consolidated Statements of Stockholders' Deficit ....................F-4 Consolidated Statements of Cash Flows ...............................F-5 Notes to Consolidated Financial Statements ..........................F-6 Report of Lopez, Blevins, Bork & Associates, LLP Independent Auditors The Board of Directors Amarillo Biosciences, Inc. We have audited the accompanying consolidated balance sheet of Amarillo Biosciences, Inc. and subsidiaries as of December 31, 2004, and the related consolidated statements of operations, stockholders' deficit and cash flows for each of the two years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, based on our audits, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Amarillo Biosciences, Inc. and subsidiaries as of December 31, 2004, and the consolidated results of their operations and their cash flows for each of the two years then ended, in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 1 to the financial statements, the Company's recurring losses from operations and the need to raise additional financing in order to execute its 2005 Plan raise doubt about its ability to continue as a going concern. (Management's plans as to these matters are also described in Note 1.) The 2004 financial statements do not include any adjustments that might result from the outcome of this uncertainty. LOPEZ, BLEVINS, BORK & ASSOCIATES, LLP Houston, Texas April 5, 2005 F-1 Amarillo Biosciences, Inc. and Subsidiaries Consolidated Balance Sheet December 31, 2004 ASSETS Current assets: Cash $ 6,283 Other current assets 835 ------------ Total current assets 7,118 Equipment, net 784 Patents, net of accumulated amortization of $179,409 131,287 ------------ Total assets $ 139,189 ============ LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable $ 168,884 Accrued interest expense 447,122 Accrued payroll 103,893 Current maturities of notes payable 1,048,500 ------------ Total current liabilities 1,768,399 Notes payable to stockholders 1,065,000 ------------ Total liabilities 2,833,399 Commitments and contingencies Stockholders' Deficit Preferred stock, $.01 par value: Authorized shares - 10,000,000 Issued shares - none -- Common stock, $.01 par value: Authorized shares - 20,000,000 Issued shares - 14,385,296 in 2004 143,853 Additional paid-in capital 19,669,145 Accumulated deficit (22,507,207) ------------ Total stockholders' deficit (2,694,209) ------------ Total liabilities and stockholders' deficit $ 139,189 ============ See accompanying summary of significant accounting policies and notes to consolidated financial statements. F-2 Amarillo Biosciences, Inc. and Subsidiaries Consolidated Statements of Operations YEARS ENDED DECEMBER 31, ---------------------------- 2004 2003 ---------------------------- Revenues: Dietary supplement sales $ 35,899 $ 26,927 Interferon sales 9,490 10,000 Federal research grant -- 6,586 Gain on sale of intangible assets -- 50,298 Other 6,117 5,784 ------------ ------------ 51,506 99,595 ------------ ------------ Expenses: Cost of sales 14,949 4,012 Research and development expenses 171,043 173,345 Selling, general and administrative expenses 362,388 394,772 Interest expense 98,331 97,956 Loss on dissolution of subsidiary -- 1,000 Impairment of intangible assets -- 50,298 Gain on sale of building and equipment -- (37,454) Reversal of accrued contingent liability -- (750,965) ------------ ------------ 646,711 (67,036) ------------ ------------ Net income (loss) $ (595,205) $ 166,631 ============ ============ Basic and diluted net income (loss) per share $ (0.05) $ 0.02 ============ ============ Weighted average shares outstanding 12,446,690 9,800,073 ============ ============ See accompanying summary of significant accounting policies and notes to consolidated financial statements. F-3 Amarillo Biosciences, Inc. and Subsidiaries Consolidated Statements of Stockholders' Deficit Years Ended December 31, 2004 and 2003
Common Stock Additional Total Issuance -------------------- Paid in Accumulate Stockholders' Price Shares Amount Capital Deficit Deficit ------------------------------------------------------------------------------------- Balance at December 31, 2002 8,994,072 $89,941 $ 18,923,182 $(22,079,633) $ (3,066,510) Net income for year ended December 31, 2003 -- -- -- 166,631 166,631 Issuance of common stock for services 0.35-0.44 455,000 4,550 164,150 -- 168,500 Issuance of common stock for cash in private placements 0.060-0.301 1,500,945 15,009 186,585 -- 201,594 Exercise of options for cash 0.060 110,000 1,100 5,500 -- 6,600 Loss on dissolution of subsidiary -- -- -- -- (1,000) ------------------------------------------------------------------------- Balance at December 31, 2003 11,060,017 110,600 19,279,417 (21,912,001) (2,521,985) Net income for year ended December 31, 2004 -- -- -- (595,205) (595,205) Issuance of common stock for services 0.2033-0.350 47,380 474 13,486 -- 13,960 Issuance of common stock for cash in private placements 0.10-0.13 2,576,385 25,764 245,166 -- 270,930 Issuance of common stock for debt 0.37 100,000 1,000 36,000 -- 37,000 Exercise of options for service 0.20-0.21 450,000 4,500 87,500 -- 92,000 Exercise of options for cash 0.06 151,514 1,515 7,576 -- 9,091 ------------------------------------------------------------------------- Balance at December 31, 2004 14,385,296 $143,853 $ 19,669,145 $(22,507,206) $ (2,694,209) =========================================================================
See accompanying summary of significant accounting policies and notes to consolidated financial statements. F-4 Amarillo Biosciences, Inc. and Subsidiaries Consolidated Statements of Cash Flows YEAR ENDED DECEMBER 31, 2004 2003 ------------------------ OPERATING ACTIVITIES Net income (loss) $(595,205) $ 166,631 Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization 29,041 22,145 Gain on sale of assets -- (37,453) Reversal of accrued liability -- (750,965) Common stock issued for services 105,960 168,500 Changes in operating assets and liabilities: Other current assets 4,737 4,468 Accounts payable 18,490 33,797 Accrued expenses 108,925 117,515 ------------------------ Net cash used in operating activities (328,052) (275,362) ------------------------ INVESTING ACTIVITIES Proceeds from sale of assets -- 117,485 Purchase of equipment -- (3,056) Patents (3,486) (12,303) ------------------------ Net cash provided by (used in) investing activities (3,486) 102,126 ------------------------ FINANCING ACTIVITIES Proceeds from notes payable 20,000 63,844 Repayments of notes payable (10,500) (87,602) Issuance of common stock 317,021 208,194 ------------------------ Net cash provided by financing activities 326,521 184,436 ------------------------ Net increase (decrease) in cash (5,017) 11,200 Cash at beginning of period 11,300 100 ------------------------ Cash at end of period $ 6,283 $ 11,300 ======================== SUPPLEMENTAL INFORMATION Cash paid for income taxes -- -- Cash paid for interest $ 5,542 $ 11,142 ======================== See accompanying summary of significant accounting policies and notes to consolidated financial statements. F-5 Amarillo Biosciences, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2004 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND BUSINESS Amarillo Biosciences, Inc. (the "Company" or "ABI"), a Texas corporation formed in 1984, is engaged in developing biologics for the treatment of human and animal diseases. The Company is continuing its clinical studies as part of the process of obtaining regulatory approval from the United States Food and Drug Administration ("FDA"), so that commercial marketing can begin in the United States. The Company has developed a dietary supplement and an interferon alpha lozenge, but have not commenced any significant product commercialization activities. The Company's viability is dependent upon successful commercialization of products resulting from its research and product development activities. The Company plans on working with commercial development partners in the United States and in other parts of the world to provide the necessary sales, marketing and distribution infrastructure to successfully commercialize the interferon alpha product for both human and animal applications. All of the Company's products will require significant additional development, laboratory and clinical testing and investment prior to the Company obtaining regulatory approval to commercially market its product(s). Accordingly, for at least the next few years, the Company will continue to incur research and development and general and administrative expenses and may not generate sufficient revenues from product sales to support its operations. The Company has been dependent upon financing from its stockholders. The Company's activities have been financed primarily through the issuance of common stock, and under an agreement with a major stockholder, and its initial public offering. The Company's 2005 Plan of Operations calls for the Company to expend approximately $918,000 in 2005. At December 31, 2004, the Company had available cash of $6,283 and negative working capital of approximately ($712,782). The Company's continued losses and lack of liquidity indicate that the Company may not be able to continue as a going concern for a reasonable period of time. The Company's ability to continue as a going concern is dependent upon several factors including, but not limited to, the Company's ability to generate sufficient cash flows to meet its obligations on a timely basis, obtain additional financing and continue to obtain supplies and services from its vendors. The Company will need to raise additional funds in order to execute its 2005 Plan. The Company is presently negotiating with human health and animal health commercial development partners in various regions of the world including the United States, Canada, Europe and the Middle East. The Company believes that one or more of these agreements will be executed during 2005. These agreements could generally include provisions for the commercial partner to pay ABI a technology access fee, could include payments for a portion of the clinical trial expenses, could include payment obligations to ABI upon the accomplishment of certain defined tasks and/or could provide for payments relating to the F-6 Amarillo Biosciences, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2004 future sales of commercial product. These agreements could be an important source of funds for ABI. However, there can be no assurance that the Company will be successful in obtaining additional funding from either human health and animal health commercial development partners or private investors. If the Company is not successful in raising additional funds, it will need to significantly curtail clinical trial expenditures and to further reduce staff and administrative expenses and may be forced to cease operations. PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Amarillo Cell of Canada, Inc., Veldona Africa, Inc., Veldona Poland, Inc., Vanguard Biosciences, Inc. and ABI Taiwan, Inc. (all Texas corporations). All significant intercompany balances and transactions have been eliminated in consolidation. The effect of translation of foreign currencies is not material. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments consist of cash and cash equivalents, receivables and debt. The carrying amount of these financial instruments approximates fair value due either to length of maturity or interest rates that approximate prevailing market rates unless otherwise disclosed in these consolidated financial statements. RECENT ACCOUNTING PRONOUNCEMENTS In December 2004, the FASB, issued a revision to SFAS 123, also known as SFAS 123R, that amends existing accounting pronouncements for share-based payment transactions in which an enterprise receives employee and certain non-employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise's equity instruments or that may be settled by the issuance of such equity instruments. SFAS 123R eliminates the ability to account for share-based compensation transactions using APB 25 and generally requires such transactions be accounted for using a fair-value-based method. SFAS 123R's effective date would be applicable for awards that are granted, modified, become vested, or settled in cash in interim or annual periods beginning after June 15, 2005. SFAS 123R includes three transition methods: one that provides for prospective application and two that provide for retrospective application. The Company intends to adopt SFAS 123R prospectively commencing in the third quarter of the fiscal year ending December 31, 2005. It is expected that the adoption of SFAS 123R will cause the Company to record, as expense each quarter, a non-cash accounting charge approximating the fair value of such share based compensation meeting the criteria outlined in the provisions of SFAS 123R. F-7 Amarillo Biosciences, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2004 LONG-LIVED ASSETS Fixed assets are stated on the basis of historical cost less accumulated depreciation. Depreciation is provided using the straight-line method over the two to five year estimated useful lives of the assets. Impairment losses are recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. No impairment losses have been recorded since inception. PATENTS; PATENT EXPENDITURES ABI holds patent license agreements and also holds patents which are owned by the Company. All patent license agreements remain in effect over the life of the underlying patents. Accordingly, the patent license fee is being amortized over 15-17 years using the straight-line method. Patent fees and legal fees associated with the issuance of new owned patents are capitalized and amortized over 15-17 years. INCOME TAXES The asset and liability approach is used to account for income taxes by recognizing deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. The Company records a valuation allowance to reduce the deferred tax assets to the amount that is more likely than not to be realized. REVENUE RECOGNITION Contract revenue for research and development performed under the manufacturing and supply agreement with Hayashibara Biochemical Laboratories, Inc. ("HBL") (see Note 4) was recorded as earned based on research and administrative costs incurred. Sales, reimbursement income, sublicense fees, etc. are recognized upon receipt of payment. RESEARCH AND DEVELOPMENT Research and development costs are expensed as incurred. F-8 Amarillo Biosciences, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2004 USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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. Actual results could differ from those estimates. STOCK OPTIONS Stock based compensation. The Company accounts for its employee stock-based compensation plans under Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees. No options were granted in the three month period ending March 31, 2004. There were 725,000 options granted to purchase common stock in the three months ended June 30, 2004, with an exercise price of $0.23 per share with a 5 year term vesting immediately. In the three month period ended September 30, 2004 775,000 options were granted to purchase common stock, with an exercise price of $0.27 per share with a 5 year term vesting immediately. No options were granted in the three month period ending December 31, 2004. The following table illustrates the effect on net loss and net loss per share if Amarillo had applied the fair value provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation. Year Ended December 31, 2004 2003 ------------ ------------ Net income (loss), as reported $ (595,205) $ 166,631 Less: stock based compensation determined under fair value based method (360,199) (21,347) ------------ ------------ $ (955,404) $ 145,284 Pro forma net loss ============ ============ Basic and diluted net loss per share As reported $ (0.05) $ 0.02 Pro forma $ (0.08) $ 0.01 The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: dividend yield 0.0%, expected volatility of 141.0%, risk-free interest rate of 1.5% and expected life of 60 months. F-9 Amarillo Biosciences, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2004 BASIC AND DILUTED NET LOSS PER SHARE Net loss per share is based on the number of weighted average shares outstanding. The effect of warrants and options outstanding (see Notes 7 and 8) is anti-dilutive. 2. EQUIPMENT Equipment is stated at cost and consists of the following: December 31, 2004 ------------------ Furniture and equipment $ 54,011 ------------------ 54,011 Less accumulated depreciation 53,227 ------------------ $ 784 ================== 3. NOTES PAYABLE The Company had a loan agreement with HBL (July 22, 1999), which called for HBL to loan the Company $3,000,000 to be advanced in three installments. The annual interest rate on unpaid principal from the date of each respective advance was 4 1/2%, with accrued interest being payable at the maturity of the note. $1,000,000 was payable on or before December 3, 2004, or on or before the expiration of one (1) year after approval of the Company's product by the FDA, whichever occurs first. This note has been extended and is payable on or before December 3, 2005, or on or before the expiration of one (1) year after approval of the Company's product by the FDA, whichever occurs first. The other $1,000,000 was due on or before February 29, 2005, or on or before the expiration of one year after approval of the Company's product by the FDA, whichever occurs first. This note has also been extended and is payable on or before February 29, 2006, or on or before the expiration of one (1) year after approval of the Company's product by the FDA, whichever occurs first. On September 30, 1999, the Company entered into an Agreement to Convert Debt with HBL regarding the above described note payable to HBL in the then principal amount of $1,000,000, the first loan installment having by then been advanced. On October 15, 1999, pursuant to the Agreement to Convert Debt, HBL canceled the then note balance in exchange for 1,111,831 shares of common stock of the Company valued at the then market value of $0.9044 per share. This stock conversion leaves the Company owing HBL a principal amount of $2,000,000 plus accrued interest. Effective November 1, 2002 the Company executed a Promissary Note for $45,000 payable to an individual stockholder. The Promissary Note accrues interest at F-10 Amarillo Biosciences, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2004 the rate per year that will be the lesser of 3% in excess of the prime interest rate published from time to time in the Wall Street Journal, adjusted on the first day of each calendar month based on such rate then in effect, or the maximum nonusurious rate of interest permitted by applicable law. Accrued interest is payable monthly, in arrears and the entire principal amount was payable October 31, 2004, this Note has been extended until October 31, 2005. The Note Holder is granted the right to purchase, within the next 4 years, up to 30,000 shares of stock at an exercise price of $0.15 per share. The Note Holder is also granted the right to purchase, within the next 3 years, up to 30,000 shares of stock at an exercise price of $0.22 per share. Effective March 21, 2003 the Company executed a second Promissary Note for $45,000 payable to the same individual stockholder. The Promissary Note accrues interest at the rate per year that will be the lesser of 3% in excess of the prime interest rate published from time to time in the Wall Street Journal, adjusted on the first day of each calendar month based on such rate then in effect, or the maximum nonusurious rate of interest permitted by applicable law. Additions were made to this Promissary Note as follows: January 27, 2004, $5,000; February 6, 2004 $5,000 and November 30, 2004 $10,000, bringing the total of this Note to $65,000. Accrued interest is payable monthly, in arrears and the entire principal amount is payable March 20, 2005. This note payable date was extended to March 20, 2006. The Note Holder is granted the right to purchase, within the next 3 years, up to 50,000 shares of stock at an exercise price of $0.06 per share. On October 10, 2003 and December 31, 2003, unsecured loans totaling $14,000 were received from an individual stockholder. Subsequently, on February 26, 2004, $10,500 of that money was used to purchase private placement shares of the Company. The Company is still in debt to the stockholder for $3,500. 4. MANUFACTURING AND SUPPLY AGREEMENTS The Company was a party to the following manufacturing and supply agreements at December 31, 2004: The Company has a Joint Development and Manufacturing/Supply Agreement with HBL (the Development Agreement), a major stockholder under which HBL will formulate, manufacture and supply HBL interferon for the Company or any sublicensee. In exchange, HBL is entitled to receive a transfer fee, specified royalties and a portion of any payment received by the Company for sublicense of rights under this agreement. The agreement further provides that the Company sublicense to HBL the right to market HBL interferon for oral use in humans and in non-human, warm-blooded species in Japan, in exchange for the Company receiving a royalty fee based on net sales. The Company is the exclusive agent for the development of HBL interferon for non-oral use in humans and in non-human, warm-blooded species in North America, in exchange, HBL is entitled to receive a transfer fee based on units of interferon supplied and the agreement also provides that a royalty fee be paid to HBL. As part of the License Agreement with Atrix F-11 Amarillo Biosciences, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2004 Laboratories, Inc. (executed September 7, 2001, terminated May 22, 2003) a second amendment to the Development Agreement was executed extending the Development Agreement to March 12, 2005 and will be renewed automatically for successive three-year terms. The Company has a supply agreement with HBL under which the Company gained an exclusive right to purchase and distribute anhydrous crystalline maltose for the treatment of dry mouth (xerostomia). This exclusive supply agreement is worldwide, except Japan. 5. LICENSE AND SUBLICENSE AGREEMENTS The Company holds patent rights for which the Company has paid certain license fees under three license agreements. Under these agreements, the Company will pay the licensor a portion of any sublicense fee received by the Company with respect to the manufacturing, use or sale of a licensed product, as well as a royalty fee based on the net selling price of licensed products, subject to a minimum annual royalty. The Company has also entered into various sublicense agreements under which the Company is entitled to receive royalties based on the net sales value of licensed products. 6. RESEARCH AGREEMENTS The Company contracts with third parties throughout the world to conduct research including studies and clinical trials. These agreements are generally less than one year in duration. 7. COMMON STOCK The Company has 20,000,000 shares of voting common shares authorized for issuance and 10,000,000 shares of preferred stock authorized for issuance which is issuable in series. To date, no preferred stock has been issued. The Company has 3,233,762 shares of common stock reserved for issuance upon exercise of options and warrants granted. In 2004, the Company sold 2,576,385 unregistered shares of its voting common stock in private placement offerings. Of these sales, 376,385 shares were sold for $0.13 per share; 150,000 shares for $0.11 per share; 100,000 shares for $0.105 per share; 1,950,000 shares for $0.10 per share; generating $270,930 in cash. On October 10, 2003 and December 31, 2003, unsecured loans totaling $14,000 were received from an individual stockholder. Subsequently, on February 26, 2004, the stockholder used this loaned money to purchase 100,000 shares of restricted F-12 Amarillo Biosciences, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2004 private placement stock at $0.105 per share. The Company is still in debt to the stockholder for $3,500. During the year ended December 31, 2004, the Board of Directors authorized the issuance of 47,380 shares of restricted common stock to consultants in lieu of cash payments. Based upon the common stock trading price at the times of issuance, and FASB rules, a non-cash consulting expense of $13,960 was recorded for the issuance of these shares during the year ended December 31, 2004. There were 151,514 Non-plan stock options exercised for $0.06 per share, generating $9,091 in cash in 2004. 8. STOCK OPTIONS AND WARRANTS The Company has 63,200 warrants to purchase common stock through April 11, 2005 at $3.125 per share and warrants to purchase common stock at $3.75 per share. Accordingly, the Company has reserved an additional 126,400 shares of its common stock to satisfy the possible future exercise of such warrants. During 2004, the Company issued 450,000 options to consultants, to purchase restricted common stock in exchange for consulting services at $0.01 per share. These options were exercised and the fair market value of the stock sale was state; 450,000 shares for $0.20 per share, generating $4,500 in cash and $77,500 in non-cash consulting services. The Company has two stock option plans: the 1996 Employee Stock Option Plan (Employee Plan) and the Outside Director and Advisor Stock Option Plan (Director Plan). The Employee Plan has authorized the grant of options to employees for up to 590,000 shares of the Company's common stock. All options granted have five to ten year terms and become exercisable over a four to five year period. The option price is equal to 100% to 110% of the fair value of the common stock on the date of grant depending on the percentage of common stock owned by the optionee on the grant date. The Director Plan allows options to purchase a maximum of 410,000 shares of the Company's common stock to be granted to outside directors and scientific advisors to the Company at an exercise price equivalent to 100% of the fair market value of the common stock on the date of grant. These are ten-year options and become exercisable over a period of five years. A summary of the Company's stock option activity and related information for the year ended December 31, is as follows: F-13 Amarillo Biosciences, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2004 2004 2003 ------------------------------------------------ WEIGHTED WEIGHTED AVERAGE AVERAGE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE ------------------------------------------------ Outstanding, beginning of year 1,871,688 $ 0.54 1,562,776 $ 0.98 Granted 1,950,000 0.25 782,037 0.42 Canceled -- -- (473,125) 0.54 Exercised (601,514) 0.06 -- -- --------- --------- Outstanding, end of year 3,220,174 $ 0.43 1,871,688 $ 0.54 ========= ========= Exercisable at end of year 3,220,174 $ 0.43 1,871,688 $ 0.54 ========= ========= Exercise prices for options outstanding as of December 31, 2004 ranged from $0.06 to $5.00. Of these options, 10,000 have exercise prices ranging from $4.00 to $5.00 and the remainder range from $0.06 to $1.63. The weighted-average remaining contractual life of those options is 5.02 years. 9. EMPLOYEE BENEFIT PLAN The Company has a Simplified Employee Pension Plan (the Plan), which is a contributory plan that covers all employees of the Company. Contributions to the Plan are at the discretion of the Company. The plan expense for the years ended December 31, 2004 and 2003, were $0, and $0, respectively. 10. INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax reporting purposes. The Company's deferred tax asset of approximately $6,660,000 and $6,495,000 at December 31, 2004 and 2003 respectively, was subject to a valuation allowance of $6,660,000 and $6,495,000 at December 31, 2004 and 2003 respectively, because of uncertainty regarding the Company's ability to realize future tax benefits associated with the deferred tax assets. Deferred tax assets were comprised primarily of net operating loss carryovers under the cash method of accounting used by the Company for federal income tax reporting. F-14 Amarillo Biosciences, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2004 At December 31, 2004, the Company has net operating loss carryforwards of approximately $19,590,000 for federal income tax purposes expiring in 2006 through 2023. The ability of the Company to utilize these carryforwards may be limited should changes in stockholder ownership occur. The difference between the reported income tax provision and the benefit normally expected by applying the statutory rate to the loss before income taxes results primarily from the inability of the Company to recognize its tax losses. 11. CONTINGENCIES The Company is not a party to any litigation and is not aware of any pending litigation or unasserted claims or assessments as of December 31, 2004. 12. RELATED PARTY TRANSACTIONS In the ordinary course of business, the Company has and expects to have transactions with related parties, including stockholders. In addition to the transactions disclosed elsewhere in these financial statements, during 2004 the Company has used the law firm of SandersBaker, P.C. Mr. Edward Morris, Secretary of the Company, is a partner in that firm. The Company was invoiced $8,402 during 2004 for legal services rendered by SandersBaker. F-15 EX-10.45 2 v016376_ex10-45.txt Exhibit 10.45 SUPPLY AGREEMENT THIS AGREEMENT is entered into this 10th day of June 2004, by and between Jerry Frasier at Global Kinetics, Inc., 4628 Kent Court, Kent, Washington 98032 (herein referred to as "GLOBAL") and Amarillo Biosciences, Inc., a Texas corporation with its principal place of business at 4134 Business Park Drive, Amarillo, Texas 79110 US (herein referred to as "ABI"). WHEREAS, ABI has entered into an agreement with Hayashibara Biochemical Laboratories, Inc. and Hayashibara Shoji, Inc. (collectively referred to as "Hayashibara") whereby ABI has been granted the exclusive right to purchase, distribute and sell worldwide except Japan, nutraceutical and healthcare products for human consumption containing anhydrous crystalline maltose as the primary ingredient to relieve dry mouth; WHEREAS, ABI and GLOBAL desire to establish terms, by which ABI will supply anhydrous crystalline maltose (hereinafter referred to by its trade name "DRY MOUTH RELIEF" or "DMR") for incorporation into products to relieve dry mouth to be sold in the United States of America (hereinafter, the "Territory") to GLOBAL; NOW THEREFORE, in consideration of the covenants and conditions hereinafter contained, the parties hereto mutually agree as follows: 1. AGREEMENT TO SUPPLY 1.1. Notice of Requirements. Starting in the second year of this Supply Agreement, no earlier than thirty (30) days prior to the beginning of each calendar quarter, and no later than thirty (30) days after the commencement of each calendar quarter, GLOBAL shall inform ABI in writing of its estimated requirements for DMR for such calendar quarter, and in the case of the first calendar quarter of each year, of its estimated requirements for DMR for the year. 2. PRICE, DELIVERY AND PAYMENT TERMS 2.1. Price. So long as GLOBAL meets the minimum purchase requirements set forth in Paragraph 3 of this Agreement, the price to be paid by GLOBAL for DMR shall be $**** per Kilogram (Kg), bulk product, not tableted or bottled in boxes of 20 Kgs. 2.2. Delivery. All deliveries for DMR shall be EX WORKS, ABI's or ABI's contractor's factory or warehouse. The term "EX WORKS" shall have the meaning ascribed thereto in INCOTERMS 2000 as published by the International Chamber of Commerce, Paris. Delivery shall be within thirty (30) days from the date on which ABI receives a purchase order and initial payment. **** Indicates that a portion of the text has been omitted and filed separately with the Commission Confidential 1 2.3. Payment. GLOBAL shall remit to ABI full payment in U.S. funds via wire transfer to a bank account of ABI's choice for each order of DMR. Account Bank: Wells Fargo Bank Routing ABA Number: 111900659 Banking Center Account Name: Amarillo Biosciences, Inc. 7515 Southwest 45th, Account Number: 8980-287695 Amarillo, Texas 79119 Fifty percent (50%) of the payment will accompany the purchase order with the balance to be paid within five (5) days of pickup in Japan. Upon execution of this Supply Agreement, GLOBAL shall make a one time reimbursement of $**** to ABI for the use of the name "DRY MOUTH RELIEF" which ABI shall purchase from Natrol (as per e-mail dated May 8, 2004 from David Laufer of Natrol). This payment will be made by GLOBAL to ABI when the payment is made by ABI to Natrol. 3. MINIMUM PURCHASE REQUIREMENTS 3.1. GLOBAL shall purchase from ABI at least the following amounts of DMR. A. 750 Kgs of DMR during the first year of this Supply Agreement. Upon execution of the Supply Agreement, GLOBAL shall purchase 100 Kgs of DMR ($****) and notwithstanding Paragraph 2.3, above, GLOBAL pay the full amount plus shipping (to be billed), for a total of $**** to ABI. This sum of $**** shall be wired as above. Failure to purchase this 100 Kgs of DMR and pay for shipping upon execution of this Supply Agreement shall cause the Supply Agreement to be null and void. B. 1,500 Kgs of DMR during the second year of the Supply Agreement. C. 2,500 Kgs of DMR during the third year of the Supply Agreement and for all succeeding years during the term of this Agreement. D. In the event quantities of DMR actually purchased by GLOBAL during any contract year exceed the minimum requirements set forth in paragraphs A through C above, the excess quantities purchased shall apply toward GLOBAL's minimum purchase obligations in succeeding years, with any such excess to be carried over into successive years, until so applied. 3.2. Within ten (10) days from the end of any term designated in Subparagraph A, B or C of Paragraph 3.1, above, ABI shall notify GLOBAL of the amount by which it has failed to purchase the required minimum amount. GLOBAL shall have thirty (30) days from the date of receipt of such notification to send to ABI a non-cancelable purchase order for immediate delivery in at least the amount necessary to equal the required minimum amount. If GLOBAL fails to meet the minimum purchase amounts set forth in Paragraphs 3.1 (A, B, or C), this Agreement shall terminate, and GLOBAL shall have no right hereunder to market DMR. **** Indicates that a portion of the text has been omitted and filed separately with the Commission Confidential 2 4. REPRESENTATION OF ABI 4.1. Specifications. ABI represents and warrants that DMR supplied to GLOBAL under this Agreement shall comply with the specifications set forth in Exhibit A. 4.2. Good Manufacturing Practices. ABI represents and warrants that all DMR supplied to GLOBAL shall comply with Good Manufacturing Practices established by the United States Food and Drug Administration (hereinafter "FDA") which are or may become applicable to the manufacture of DMR to be used in the production of a dietary supplement in the U.S. 4.3. FDA Guaranty. All DMR supplied to GLOBAL, pursuant to this Agreement, will not be, as of the date of delivery, adulterated or misbranded within the meaning of the Federal Food, Drug and Cosmetic Act, or an article which may not under provisions of said Act, be shipped and/or sold in interstate or foreign commerce. 4.4. Co-Exclusivity. Except as required for ABI to sell bottles of MAXISAL to local Amarillo pharmacies and health food stores and to individuals who buy bottles of Maxisal, ABI represents and warrants that it shall not sell in the Territory or permit any person other than GLOBAL to sell DMR in the Territory, during the term of this Agreement. ABI shall cease selling Maxisal to individuals when GLOBAL notifies ABI that GLOBAL is able to deliver product and when ABI's current inventories are sold. 5. REPRESENTATIONS OF GLOBAL 5.1. Defective Product. GLOBAL shall notify ABI in writing of any alleged defects in DMR no later than thirty (30) days from the date of its receipt in the Territory. 5.2. Trademark. During the term of this Agreement GLOBAL shall have the exclusive right and license as well as the obligation, to use the name "DRY MOUTH RELIEF" in connection with the sale of products containing DMR in the Territory and shall use said trademark on the label of products containing the same. GLOBAL shall have no right after termination of this Agreement to use the name "DRY MOUTH RELIEF" or any similar name which may confuse or intend to confuse the general public as a trademark for other than product supplied by ABI. **** Indicates that a portion of the text has been omitted and filed separately with the Commission Confidential 3 6. TERM and PRICING 6.1. General. This Agreement shall become effective as of the date hereof and, unless sooner terminated pursuant to the terms hereof, shall continue in effect until May 10, 2009, and thereafter from year to year, unless terminated by either party by notice to the other given not less than ninety (90) days prior to the end of the initial term or any one year extension thereof; provided however, that for all periods subsequent to October 12, 2005, ABI's obligations to supply DMR hereunder shall be subject to the renewal or extension to that certain Supply Agreement between ABI and Hayashibara dated October 13, 2000 (the "ACM Agreement") regarding supply of anhydrous crystalline maltose by Hayashibara to ABI. 6.2. Price Redeterminations. The price of product hereunder shall be adjusted from time to time, but no more frequently than annually, to reflect any increase in the Producers Price Index, Drugs and Pharmaceuticals, Subdivision Code 063 after the date of this Agreement. Such price shall also be adjusted to reflect any increases in the price charged by HBL for product under the ACM Agreement, to reflect any increases in ABI's costs occurring after November 30, 2003, and to reflect any costs arising from changes requested by GLOBAL in product specifications, manufacturing, or release of the product. 6.3. Termination for Cause. This agreement may be terminated by either party at any time upon material default by a party of its obligations under this Agreement by giving written notice to the defaulting party specifying in detail the facts constituting such material default and specifying a termination date of not less than thirty (30) days following the giving of such notice. Any such termination shall take effect on the date specified unless the other party has remedied such default and has given written notice to the other party specifying in detail the steps taken to effect the remedy. 7. FURTHER ASSURANCES All parties hereto shall do and perform and cause to be done and performed all such further acts and things and shall execute and deliver all such other agreements, certificates, instruments or documents as the other party hereto may reasonably request in order to carry out the intent and purposes of this Agreement and the consummation of the transactions contemplated hereby. 8. GENERAL PROVISIONS 8.1. Entire Agreement. This Agreement, and Exhibit A hereto, comprise the entire agreement between the parties with respect to the subject matter of this Agreement and shall supersede all prior agreements or understandings, oral or written, with respect thereto. 8.2. Notices. All notices to parties required under this Agreement shall be sent (i) by Overnight Courier Delivery, or (ii) by Facsimile Message if confirmed by phone and by mailing a copy by First Class Mail. All notices required under this Agreement shall be **** Indicates that a portion of the text has been omitted and filed separately with the Commission Confidential 4 sent to: If to ABI, to: If to GLOBAL, to: Amarillo Biosciences, Inc. Jerry Frasier ATTN: Joseph M. Cummins Global Kinetics, Inc. 4134 Business Park Drive 4628 Kent Court Amarillo, TX, USA 79110 Kent, WA 98032 Fax: 806-376-9301 Fax: 253-270-9973 or, in each case, at such other address as may be specified in writing to the other party. 8.3. Force Majeure. Neither party hereto shall be responsible for any failure to comply with the terms hereof for the time and to the extent that such failure is due to a cause or causes beyond its responsible control, or could not have been avoided by reasonable diligence. These causes shall include, without limitation, fire, flood, explosions, strike, labor disputes, labor shortages, picketing, lockout, transportation embargo or failure of transportation, inability to secure power, fuel, or other materials required for the production of DMR, inability to utilize the full capacity of any facility due to governmental actions, machinery malfunctions, inability to obtain necessary permits, licenses or regulatory approvals, war, riot, civil disturbance or insurrection, epidemics, quarantine restrictions, any action or inaction of any government or agency thereof, or any judicial action. Upon the occurrence of an event of force majeure, the party so affected shall notify the other party specifying in reasonable detail the nature and expected duration of the event of force majeure, and such party will have the right to suspend or reduce deliveries or acceptance during the period of the event of force majeure. 8.4. Amendment and Assignment. This Agreement may not be amended, waived, discharged or terminated orally, but only by an instrument in writing signed by both parties. This Agreement shall be binding upon the respective successors and assigns of the parties. This Agreement may not be assigned by either party without the prior written consent of the other party which consent shall not be unreasonably withheld. 8.5. Law Governing. This Agreement shall be construed, enforced and performed in accordance with the laws of the State of Texas, USA, excluding principles of conflicts of law. 8.6. Language. The English language version of this Agreement shall govern and control any translations of the Agreement into any other language. 8.7. Arbitration. All disputes between the parties in connection with this Agreement shall be finally settled by arbitration. Arbitration shall take place in Amarillo, Texas, and shall be conducted under the rules of the American Arbitration Association by one or more arbitrators appointed in accordance with said Rules applying the terms and conditions of this Agreement and consistent provisions of the internal laws of the State of Texas. Any judgment upon this award may be entered in any court having jurisdiction. **** Indicates that a portion of the text has been omitted and filed separately with the Commission Confidential 5 IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the date first above written. AMARILLO BIOSCIENCES, INC. GLOBAL KINETICS, INC. By: /s/ Joseph M. Cummins By: /s/ Jerry Frasier --------------------------- --------------------------- Joseph M. Cummins Jerry Frasier President & CEO President **** Indicates that a portion of the text has been omitted and filed separately with the Commission Confidential 6 EXHIBIT A Maxisal(R) Powder Bulk Product Specifications
Test Specification - --------------------------------------------------------------------------------------------------------- Appearance / Description White, crystalline powder that is odorless and has a sweet taste Identity Fehling reaction produces a red precipitate Moisture content Not more than 1.2% Maltose Purity Not less than 92% Crystallinity Not less than 70% - ---------------------------------------------------------------------------------------------------------
Maxisal(R) Lozenges Finished Product Specifications
Test Specification - --------------------------------------------------------------------------------------------------------- Appearance / Description White, bi-convex, cylindrical lozenges that are not cracked, are free of foreign particulate matter, and meet the following: Diameter Diameter 8.0 mm (approx.) Thickness Thickness 3.9 " 0.2 mm Hardness Hardness 7 " 3 kg / cm2 Moisture content Maximum of 2.0% Weight Variation Not more than 5% variation from target of 204 mg Disintegration Not more than 5 minutes in USP apparatus in water Friability Not more than 1% loss in 4 minutes Identity Correlation of $0.99 to Sigma standard for maltose by FT-NIR - ---------------------------------------------------------------------------------------------------------
**** Indicates that a portion of the text has been omitted and filed separately with the Commission Confidential 7 EX-10.46 3 v016376_ex10-46.txt Exhibit 10.46 LICENSE AND SUPPLY AGREEMENT THIS LICENSE & SUPPLY AGREEMENT ("Agreement") is made and effective this 13th day of September 2004, by and between AMARILLO BIOSCIENCES, INC., a Texas corporation with its principal place of business at 4134 Business Park Drive, Amarillo, Texas 79110 (hereinafter "ABI") and NOBEL ILAC SANAYII VE TICARET A.S. and its affiliates, a company organized under the laws of Turkey with its principal place of business at Barbaros Bulvari 76/78 Besiktas 34353 ISTANBUL / Turkey (hereinafter "NOBEL") (ABI and NOBEL are hereinafter collectively referred to as the "Parties"). WHEREAS, ABI and its contract suppliers have substantial expertise in the production and use of oral interferon alpha (hereinafter, "IFN-(alpha)") and have proprietary rights and know-how in the field of production, purification and formulation of IFN-(alpha); WHEREAS, ABI is willing to disclose to NOBEL Technical Information consisting of human data for hepatitis B, hepatitis C, Behcet's Disease (BD), AIDS and all other data, including safety, bioavailability, and clinical trial data necessary for NOBEL to obtain regulatory approval for a hepatitis B or hepatitis C or BD or AIDS product in the Territory; and WHEREAS, ABI has an exclusive worldwide license (except Japan) to market and distribute the oral formulation of HBL IFN-(alpha) (as defined in ARTICLE I, below), and desires to provide HBL IFN-(alpha) to NOBEL on the terms and conditions herein set forth, and NOBEL desires to obtain the right to perform clinical trials, distribute and market HBL IFN-(alpha) contained in Licensed Product on the terms and conditions herein set forth; NOW, THEREFORE, for and in consideration of the mutual covenants contained herein, and for other good and adequate consideration the receipt and sufficiency of which are evidenced by the execution hereof, ABI and NOBEL agree as follows: **** Indicates that a portion of the text has been omitted and filed separately with the Commission CONFIDENTIAL 1 ARTICLE I DEFINITIONS 1.1 "ABI" and "NOBEL" shall mean and include not only the indicated company, but also such company's Assignees. 1.2 "Affiliate" means a corporation, company, partnership, or other business entity which controls or is controlled by, or is under common control with, the designated party. In the case of a corporation or company, "control" means ownership either directly or indirectly of at least Fifty Percent (50%) of the shares of stock entitled to vote for the election of Directors. 1.3 "Agreement" means this License and Supply Agreement. 1.4 "Assignee" means any permitted assignee or sub-licensee of rights under this Agreement 1.5 "Dose" means 500 International Units (IU) of IFN-(alpha). 1.6 "HBL IFN-(alpha)" means the cell culture derived human lymphoblastoid IFN-(alpha) used for the Licensed Product by ABI and produced by HAYASHIBARA BIOCHEMICAL LABORATORIES, INC. ("HBL"). 1.7 "Licensed Indications" means all human indications treated or treatable by the oral administration of IFN-(alpha). 1.8 "Licensed Product" means a formulation or composition containing HBL IFN-(alpha) and designated, detailed, or labeled for oral use in the treatment of the Licensed Indications. 1.9 "MOH" means Ministry of Health in each individual country in the Territory. **** Indicates that a portion of the text has been omitted and filed separately with the Commission CONFIDENTIAL 2 1.10 "Technical Information" means all information, reports, results, inventions, know how, materials, and any other technical and scientific data, specifications and formulae directly related to the development, regulatory approval, manufacture, testing, use, marketing and/or sale of Licensed Product, and any non-public information relevant to the business of the Parties which is necessarily disclosed by one to the other during the Parties' conduct under this Agreement. "ABI Technical Information" refers to Technical Information originating with ABI or which ABI has obtained through its contractual relationships with third parties. "NOBEL Technical Information" refers to Technical Information originating with NOBEL or which NOBEL has obtained through its contractual relationships with third parties. "Technical Information" when not otherwise specified herein means both ABI Technical Information and NOBEL Technical Information. 1.11 "Territory" means Azerbaijan, Bosnia & Herzegovina, Bulgaria, Croatia, Georgia, Kazakhstan, Kyrgyzstan, Macedonia, Romania, Russia, Saudi Arabia, Slovenia, Tajikistan, Turkey, Turkmenistan, Uzbekistan, and Federal Republic of Yugoslavia. ARTICLE II GRANT OF LICENSE 2.1 ABI grants to NOBEL and NOBEL accepts, subject to the terms of this Agreement, the exclusive right to use HBL IFN-(alpha) for clinical testing and trials, and upon proper regulatory approval, the exclusive right to market and distribute Licensed Product to treat the Licensed Indications in the Territory. ABI will provide NOBEL Technical Information for the above-mentioned purposes at no cost to NOBEL. ABI retains all other rights to HBL IFN-(alpha), including without limitation, the right to test, develop, license, sub-license, market, distribute or otherwise use HBL IFN-(alpha) for treatment of all indications other than the Licensed Indications, and for treatment of the Licensed Indications in all countries not included in the Territory. **** Indicates that a portion of the text has been omitted and filed separately with the Commission CONFIDENTIAL 3 2.2 The license granteded to NOBEL under this Agreement shall commence on the effective date of this Agreement and shall terminate immediately upon the termination or expiration of this Agreement as defined in Article VI,. 2.3 NOBEL shall have the right to use and sell Licensed Product only in the Territory. NOBEL shall not seek customers, establish any branch or maintain any distribution depot for Licensed Product in any country outside the Territory. NOBEL shall not sell Licensed Product to any customer in any country outside the Territory or to any customer in the Territory if, to the knowledge of NOBEL, such customer intends to resell the Licensed Product in any country outside the Territory. NOBEL shall cause ABI's name to appear on each outer package of the Licensed Product distributed in the Territory, providing that it complies with local laws and Ministry of Health regulations. 2.4 Licensed Product sold by NOBEL shall bear the trademark "Veldona" or another trademark proposed by NOBEL to which ABI agrees, acknowledging ABI as developer and manufacturer, providing that it complies with local laws and MOH regulations. NOBEL shall own all rights to such trademarks in the Territory, even if NOBEL ceases marketing the Licensed Product. ARTICLE III SUPPLY OF PRODUCT 3.1 Subject to the terms and conditions of this Agreement, ABI shall supply clinical trial samples, including 500 IU HBL IFN-(alpha) lozenges and placebos to NOBEL at $**** and $**** per dose, respectively, and (upon government approval) will provide Licensed Product for sale in the Territory for the consideration set forth in Paragraph 4.1, below. The quantity of clinical trial samples provided for clinical testing will be agreed to by the Parties as part of the clinical development plan. Licensed Product shall be supplied in response to issuance by NOBEL of written purchase orders delivered to ABI specifying the quantity to be supplied, along with any special instructions/requests regarding supply and/or delivery. Nobel shall have the right to purchase the Licensed Product through a company located in Europe. ABI shall have no responsibility for obtaining any required regulatory approvals, nor for distribution, promotion, pricing, or marketing of lozenges in the Territory, all of which shall be completed by NOBEL with the assistance of ABI. **** Indicates that a portion of the text has been omitted and filed separately with the Commission CONFIDENTIAL 4 3.2 ABI agrees to allow NOBEL right of reference to ABI's US FDA Drug Master File for HBL IFN-(alpha) and to do such other acts as are reasonably necessary, and within ABI's control, to facilitate approval of HBL IFN-(alpha)-containing lozenges in the Territory for use in the Licensed Indications, and ABI also hereby agrees to consult with NOBEL at NOBEL's request concerning regulatory affairs, to review documents to be submitted to governmental agencies for approval, and to take such other actions as may be necessary from time to time to facilitate approval of Licensed Product for sale and use in the Territory. ABI also agrees to provide clinical data from its past, current or future studies, relating to safety or bioavailability, or clinical data relating to the use of HBL IFN-(alpha) in hepatitis B, hepatitis C, BD or AIDS. NOBEL will be responsible for packaging and labeling of the clinical trial material. Further, NOBEL will be responsible for the preparation of all necessary materials including protocols, case report forms, and Investigator Brochures as required for conducting the clinical trials in the Territory. ABI shall reasonably provide to NOBEL other support or assistance requested by NOBEL and within ABI's capabilities with respect to regulatory and clinical activities free of charge. ARTICLE IV CONSIDERATION 4.1 For all Licensed Product supplied by ABI to NOBEL (other than quantities provided pursuant to Paragraph 3.2 above), ABI shall receive from NOBEL the payment per Dose specified at Exhibit "A" for Turkey. The price per dose for the countries of Azerbaijan, Bosnia & Herzegovina, Bulgaria, Croatia, Georgia, Kazakhstan, Kyrgyzstan, Macedonia, Romania, Russia, Saudi Arabia, Slovenia, Tajikistan, Turkmenistan, Uzbekistan, and Federal Republic of Yugoslavia shall be determined by both parties according to market and regulatory conditions of each individual country. Payment for each shipment of Licensed Product shall be made by NOBEL by irrevocable letter of credit on a U.S. bank. The price per Dose shall be further adjusted from time to time as may be necessary to reflect any Change in the Producers Price Index, Drugs and Pharmaceuticals, Subdivision Code 063, after the date of this Agreement. In addition, both the price per Dose and the amount to be invoiced and paid for Licensed Product shall be further adjusted to reflect any changes for (i) the variable cost of any raw material or combination of raw materials that changes by more than twenty percent (20%) from ABI's cost at the date of this Agreement, and (ii) the variable cost arising from changes in product specifications, manufacturing, testing, or release of the product; provided, however, that if such variable cost increases occur within five (5) years after the date of approval of a Licensed Product for sale in the Territory, under circumstances where MOH does not permit an increase in the sales price of the Licensed Product, then the price adjustment otherwise provided for under this sentence shall be reduced by fifty percent (50%). NOBEL shall receive Licensed Product at HBL's manufacturing location in Okayama, Japan and the shipping arrangements shall be made by NOBEL's shipping agent. NOBEL shall pay the price set forth at Exhibit A, which price does not include freight and insurance. Title to Licensed Product purchased by NOBEL shall transfer to NOBEL, and NOBEL shall pay all freight charges and bear the risk of loss and damage, from the time Licensed Product is placed at the disposal of NOBEL at the manufacturing location in Okayama, Japan. **** Indicates that a portion of the text has been omitted and filed separately with the Commission CONFIDENTIAL 5 4.2 The Parties agree to a strategy of conducting BD studies in Turkey (at NOBEL's expense) under an IND granted to ABI by the US FDA. The Parties further agree that US FDA approval will be sought and this FDA approval and resultant Free Sale Certificate will be owned by ABI but will be used by NOBEL to seek regulatory approval in each country of the Territory. The Parties agree that ABI, as the sponsor of the IND, must file the NDA (New Drug Application) with the US FDA at ABI's expense. The expense of monitoring the Turkish clinical trials will be shared 50:50 between the Parties. NOBEL shall three (3) months after receiving the approvals from local IRB and Ethical Commities of MOH commence a clinical trial for the BD indication using protocols developed jointly and approved by ABI. NOBEL will conduct all clinical trials at its own expense. NOBEL shall, within six (6) months of the conclusion of the appropriate clinical study, apply for, at its own cost and expense and without any financial contribution from ABI, all necessary licenses, registrations or approvals required to be issued in the Territory, or any agency or instrumentality thereof, as a precondition to the import and sale of Licensed Product. NOBEL will apply for any pricing or reimbursement approvals, will exercise diligence to maintain all such approvals, and will diligently market the approved Licensed Product through the term of this Agreement. NOBEL will launch Licensed Product in the Territory within three (3) months of receipt of all necessary governmental approvals, and shall thereafter use its best efforts to advertise, promote and sell such Licensed Product after such approval as far as the MOH regulations allow. If at any time during the term of this Agreement NOBEL should fail to comply in a timely way with any of the requirements set forth in this Section 4.2, or if at any time during the term of this Agreement NOBEL should no longer be actively pursuing the application for any such approval or license in the Territory, or if, having obtained such approval or license, NOBEL should no longer be actively developing or marketing any Licensed Product under this Agreement in the Territory, under the preconditions permitted by applicable laws and regulations, both parties shall enter into consultation to decide the assignment of such applications, approvals and/or licenses from NOBEL. **** Indicates that a portion of the text has been omitted and filed separately with the Commission CONFIDENTIAL 6 4.3 NOBEL shall provide ABI by December 31st of each year during the term of this Agreement, a report of ongoing efforts for the development of Licensed Products, including a report of efforts by NOBEL with respect to clinical testing, regulatory approval efforts, marketing/sales strategy, and any other areas into which NOBEL's reasonable business efforts in accordance with this paragraph may reasonably be categorized. Such report shall be provided in English and shall be accompanied by labeling, instructions, promotional and other support materials developed for NOBEL's sales force, patients, physicians, or other outside parties. Such a report shall be prepared more often if ABI so requests in writing, provided that ABI pays to NOBEL the expenses incurred by NOBEL in generating such additional reports. It is understood that ABI will receive a copy in English of all NOBEL Technical Information. **** Indicates that a portion of the text has been omitted and filed separately with the Commission CONFIDENTIAL 7 4.4 During the term of this Agreement, NOBEL shall provide to ABI all data relating to the clinical testing and development of the Licensed Product for the Licensed Indications. ABI shall be allowed to use all clinical results obtained in the Territory and subject to notification to NOBEL, to use these results in non-NOBEL territories, as long as ABI shares 50:50 with NOBEL any option or license fee ABI receives in any country outside the USA or outside the Territory. 4.5 Unless specifically authorized in writing by ABI, NOBEL shall not sell, or offer for sale or act as sales agent for the solicitation of orders for any oral products (other than Licensed Products) that contain any IFN-(alpha) derived from any species and designated, detailed, or labeled for oral use for the Licensed Indications. ABI shall not authorize any third parties, directly or indirectly, to market or sell any IFN-(alpha) in the Territory for oral use in the treatment of the Licensed Indications. 4.6 NOBEL shall provide medical, pharmaco-vigilance and other appropriate customer support services in connection with sale of Licensed Products, and will report to ABI on a timely basis all material adverse reactions, product complaints and other relevant customer feedback. NOBEL agrees to advise ABI fully with respect to health, safety, environmental, and other standards, specifications, and other requirements imposed by law, regulation, or order in the Territory and applicable to Licensed Product which may be brought to NOBEL's attention from time to time, and which would have a material effect on the use or sale of Licensed Product for Licensed Indications in the Territory. NOBEL shall also advise ABI of all instructions, warnings, and labels applicable to Licensed Product for the Licensed Indications that are necessary or desirable under laws, regulations, or practices in the Territory. ABI shall meet such safety standards or specifications. ABI shall not increase the price charged to NOBEL for the Licensed Product unless changes to the specification are required. **** Indicates that a portion of the text has been omitted and filed separately with the Commission CONFIDENTIAL 8 ARTICLE V ORDERS AND SHIPMENTS 5.1 Within ninety (90) days of the date hereof, and at least ninety (90) days prior to the commencement of each calendar year during the term of this Agreement, NOBEL will furnish ABI with its projected requirements for Licensed Product during the next succeeding calendar year. NOBEL may amend its projected requirements from time-to-time, provided, however, that ABI shall be obligated only to make its best effort to comply with any requests in excess of annual projections received by it at least ninety (90) days prior to the commencement of the calendar year in question. Under no circumstances shall ABI be required to deliver to NOBEL, hereunder, an amount of Licensed Product which exceeds the amount ABI is able, in good faith, to acquire from HBL, or from HBL's contract manufacturers. The exact composition of Licensed Product shall be disclosed in writing by ABI to NOBEL. Subject to the foregoing, ABI shall use its best efforts to deliver Licensed Product in accordance with NOBEL's projected requirements and product specifications. 5.2 ABI shall ship the Licenced Product within thirty (30) days of request by NOBEL, against anirrevocable letter of credit on a U.S. bank (or other financial surety acceptable to ABI or to the agent nominated by ABI) in an amount sufficient to cover the purchase price payable to ABI or the agent nominated by ABI under Paragraph 4.1 above. The letter of credit shall be issued by a financial institution acceptable to ABI or to the agent nominated by ABI, shall be in U.S. dollars and shall not expire until the final payment for the respective shipment has been made to ABI or to the agent nominated by ABI. 5.3 Orders of Licensed Product for commercial sales shall be made for "full lot" quantities of 500,000 Doses. NOBEL shall meet or exceed the following annual minimum purchases from ABI. If NOBEL does not achieve these levels, it will enter into consultations with ABI to evaluate and remedy the situation, after which NOBEL will have the opportunity to make up the difference by either purchasing product or by cash payment within 90 days of the end of the period. If NOBEL does not elect to so make up the difference, then ABI will have the right to make the Agreement non-exclusive, and appoint another licensee or market the Product under the ABI name. **** Indicates that a portion of the text has been omitted and filed separately with the Commission CONFIDENTIAL 9 1st twelve months after launch 500,000 doses 2nd twelve months after launch 1.5 million doses 3rd twelve months after launch and beyond 3 million doses ARTICLE VI TERM AND TERMINATION 6.1 This Agreement and all rights granted hereunder by each Party shall terminate ten (10) years after the first market approval in Turkey, and if not cancelled by NOBEL, will be extended on a yearly basis by a request of NOBEL at least one hundred and eighty (180) days prior to the expiration date; If (a) NOBEL does not commence application for government approval, as may be required or advisable, within six (6) months after NOBEL receives all supporting documentation required for application for approval of commencement of the pivotal clinical trial; and (b) after approval of the Licensed Product, place orders for minimum annual shipments as provided in Paragraph 5.3, above; then ABI shall have the right to terminate this Agreement upon ninety (90) days prior written notice to NOBEL. NOBEL will proceed diligently to obtain market approval for the Territory according to the timetable set forth in paragraph 4.2 of this Agreement. If NOBEL fails to commence clinical trials under the IND granted to ABI by the US FDA as agreed in Paragraph 4.2, then ABI shall have the right to terminate this Agreement upon ninety (90) days prior written notice to NOBEL. 6.2 Termination of this Agreement for any reason shall not relieve the Parties of any obligation accruing prior to such termination. In addition, ARTICLE VIII ("Confidentiality") shall survive termination of this Agreement. **** Indicates that a portion of the text has been omitted and filed separately with the Commission CONFIDENTIAL 10 6.3 On termination of this Agreement for any reason set forth herein, NOBEL shall cease to sell Licensed Product after it sells all Licensed Product in its inventory that has already been paid for, and shall surrender to ABI all ABI Technical Information that it may have received during the term of this Agreement, and at the request of ABI, NOBEL may conditionally assign any approval, permit, or license it holds relating to Licensed Product to ABI. Any accrued payment obligations shall be paid within thirty (30) days of the termination of this Agreement. ARTICLE VII WARRANTY AND INDEMNIFICATION 7.1 ABI represents and warrants that as of the date of this Agreement, it is the exclusive owner of the right to sell and distribute Licensed Product for use in treating the Licensed Indications in the Territory. ABI further warrants that at the time of shipment, all Licensed Product supplied by it (i) shall meet all product specifications previously agreed in writing between ABI and NOBEL; (ii) shall not be adulterated or misbranded; and (iii) shall be manufactured in accordance with good manufacturing practices in the country of manufacture. ABI shall indemnify and hold NOBEL harmless from any and all costs, expenses, damages, judgments, and liabilities incurred by or rendered against NOBEL arising from any claim made or suit brought as a result of a breach by ABI of its warranties under this Paragraph 7.1. 7.2 NOBEL warrants that its operations and activities in the Territory shall be in compliance with applicable laws, statutes and regulations; and NOBEL shall indemnify and hold ABI harmless from any and all costs, expenses, damages, judgments, and liabilities incurred by or rendered against ABI or its Affiliates arising from the use, testing, recall, labelling, promotion, sale, or distribution of Licensed Product as a result of any breach of such warranty by NOBEL. ABI warrants that the manufacture of Licensed Product, including without limitation both bulk interferon alpha and finished product, shall be in compliance with applicable laws, statutes and regulations, and ABI shall indemnify and hold NOBEL harmless from any and all costs, expenses, damages, judgments, and liabilities incurred by or rendered against NOBEL or its Affiliates arising from the use, testing, recall, labeling, promotion, sale or distribution of Licensed Product as a result of any breach of such warranty by ABI. **** Indicates that a portion of the text has been omitted and filed separately with the Commission CONFIDENTIAL 11 ARTICLE VIII CONFIDENTIALITY 8.1 ABI owns or is licensed under confidential or secret information relating to the Licensed Products, and NOBEL intends to conduct trials in the Territory, which will generate confidential or secret information relating to the Licensed Products, and it is the intention of both ABI and NOBEL to maintain this confidentiality. 8.2 Each Party agrees to maintain confidential and secret all Technical Information which may be disclosed or provided to it by the other Party or that the Parties may together subsequently acquire. 8.3 Each Party's obligation to the other to maintain confidentiality hereunder shall terminate with respect to any particular item and only said item of the disclosing Party's Technical Information, when the recipient Party can demonstrate that such item of information: 8.3.1 Is publicly known and available through some means other than by the recipient Party's act or omission; or 8.3.2 Was in the recipient Party's possession prior to its disclosure by the other Party, as established by written evidence; or 8.3.3 Has come into the recipient Party's possession through a third party free of any obligation of confidentiality to the disclosing Party, where said third party has acquired said information lawfully and not under circumstances forbidding its disclosure. **** Indicates that a portion of the text has been omitted and filed separately with the Commission CONFIDENTIAL 12 8.4 Neither Party will permit the other Party's Technical Information or any part thereof to be disclosed to third parties or to employees except on a "need-to-know" basis and each will maintain such information and/or documents with the same precautions it uses to safeguard its own confidential or secret information. 8.5 Each Party will notify the other promptly if it has knowledge that an unauthorized third party possesses Technical Information of the other Party. 8.6 NOBEL shall have the right to use ABI's Technical Information, and to access ABI's US FDA Drug Master File for HBL IFN-(alpha), to the extent reasonably necessary to accomplish the objectives of this Agreement. 8.7 Upon written notification to NOBEL, ABI may use NOBEL's Technical Information for the purposes of designing protocols and studies, and for submission to regulatory authorities in any country outside the Territory in connection with an application for drug approval of the Product, subject, however, to the provisions of Section 4.4 regarding use of clinical data. ARTICLE IX MISCELLANEOUS 9.1 Force Majeure. The failure of NOBEL, ABI, or any of their Affiliates to take any action required by this Agreement if such failure is occasioned by an act of God or the public enemy, fire, explosion, perils of the sea, floods, drought, war, riot, sabotage, accident, embargo or any circumstance of like or different character beyond the reasonable control of the Party so failing or by the interruption or delay in transportation, inadequacy, or shortage or failure of the supply of materials and/or equipment, equipment breakdown, labor trouble or compliance with any order, direction, action or request of any governmental officer, department or agency and whether in any case such circumstances now exist or hereafter arise, shall not subject said Party to any liability to the other. **** Indicates that a portion of the text has been omitted and filed separately with the Commission CONFIDENTIAL 13 9.2 Communication. Any payment, notice or other communication required or permitted to be made or given to either Party pursuant to this Agreement shall be sufficiently made or given on the date of sending if sent to such Party by certified or registered mail, or by courier service, postage or delivery charge prepaid, addressed to it at its address set forth below, or to such other address as it may have designated by written notice given to the other Party. Fax numbers are given for convenience only, as an additional method of delivery, and no notice or other communication transmitted by fax shall be considered to be sufficiently made or given until such notice or communication is also sent by one of the other means described above. In case of NOBEL: Hasan Ulusoy, Chairman Barbaros Bulvari 76/78 Besiktas 34353 Istanbul / Turkey Phone: 0-212-259-7490 Fax: 0-212-258-8789 Email: hasan.ulusoy@nobel.com.tr In case of ABI: Dr. Joseph M. Cummins, Chairman & CEO Amarillo Biosciences, Inc. 4134 Business Park Drive Amarillo, TX 79110 Phone: (806) 376-1741 x 13 Fax: (806) 376-9301 Email: jcummins@amarbio.com **** Indicates that a portion of the text has been omitted and filed separately with the Commission CONFIDENTIAL 14 And: Edward L. Morris, Legal Counsel SandersBaker, P.C. One Maxor Plaza 320 S. Polk, Suite 700 Amarillo, TX 79101 Phone: (806) 372-3725 Fax: (806) 372-3725 9.3 Amendments to Agreement. This Agreement constitutes the entire Agreement between the Parties hereto on this subject matter and supersedes all previous arrangements whether written or oral. Any amendment or modification of this Agreement shall be effective only if made in writing, and executed by both Parties. 9.4 Enforceability. To the extent permitted by law, each Party waives any provision of law which renders any provision herein invalid, illegal or unenforceable in any respect, provided it does not contradict local laws and MOH regulations. 9.5 Relationship of Parties. All purchases and resales of Licensed Product by NOBEL shall be for NOBEL's own account as a principal and not as an agent of ABI. NOBEL shall act in all respects as an independent contractor and not as a representative or agent of ABI. This Agreement shall not be construed to create a relationship of partners, joint venturers, brokers, employees, agents, master or servant between the Parties. Neither Party shall have any right or authority to assume or create any responsibility, express or implied, in the name of the other Party or to bind the other Party in any manner whatsoever. 9.6 Assignment. Neither Party hereto shall assign any of its rights under this Agreement to any person or entity not an Affiliate of the assigning Party without the prior written consent of the other Party, which consent shall not be unreasonably withheld. **** Indicates that a portion of the text has been omitted and filed separately with the Commission CONFIDENTIAL 15 9.7 Venue and Governing Law. Any controversy or claim arising out of or relating to this contract, or the breach thereof, shall be settled by arbitration administered by the American Arbitration Association under its Commercial Arbitration Rules and judgment. The number of arbitrator shall be one and the seat or legal place of arbitration shall be New York USA. The Language to be used in arbitral proceedings shall be English and the governing law of the contract shall be the substantive law of USA. 9.8 Governing Language. The English language of this Agreement shall govern and control any translations of the Agreement into any other language. Documents furnished by NOBEL to ABI under the terms of this Agreement shall be furnished in English, or alternatively, shall be accompanied by an English translation. IN WITNESS WHEREOF, the Parties hereunto have caused this instrument to be executed in duplicate by their duly authorized representatives as of the date first above written. ABI: NOBEL: AMARILLO BIOSCIENCES, INC. NOBEL ILAC SANAYII VE TICARET A.S. By: By: /s/ Joseph M. Cummins /s/ Hasan Ulusoy - -------------------------------- --------------------------------------- Joseph M. Cummins, Hasan Ulusoy Chairman & CEO Chairman **** Indicates that a portion of the text has been omitted and filed separately with the Commission CONFIDENTIAL 16 EXHIBIT "A" This Exhibit "A" is attached to that certain License and Supply Agreement by and between AMARILLO BIOSCIENCES, INC. and NOBEL ILAC SANAYII VE TICARET A.S. and its affiliates dated September 13, 2004, and constitutes a part of said Agreement, as if fully set forth therein. ABI will supply to NOBEL either bulk finished lozenges from its subcontractor's plant for an agreed period of time up to a maximum quantity per year to be decided, at the price noted below. Finished bulk lozenges: $**** (US) per lozenge However, nothing in this Agreement shall obligate NOBEL to operate without a profit. If the MOH of Turkey sets the reimbursement price for interferon lozenges so low that NOBEL can not make a profit at $**** per lozenge, then ABI and NOBEL shall negotiate in good faith to adjust the price of finished bulk lozenges to NOBEL. 17 EX-99.1 4 v016376_ex99-1.txt EXHIBIT 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Amarillo Biosciences, Inc. on Form 10-QSB for the period ended December 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), each of the undersigned, in the capacities and on the dates indicated below, hereby certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of his knowledge: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company. Date: April 15, 2005 By: /s/ Joseph M. Cummins -------------------------------- Joseph M. Cummins President, Chief Executive Officer and Chief Financial Officer EX-99.2 5 ex-99_2.txt FORM OF CERTIFICATION PURSUANT TO RULE 13a-14 AND 15d-14 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED CERTIFICATION I, Joseph M. Cummins, certify that: 1. I have reviewed this annual report on Form 10-KSB of Amarillo Biosciences, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periods covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: (a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; (b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days of the filing date of this annual report (the "Evaluation Date"); and (c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. As the registrant's certifying officer I have disclosed, based on the most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize, and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls. 6. I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: April 15, 2005 /s/ Joseph M. Cummins -------------------------------------------- Name: Joseph M. Cummins Title: President and Chief Executive Officer and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----