-----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, UmyDro5GrGj0xai1P3APdJvdNBynpKVq8z2q9SQmKZvc+K+T8XWZoueuJtP2mw3c hMXzAj36vPqurIpqaNjqCA== 0001144204-06-013268.txt : 20060403 0001144204-06-013268.hdr.sgml : 20060403 20060331173617 ACCESSION NUMBER: 0001144204-06-013268 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20051231 FILED AS OF DATE: 20060403 DATE AS OF CHANGE: 20060331 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: 06730302 BUSINESS ADDRESS: STREET 1: AMARILLO BIOSCIENCES INC STREET 2: 4134 BUSINESS PARK DRIVE CITY: AMARILLO STATE: TX ZIP: 79110-4225 BUSINESS PHONE: (806) 376-1741 MAIL ADDRESS: STREET 1: AMARILLO BIOSCIENCES INC STREET 2: 4134 BUSINESS PARK DRIVE CITY: AMARILLO STATE: TX ZIP: 79110-4225 10KSB 1 v039467_10ksb.txt 1 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, 2005 [_] 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 incorporation or (I.R.S. Employer 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 is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. [_] 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] Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12(b)(2) of the Exchange Act). Yes [_] No [_] Revenues for its most recent fiscal year were $178,286. As of December 31, 2005, there were outstanding 19,801,990 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 $8,514,856. 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 2006 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 15 United States patents relating to the use or composition of low-dose oral natural interferon alpha and one patent on the dose formulation of our dietary supplement. 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. 2 The Company has 4 full-time employees. The Company makes extensive use of consultants in business and research and development. Governmental or FDA approval is required on the Company's principal products. The Company's progress toward approval is discussed under each specific indication, below. 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. 3 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. 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 2006. 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 2006. At the end of February, 2006, Martin Cummins, Director of Regulatory and Clinical Affairs for ABI, visited Nobel Ilac Sanayii Ve Ticaret A.S. He participated in final investigatory meetings prior to the enrollment of 90 patients with Behcet's disease in a study of interferon lozenges versus placebo. The treatment duration is 12 weeks, with completion of the study expected within a year. 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. 4 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. 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. A trial of low-dose, orally administered IFNa (150 IU three times daily) has shown minimal to no side effects. Subjects are evaluated with pulmonary function tests every three months and high resolution computed tomography (HRCT) at yearly intervals. Of the 9 subjects who have completed at least one year, the forced vital capacity has remained stable in 8 and the oxygen saturation after a 6-minute walk has been stable in 7 and improved in 1. One subject showing lack of progression has been followed for over 4 years and another for 2 years. The 8 subjects whose pulmonary function tests were stable showed no evidence of disease progression on HRCT scans. Most subjects who entered the study with a cough noted marked improvement within the first few weeks of treatment with corresponding increases in quality of life scores. These results strongly suggest that this regimen can prevent progression according to the criteria defined in the International Consensus Statement published by the American Thoracic Society. 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 essential 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. 5 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. Patients are currently being enrolled in a study at M.D. Anderson Cancer Center in Houston, Texas, to evaluate interferon lozenges in patients with the pre-leukemic conditions known as essential thrombocythemia and polycythemia vera. The first stage of enrollment should be completed by August. Goal of the study is to support and expand on positive data ABI generated in treating these conditions at the Mayo Clinic. 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 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 arranged to support two animal studies in influenza. In a study planned in Australia and another study planned in the USA, mice will be given oral interferon or placebo and challenged with mouse-adapted influenza virus. It is the Company's goal to generate animal data to support the human clinical data from studies in the former Soviet Union, Bulgaria, Japan and China. In those cases, it was reported that orally or intranasally administered interferon significantly (P< 0.05) reduced the severity and duration of naturally occurring influenza, compared to placebo. With these new animal data to supplement the human data, the Company hopes to insert oral interferon into the debate as to how best to respond to an influenza pandemic. 6 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; May 10, 1996; and September 7, 2001. The current expiration date of the Development Agreement is March 12, 2008, at which time it will automatically renew for an additional three (3) years, unless the parties agree otherwise. 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 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. 7 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. In 2005, the clinical protocol was developed, clinical supplies were made and packaged, and clinical investigators identified. The first patients will be enrolled in April 2006. At the end of February 2006, Martin Cummins, Director of Regulatory and Clinical Affairs for ABI, visited Nobel. He participated in final investigatory meetings prior to the enrollment of 90 patients with Behcet's disease in a study of interferon lozenges versus placebo. The treatment duration is 12 weeks, with completion of the study expected within a year. Other Agreements On October 19, 2005, ABI reached agreement with Global Kinetics of Kent, Washington to become the distributor of oral interferon in Cambodia. Global Kinetics' sales of interferon are expected to begin in the first half of 2006. The supply agreement between ABI and Global Kinetics on dry mouth relief was terminated. On December 29, 2005 ABI announced that it had entered into a distribution agreement with Bumimedic (M) Sdn. Bhd, a Malaysian pharmaceutical company to market ABI's low-dose interferon (natural human IFN) in Malaysia, Singapore and Brunei. Bumimedic will apply for registration to have ABI's natural human IFN approved for sale, following which it will commence marketing the product. The terms of the agreement call for Bumimedic to manufacture the tablets from ABI's natural human IFN (which is supplied by Hayashibara Biochemical Laboratories), package the tablets and distribute them to local hospitals, pharmacies and clinics in Malaysia, Singapore and Brunei. Pursuant to the agreement, ABI will receive a series of payments, which will be received in three stages: upon formal execution of the distribution agreement, upon regulatory approval, and upon registration. ABI will also receive a royalty on the sale of the natural human IFN sold. This agreement was made possible through the company's previously announced relationship with Dr. Claus Martin, President and CEO, Gessellschaft Fur Medizinisch and Technische Investionen mbH & CoKG. (GMTI), a privately held German venture capital group. In 2005 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. 8 Animal Health Application There is animal health approval for low dose oral administration of human interferon alpha supplied by Hayashibara Biochemical Laboratories (HBL) in Japan. The product was launched in Japan in September 2004. Amarillo Biosciences owns the distribution rights to HBL interferon for animal health outside Japan and receives a royalty on all Japanese HBL interferon sales. Patents and Proprietary Rights No new patents were issued in 2005. Cost of Compliance with Environmental Regulations The Company incurred no costs to comply with environment regulations in 2005. 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. 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. 9 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. 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. Research and Development During the years ended December 31, 2005 and 2004, the Company incurred expenses of $187,810 and $171,043, 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, at their cost, 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 2006 PLAN OF OPERATIONS - Research and Development". 10 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 inadequate and larger office space will be sought in the future. ITEM 3. LEGAL PROCEEDINGS. None. 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 bids as quoted on the OTC Bulletin Board for each quarter of 2005 and 2004 was as follows: 2005 2004 ----------------------- ----------------------- Quarter High Low High Low -------- -------- -------- -------- First $ 0.58 $ 0.29 $ 0.44 $ 0.27 Second 0.45 0.31 0.35 0.18 Third 0.38 0.27 0.32 0.20 Fourth 0.61 0.27 0.38 0.21 The quotations reflect inter-dealer bids without retail markup, markdown, or commission, and may not represent actual transactions. As of December 31, 2005, the Company had approximately 1,620 shareholders of record. During 2005 there were 32 sales of the unregistered common stock of the Company by private placement, raising $850,014 in cash. Of those purchases, 8 were by individuals who were not accredited investors within the meaning of Rule 501 of Regulation D, promulgated under the U.S. Securities Act of 1933, and 24 purchases were made by accredited investors. Of these sales, 1,380,000 shares were sold for $0.10 per share; 3,435,000 shares were sold for $0.20 per share; and 113,700 shares were sold for $0.22 per share. The foregoing private placements were conducted in reliance on Rule 506, promulgated under Section 4(2) of the Securities Act of 1933. 11 The following shares of the Company were repurchased in 2005: ------------------------------------------------------------------- Shares repurchased from the Crowe Estate: 120 shares ------------------------------------------------------------------- ITEM 6. MANAGEMENT DISCUSSION 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 $22,507,207 at December 31, 2004 to $23,132,394 at December 31, 2005. 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 2006 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 2006 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. ABI issued 37,994 unregistered shares of its voting common stock as payment for consulting services performed in 2005. Valuation of the stock granted ranged from $0.29 to $0.4467 per share which generated a value of $13,211. Liquidity and Capital Resources At December 31, 2005, the Company had available cash of approximately $193,515, and had a working capital deficit of approximately ($2,402,174). 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 flow 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 2006 Plan. The Company is presently negotiating with human health commercial development partners in various regions of the world including the United States, South America, China and Southeast Asia. The Company believes that one or more of these agreements will be executed during 2006. 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 human 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. 12 Total outstanding current liabilities decreased to approximately $2.6 million at December 31, 2005, as compared to approximately $2.8 million at December 31, 2004. 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. 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 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. 13 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 $6,989,000 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, 2005, to the fiscal year ended December 31, 2004. Revenues. During the fiscal year ended December 31, 2005, $42,730 from product sales was generated compared to revenues from product sales for the fiscal year ended December 31, 2004, of $45,389, a decrease of $2,659 or approximately 6%. The decrease is primarily due to lack of sales of interferon products in 2005. Selling, General and Administrative Expenses. Selling, General and Administrative expenses of $492,659 were incurred for fiscal year ended December 31, 2005, compared to $362,388 for the fiscal year ended December 31, 2004, an increase of $130,271. There was $13,212 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, 2005, 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 $13,212 was recorded for the issuance of these shares during the year ended December 31, 2005. In addition, the Company issued 450,000 options to consultants, to purchase restricted common stock in exchange for consulting services. The options are as follows, 250,000 at $0.01 per share, and 200,000 options at $0.05 per share. These options were exercised and the fair market value of the stock sales were stated; 250,000 shares for $0.01 per share, generating $2,500 in cash and $77,500 in non-cash consulting services; and 200,000 shares for $0.05 per share, generating $10,000 in cash and $60,000 in non-cash consulting services. 14 Net Income (Loss). Net Loss applicable to common shareholders for the fiscal year ended December 31, 2005 was $625,186 compared to a Net Loss of $595,205 for the fiscal year ended December 31, 2004. 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. 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. 15 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. 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 2006; however, there can be no assurance that we will be able to acquire product liability insurance with terms that are commercially feasible. 16 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 Bulletin Board, and there can be no assurance that a trading market will develop further or be maintained in the future. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. ITEM 8A. CONTROLS AND PROCEDURES. As of December 31, 2005, the disclosure controls and procedures in place have been evaluated and are sufficient to ensure the accurate and full disclosure of financial matters. The management of the Company is responsible for establishing and maintaining internal controls over the financial reporting of the Company. The Company uses the following framework to evaluate the effectiveness of the internal controls over financial reporting: We maintain a system of disclosure controls and procedures that are designed to provide reasonable assurance that information, which is required to be timely disclosed, is accumulated and communicated to management in a timely fashion. In the ordinary course of business, we review our system of internal control over financial reporting and make changes to our systems and processes to improve controls and increase efficiency, while ensuring that we maintain an effective internal control environment. Changes may include such activities as implementing new, more efficient systems and automating manual processes. An evaluation of the effectiveness of the design and operation of our disclosure controls and procedures was performed as of the end of the period covered by this report. This evaluation was performed under the supervision and with the participation of management, including our Chief Executive Officer, who is also currently the Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer concluded that our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to management, including our Chief Executive Officer, to allow timely decisions regarding required disclosure and are effective to provide reasonable assurance that such information is recorded, processed, summarized and reported within the time periods specified by the SEC's rules and forms. 17 As of December 31, 2005, the Company's internal controls are effective to ensure full and fair internal disclosure of financial matters. The Company's accounting firm has issued an attestation report on the management's assessment of the Company's internal controls. No material changes to the Company's internal controls were made in 2005 and no material weaknesses in such controls were found. ITEM 8B. OTHER INFORMATION. The matters disclosed under PART II, ITEM 5, regarding private placements by the Company of its securities during 2005, were required to be reported in one or more Form 8-Ks during 2005, but were not so reported. All such matters required to be reported on Forms 8-K during 2005 have been included in ITEM 5 of this Form 10KSB. PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT. As of December 31, 2005, the directors and executive officers of the Company were as follows: Name Age Position Joseph Cummins, DVM, PhD (1)(3)... 63 Chairman of the Board, President, Chief Executive Officer, Chief Financial Officer and Director Stephen Chen, PhD (2)(4).......... 56 Director Katsuaki Hayashibara (3)(4)(5).... 61 Director Dennis Moore, DVM (1)(4)(5)....... 59 Director James Page, MD (1)(2)(5).......... 78 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. 18 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. 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. Audit Committee Financial Expert The Company does not have an audit committee financial expert because no one on the board has the education or experience to qualify as an audit committee financial expert. An audit committee financial expert is a person who has an understanding of GAAP and financial statements; the ability to assess accounting and financial principles in connection with the accounting of the Company; experience preparing, auditing, analyzing, or evaluating financial statements; an understanding of internal controls over financial reporting; and an understanding of audit committee functions. 19 Code of Ethics The Company's Code of Ethics may be found on the Company's website, www.amarbio.com. 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. ITEM 10. EXECUTIVE COMPENSATION. The following table sets forth for the three years ended December 31, 2005 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, 2005.
Summary Compensation Table Long Term Annual Compensation Compensation --------------------------------------------- -------------------- Name and Principal Position Year Salary Bonus Securities Other Underlying Compensation Options - ------------------------------------- -------- -------------- --------- -------------- ---------------- Dr. Joseph M. Cummins, 2005 $177,000 $ - $ - 600,000 Chairman of the Board, President and Chief Executive Officer 2004 $ 74,716 $ - $ - 650,000 2003 $103,779 $ - $ - 490,000
20 Option Grants in 2005 The following table sets forth certain information relating to options granted in 2005 to the executive officers named above, to purchase shares of common stock of the Company.
Number of Shares % of Total of Common Stock Options Granted Exercise or Name Underlying Options to Employees Base Price Expiration Granted (#) in 2005 ($/Sh) Date - -------------------------------------- ------- ---- --------- ---------- Joseph M. Cummins..................... 100,000 7.7% $0.40 (1) 02/25/2010 500,000 38.5% $0.30 (1) 08/22/2010
(1) The fair market value of the common stock on the date of the grant. Aggregated Option Exercises at December 31, 2005 And Year-End Option Values The following table sets forth information for the executive officers named above, regarding the exercise of options during 2005 and unexercised options held at the end of 2005.
Value of Unexercised Name Number of Shares of Common Stock In-The-Money Shares Value Underlying Unexercised Options at Options at Acquired on Realized December 31, 2005 (#) December 31, 2005 ($) (1) Exercise (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable - -------------- --------------- ----------- -------------------------------- ----------------------------------- Joseph Cummins -- -- 1,788,486 / None $769,049 / None
(1) Calculated based on the closing price of the common stock ($0.43) as reported by OTC BB on December 30, 2005. Director Compensation for Last Fiscal Year
Cash Compensation Stock Options ----------------------------------- ------------------ Number of Name Consulting Fees Securities Meeting Fees (1) (2) Underlying Options - ---------------------------------------------------------------------------------------------------------------------- Stephen Chen, PhD $ -- $ -- 600,000 Katsuaki Hayashibara -- -- 600,000 Dennis Moore, DVM -- -- 600,000 James Page, MD -- -- 600,000
(1) Directors do not receive compensation for attendance at directors' meetings. (2) Directors may receive up to $1,200 per day, prorated for partial days, for employment on special projects or assignments. There are no employment agreements with any of the executives of the Company. 21 ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS As of December 31, 2005, there were 19,801,990 shares of the Company's common stock outstanding. The following table sets forth as of December 31, 2005, the beneficial ownership of each person who owns more than 5% of such outstanding common stock:
Name and Address Amount and Nature of Percent of Class Beneficial Ownership Owned - -------------------------- -------------------- ----- Hayashibara Biochemical Laboratories, Inc. 2-3 Shimoishii 1-chome Okayama 700, Japan 3,290,781 17%
The following table sets forth the beneficial ownership of the Company's stock as of December 31, 2005 by each executive officer and director and by all executive officers and directors as a group:
Name and Address of Owner Amount and Nature of Percent of Class Beneficial Ownership Owned - ------------------------- -------------------- ---------------- Joseph Cummins 2122 Harrison Amarillo, TX 79109 2,025,032(1) 9.4% Dennis Moore 402 Fish Hatchery Hamilton, MT 59840 864,299(2) 4.2% Katsuaki Hayashibara 2-3, Shimoishii, 1-chome Okayama, 700 Japan 912,365(3) 4.4% Stephen Chen Floor 7-1, No. 18 Xin Yi Road, Sec. 5 864,125(4) 4.2% Taipei, Taiwan James Page 103 Clubhouse Lane, #182 Naples, FL 34105 864,125(5) 4.2% ------------------------- ---------------------- 5,529,946 22.2% Total Group (all directors and executive officers - 5 persons)
(1) 1,788,486 of these shares are exercisable options (2) 814,125 of these shares are exercisable options (3) 864,125 of these shares are exercisable options (4) 814,125 of these shares are exercisable options (5) 864,125 of these shares are exercisable options 22 Employee Stock Option Plan The Company has an employee stock option plan entitled the 1996 Employee Stock Option Plan, which has been approved by the shareholders of the Company, and which was amended and restated effective September 12, 1998, and May 11, 1999, both of said amendments and restatements also having been approved by the shareholders of the Company. 590,000 shares of the Company's common stock are reserved for issuance under said Employee Stock Option Plan; however, none of such options are currently outstanding to employees of the Company. Options granted in prior years under the Employee Stock Option Plan have either lapsed, or have been exercised in full, or have been returned to the Company in exchange for non-qualified stock options. However, the Company may grant qualified stock options to employees under the Employee Stock Option Plan from time to time in the future. 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 17% 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 November 30, 1999 loan has been extended until December 2006 and the February 29, 2000 loan has been extended to February 29, 2007. The aggregate balance on both notes at December 31, 2005, including principal and accrued interest, was $2,510,701. 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 2005, 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 $20,354 by said firm in 2005. 23 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. ITEM 13. EXHIBITS EXHIBIT INDEX 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).
24 10.29** Distribution Agreement dated September 17, 1997 between HBL and the Company (interferon gamma). 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. 10.45++++ a Supply Agreement dated June 20, 2004 between Global Kinetics, Inc. and the Company. 10.46++++ a License and Supply Agreement dated September 13, 2004 between Nobel ILAC SANAYII VE TICARET A.S. and the Company. 10.47 a License and Supply Agreement dated October 19, 2005 between Global Kinetics, Inc. and the Company. 10.48 a License and Supply Agreement dated January 18, 2006, between Bumimedic (Malaysia) SDN. BHD., and the Company.
25 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. aPortions of this exhibit have been omitted and filed separately with the commission. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The following summarizes the fees incurred by the Company during 2004 and 2005 for accountant and related services. Audit Fees 2005 2004 ---------------- -------------- Malone & Bailey, PLLC $15,000 Lopez, Blevins, Bork & Assoc. LLP $17,875 $ 3,500 Audit-Related Fees 2005 2004 ---------------- -------------- Johnson & Sheldon $465 $575 Tax Fees 2005 2004 ---------------- -------------- Johnson & Sheldon $2,750 $2,100 All Other Fees None. Accountant Approval Policy Before an accountant is engaged by the Company to perform audit or non-audit services, the accountant must be approved by the Company's Audit Committee. 26 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: March 31, 2006 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, March 31, 2006 - ---------------------------------------- President, Chief Financial Joseph M. Cummins Officer, Director and Chief Executive Officer Director - ---------------------------------------- Stephen T. Chen Director - ---------------------------------------- Katsuaki Hayashibara Director March 31, 2006 - ---------------------------------------- /s/ Dennis Moore Director - ---------------------------------------- Dennis Moore /s/ James A. Page Director March 31, 2006 - ---------------------------------------- James A. Page
27 Amarillo Biosciences, Inc. and Subsidiaries Consolidated Financial Statements Year ended December 31, 2005 Contents Report of Independent Registered Public Accounting Firm .................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 Independent Registered Public Accounting Firm 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, 2005, 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, 2005, 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 2006 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 2005 financial statements do not include any adjustments that might result from the outcome of this uncertainty. LOPEZ, BLEVINS, BORK & ASSOCIATES, LLP Houston, Texas March 27, 2006 F-1 Amarillo Biosciences, Inc. and Subsidiaries Consolidated Balance Sheet December 31, 2005
Assets Current assets: Cash $ 193,315 Other current assets 2,788 ------------ Total current assets 196,103 Equipment, net 725 Patents, net of accumulated amortization of $191,789 118,907 ------------ Total assets $ 315,735 ============ Liabilities and Stockholders' Deficit Current liabilities: Accounts payable $ 41,513 Accrued interest expense 510,701 Notes payable, including notes payable to stockholder 2,093,500 ------------ Total current liabilities 2,645,714 ------------ Total Liabilities 2,645,714 ------------ Commitments and contingencies Stockholders' deficit Preferred stock, $.01 par value: Authorized shares - 10,000,000 Issued shares - none -- Common stock, $.01par value: Authorized shares - 50,000,000 Issued shares - 19,801,870 198,019 Additional paid-in capital 20,648,219 Accumulated deficit (23,176,217) ------------ Total stockholders' deficit (2,329,979) ------------ Total liabilities and stockholder's deficit $ 315,735 ============
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, ---------------------------- 2005 2004 ------------ ------------ Revenues: Dietary supplement sales $ 42,730 $ 35,899 Interferon sales -- 9,490 Federal research grant 44,349 -- Royalty revenue 67,486 -- Other -- 6,117 ------------ ------------ Total Revenues 154,565 51,506 ------------ ------------ Expenses: Cost of sales 22,456 14,949 Research and development expenses 187,810 171,043 Selling, general and administrative expenses 492,659 362,388 Interest expense 120,651 98,331 ------------ ------------ Total Expenses 823,576 646,711 ------------ ------------ Net income (loss) $ (669,011) $ (595,205) ============ ============ Basic and diluted net income (loss) per share $ (0.04) $ (0.05) ============ ============ Weighted average shares outstanding 16,495,678 12,446,690 ============ ============
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, 2005 and 2004
Total Common Stock Additional Paid Accumulated Stockholders' Issuance Price Shares Amount in Capital Deficit Deficit Balance at December 31, 2003 11,060,017 $ 110,600 $ 19,279,417 $ (21,912,001) $ (2,521,984) Net loss for year ended December 31, 2004 - - - (595,205) (595,205) Issuance of common stock for services .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) (2,694,208) Net loss for year ended December 31, 2005 - - - (669,011) (669,011) Issuance of common stock for services 0.29-0.4467 37,994 380 12,832 - 13,212 Issuance of common stock for cash in private placements 0.20-0.22 4,928,700 49,287 800,702 - 849,989 Exercise of options for service 0.32-0.35 450,000 4,500 145,500 - 150,000 Issuance of warrants in connection with debt - - 20,105 - 20,105 Purchase and retirement of common stock 0.55 (120) (1) (65) (66) Balance at December 31, 2005 19,801,870 $ 198,019 $ 20,648,219 $ (23,176,217) $ (2,329,979)
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
Years ended December 31 Operating Activities 2005 2004 --------- --------- Net income (loss) $(669,011) $(595,205) Adjustments to reconcile net income (loss) to Net cash provided by (used for) operating activities: Depreciation and amortization 12,439 29,041 Common stock issued for services 150,712 105,960 Issuance of warrants in connection with debt 20,105 Changes in operating assets and liabilities: Other current assets (1,953) 4,737 Accounts payable (120,381) 18,490 Accrued expenses (47,302) 108,925 --------- --------- Net cash used in operating activities (655,391) (328,052) --------- --------- Investing Activities Patents -- (3,486) --------- --------- Net cash provided by (used in) investing activities -- (3,486) --------- --------- Financing Activities Proceeds from notes payable -- 20,000 Proceeds from excersise of options 12,500 -- Repayments of notes payable (20,000) (10,500) Purchase and retirement of common stock (66) -- Issuance of common stock 849,989 317,021 --------- --------- Net cash provided by financing activities 842,423 326,521 --------- --------- Net increase (decrease) in cash 187,032 (5,017) Cash at beginning of period 6,283 11,300 --------- --------- Cash at end of period $ 193,315 $ 6,283 ========= ========= Supplemental Cash Flow Information Cash paid for interest $ 36,967 $ 5,542 ========= =========
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, 2005 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 2006 Plan of Operations calls for the Company to expend approximately $5 million in 2006. At December 31, 2005, the Company had available cash of $193,315 and negative working capital of approximately ($2,402,174). 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 2006 Plan. The Company is presently negotiating with human health commercial development partners in various regions of the world including the United States, China, South America and Southeast Asia. The Company believes that one or more of these agreements will be executed during 2006. 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. F-6 Amarillo Biosciences, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2005 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 adopted SFAS 123R 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, 2005 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. Amortization expense amounted to $12,379 and $19,321 for the years ended December 31, 2005 and 2004, respectively. 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 Dietary supplement and interferon sales Revenues for the dietary supplement sales are recognized when an arrangement exists, the price is fixed and it has been determined that collectibilty is reasonably assured. This generally occurs at the point when the goods are shipped to the customer, Federal research grant On May 2, 2005, the Company was awarded a research grant through the National Institute of Health, Small Business Innovation Research Program. The Ohio State University was sub-contracted to perform the research associated with this grant. Funds are drawn down electronically through the U.S. Department of Health & Human Services Program Support Center, Financial Management Service, Division of Payment Management (DPM). The sub-contractor requests funds to perform the research, the Company then requests a draw from the DPM, the funds are wired to the Company's bank account and a check is sent to the sub-contractor. These funds are recognized by the Company when received and expensed when payment is made to the sub-contractor. F-8 Amarillo Biosciences, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2005 Royalty revenue Royalty revenue is calculated based on a percent of sales relating to a license. Amarillo recognized revenue on these royalties in the month the revenue is generated by the licensee. Research and Development Research and development costs are expensed as incurred. 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. There were 520,000 options granted to purchase common stock in the three months ended March 31, 2005, with an exercise price of $0.40 per share with a 5 year term. No options were granted in the three month period ending June 30, 2005. During the three month period ending September 30, 2005 there were 3,400,000 options granted to purchase common stock, with an exercise price of $0.30 per share with a 5 year term. These options vest immediately. No options were granted in the three month period ending December 31, 2005. F-9 Amarillo Biosciences, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2005 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. 2005 2004 ----------- ----------- Net loss, as reported $ (625,186) $ (595,205) Less: stock based compensation determined $ (984,339) $ (360,199) ----------- ----------- Pro forma net loss $(1,609,525) $ (955,404) Basic and diluted net loss per share As reported $ (0.04) $ (0.05) Pro forma $ (0.10) $ (0.08) 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. 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, 2005 ----------------- Furniture and equipment $54,011 ------- 54,011 Less accumulated depreciation 53,286 ------- $ 725 ======= Depreciation expense amounted to $60 and $1,667 for the years ended December 31, 2005 and 2004, respectively. F-10 Amarillo Biosciences, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2005 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. One of these 3 notes was converted into stock as shown below. 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, 2005, 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, 2006, 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 is due on or before February 29, 2007, or on or before the expiration of one 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 Promissory Note for $45,000 payable to an individual stockholder. The Promissory 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. Accrued interest is payable monthly, in arrears and the entire principal amount was payable October 31, 2004, in November 2005 the Company paid $20,000 toward the principle of this note and a the Note was amended restating the Note amount as $25,000, this Note is due October 31, 2006. The Note Holder is granted the right to purchase the following; up to 30,000 shares of stock at an exercise price of $0.15 per share on or before October 31, 2006; up to 30,000 shares of stock at an exercise price of $0.22 per share on or before October 31, 2007; and 30,000 shares of stock at an exercise price of $0.47 per share on or before November 15, 2008. F-11 Amarillo Biosciences, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2005 Effective March 21, 2003 the Company executed a second Promissory Note for $45,000 payable to the same individual stockholder. The Promissory 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 Promissory 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 the following; up to 50,000 shares of stock at an exercise price of $0.06 per share on or before March 31, 2007; and 30,000 shares of stock at an exercise price of $0.50 per share on or before March 20, 2008. 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. The Company has secured a line of credit for up to $10,000 from it's bank Wells Fargo. This line is used from time to time for purchases. 4. Manufacturing and Supply Agreements The Company was a party to the following manufacturing and supply agreements at December 31, 2005: 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 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 current expiration date of the Development Agreement is March 12, 2008. 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, excluding Japan. F-12 Amarillo Biosciences, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2005 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 and Preferred Stock The Company has 50,000,000 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 7,512,862 shares of common stock reserved for issuance upon exercise of options and warrants granted. In 2005, the Company sold 4,928,700 unregistered shares of its voting common stock in private placement offerings. Of these sales, 1,380,000 shares were sold for $0.10 per share; 3,435,000 shares for $0.20 per share; 113,700 shares for $0.22 per share; generating $850,014 in cash. During the year ended December 31, 2005, the Board of Directors authorized the issuance of 37,994 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 $13,211 was recorded for the issuance of these shares during the year ended December 31, 2005. 8. Stock Options and Warrants During 2005, the Company issued 450,000 options to consultants, to purchase restricted common stock in exchange for consulting services. The options are as follows, 250,000 at $0.01 per share, and 200,000 options at $0.05 per share. These options were exercised and the fair market value of the stock sales were stated; 250,000 shares for $0.01 per share, generating $2,500 in cash and $77,500 in non-cash consulting services; and 200,000 shares for $0.05 per share, generating $10,000 in cash and $60,000 in non-cash consulting services. F-13 Amarillo Biosciences, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2005 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: 2005 2004 Options Price Options Price ------------------------------------------------ Outstanding Beg of Year 2,925,862 0.41 2,071,688 0.54 Granted 3,920,000 0.31 1,500,000 0.25 Cancelled - (494,312) 1.12 Exercised - (151,514) 0.06 Outstanding End of Year 6,845,862 0.31 2,925,862 0.41 Exercisable End of Year 6,845,862 0.31 2,925,862 0.41 Exercise prices for options outstanding as of December 31, 2005 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 5.01 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, 2005 and 2004, were $0, and $0, respectively. F-14 Amarillo Biosciences, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2005 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 $6,989,000 and $6,660,000 at December 31, 2005 and 2004 respectively, was subject to a valuation allowance of $6,989,000 and $6,660,000 at December 31, 2005 and 2004 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. At December 31, 2005, the Company has net operating loss carryforwards of approximately $20,556,000 for federal income tax purposes expiring in 2006 through 2024. 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, 2005. 12. Related Party 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 17% 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 November 30, 1999 loan has been extended until December 2006 and extension of the February 29, 2000 loan is under discussion. The aggregate balance on both notes at December 31, 2005, including principal and accrued interest, was $2,510,701. 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. F-15 Amarillo Biosciences, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 2005 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. 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 2005 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 $20,354 during 2005 for legal services rendered by SandersBaker. 13. Subsequent Events (Unaudited) On March 14, 2006 the Company paid a Promissory Note for $65,000 payable to an individual stockholder. Since December 31, 2005, the Company has sold 1,471,060 shares of unregistered stock in private placement offerings. Of these sales, 671,000 shares were sold for $0.20 per share; 200,000 were sold for $0.38 per share; 600,000 were sold for $0.52 per share; generating cash of $522,260. F-16 EX-10.47 2 v039467_ex10-47.txt LICENSE AND SUPPLY AGREEMENT between GLOBAL KINETICS, INC. and AMARILLO BIOSCIENCES, INC. October 19, 2005 Confidential ------------ **** Indicates that a portion of the text has been omitted and filed separately with the Commission. 1 TABLE OF CONTENTS ARTICLE I: DEFINITIONS.........................................................5 ARTICLE II: RESEARCH AND DEVELOPMENT..........................................12 Section 2.01. GKI Obligations.......................................12 Section 2.02. ABI Obligations.......................................13 Section 2.03. Availability of Resources; Cooperation................13 Section 2.04. Reporting Obligations of GKI..........................14 ARTICLE III: LICENSE..........................................................14 Section 3.01. License and Supply Grant..............................14 Section 3.02. Restrictions..........................................14 Section 3.03. Retained Rights.......................................14 ARTICLE IV: PAYMENTS AND ROYALTIES............................................15 Section 4.01. Royalty Payments......................................15 Section 4.02. Minimum Payment.......................................15 Section 4.03. Reports...............................................15 Section 4.04. Records and Audits....................................15 Section 4.05. Exchange Rate; Manner and Place of Payment............16 Section 4.06. Late Payments.........................................16 Section 4.07. Taxes.................................................16 ARTICLE V: TERM AND TERMINATION...............................................16 Section 5.01. Term..................................................16 Section 5.02. Termination By GKI....................................16 Section 5.03. Termination by ABI....................................17 Section 5.04. Termination Upon Certain Events.......................18 Section 5.05. Remedies..............................................18 Section 5.06. Effect of Termination.................................18 Section 5.07. Bankruptcy............................................19 Section 5.08. Continuing Obligations................................19 Section 5.09. Return of Confidential Information....................19 ARTICLE VI: SUPPLY, MANUFACTURE AND PURCHASE OF PRODUCT.......................19 Section 6.01. Supply of Clinical Samples............................19 Section 6.02. Supply and Manufacturing Rights.......................20 Section 6.03. Quality Assurance.....................................20 Section 6.04. ABI's Duties..........................................20 Section 6.05. Failure to Supply.....................................21 Section 6.06. Allocation............................................22 Section 6.07. Records and Audits....................................22 ARTICLE VII: PURCHASE AND SALE................................................22 Section 7.01. Purchase Price and Payment............................22 Section 7.02. Labeling and Artwork..................................23 Confidential ------------ **** Indicates that a portion of the text has been omitted and filed separately with the Commission. 2 Section 7.03. Purchase Forms.........................................23 Section 7.04. Confirmation...........................................23 Section 7.05. Delivery...............................................23 Section 7.06. Forecasts and Orders...................................24 ARTICLE VIII: WARRANTY, REJECTION AND INSPECTIONS.............................25 Section 8.01. ABI Warranty...........................................25 Section 8.02. Rejection of Product for Failure to Conform to Specifications...................25 Section 8.03. GKI Inspections........................................26 ARTICLE IX: REGULATORY COMPLIANCE.............................................26 Section 9.01. Maintenance of Marketing Authorizations................26 Section 9.02. Adverse Drug Event Reporting and Phase IV Surveillance..................................26 Section 9.03. Commercial Sale Testing and Reporting..................27 Section 9.04. Assistance.............................................27 Section 9.05. Compliance.............................................27 ARTICLE X: REPRESENTATIONS, WARRANTIES AND COVENANTS..........................28 Section 10.01. Corporate Power.......................................28 Section 10.02. Due Authorization.....................................28 Section 10.03. Binding Obligation....................................28 Section 10.04. Ownership of ABI Rights...............................28 Section 10.05. Material Agreements...................................29 Section 10.06. Adverse Properties....................................29 Section 10.07. Preservation of Name and Reputation...................29 Section 10.08. Debarment.............................................29 Section 10.09. Limitation on Warranties..............................29 Section 10.10. Limitation of Liability...............................30 ARTICLE XI: COVENANTS OF GKI AND ABI..........................................30 Section 11.01. Access to Books and Records...........................30 Section 11.02. Further Actions.......................................30 Section 11.03. Equitable Relief......................................30 ARTICLE XII: INDEMNIFICATION..................................................31 Section 12.01. GKI Indemnified by ABI................................31 Section 12.02. ABI Indemnified by GKI................................31 Section 12.03. Prompt Notice Required................................31 Section 12.04. Indemnitor May Settle.................................32 ARTICLE XIII: DISPUTE RESOLUTION..............................................32 Section 13.01. Disputes..............................................32 Section 13.02. Trial Without Jury....................................33 Section 13.03. Performance to Continue...............................33 Section 13.04. Provisional Remedies..................................33 Section 13.05. Determination of Patents and Other Intellectual Property.................................33 Confidential ------------ **** Indicates that a portion of the text has been omitted and filed separately with the Commission. 3 ARTICLE XIV: CONFIDENTIALITY.................................................33 Section 14.01. Confidentiality......................................33 Section 14.02. Publicity Review....................................34 ARTICLE XV: MISCELLANEOUS....................................................34 Section 15.01. Commercially Reasonable Efforts.....................34 Section 15.02. Notices.............................................34 Section 15.03. Severability........................................35 Section 15.04. Entire Agreement/Merger.............................35 Section 15.05. Amendment...........................................36 Section 15.06. Counterparts........................................36 Section 15.07. No Waiver of Rights.................................36 Section 15.08. Force Majeure.......................................36 Section 15.09. Further Assurances..................................36 Section 15.10. Assignment and Sublicense...........................36 Section 15.11. Expenses............................................37 Section 15.12. Binding Effect......................................37 Section 15.13. Governing Law.......................................37 Section 15.14. Survival of Representations and Warranties..........37 Section 15.15. No Strict Construction..............................37 Section 15.16. Independent Contractors.............................37 Exhibit A - Specifications.......................................A-1 Exhibit B - Certificate of Compliance............................B-1 Confidential ------------ **** Indicates that a portion of the text has been omitted and filed separately with the Commission. 4 LICENSE AND SUPPLY AGREEMENT This License and Supply Agreement ("Agreement") is made as of October 19, 2005 (the "Effective Date"), by and between Global Kinetics, Inc., a Washington corporation ("GKI"), with its principal place of business located at 4628 Kent Court, Kent, Washington 98032, and Amarillo Biosciences, Inc., a Texas corporation ("ABI"), with its principal place of business located at 4134 Business Park Drive, Amarillo, Texas 79110. ABI and Global Kinetics, Inc. are sometimes referred to collectively herein as the "Parties" and individually as a "Party." WHEREAS, ABI and its contract supplier, Hayashibara Biochemical Laboratories, Inc. ("HBL") have substantial expertise in the production and oral use of human interferon alpha ("IFN") and have proprietary rights and Know-How in the field of production, purification and formulation of IFN; WHEREAS, ABI is willing to disclose to GKI the ABI Know-How consisting of human clinical data and all other data, including safety, bioavailability, and clinical trial data necessary for GKI to obtain regulatory approval for a product for the treatment of human diseases in the Territory; and WHEREAS, ABI has an exclusive worldwide license (except Japan) to market and distribute the oral formulation of HBL IFN, and desires to provide HBL IFN to GKI on the terms and conditions herein set forth, and GKI desires to obtain the right to perform clinical trials on, distribute and market HBL IFN on the terms and conditions herein set forth; WHEREAS, ABI owns certain proprietary information, intellectual property, Patents and ABI Know-How, and other rights relating to the use of low dose IFN for the treatment or prevention of human diseases; WHEREAS, subject to the terms of this Agreement, ABI desires to grant to GKI, and GKI wishes to obtain from ABI, an exclusive supply agreement license, subject to existing rights, to such Know-How and related intellectual property rights in the Territory in connection with the Product; and WHEREAS, ABI is willing to grant such rights and licenses to GKI under the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the mutual promises, covenants and agreements hereinafter set forth, the Parties mutually agree as follows: ARTICLE I: DEFINITIONS (a) The following terms as used in the Agreement shall, unless the context clearly indicates to the contrary, have the meaning set forth below: **** Indicates that a portion of the text has been omitted and filed separately with the Commission. Confidential ------------ **** Indicates that a portion of the text has been omitted and filed separately with the Commission. 5 "ABI Know-How" means all Know-How under the Control of ABI as of the Effective Date and at any time during the Term related to (but not claimed under) the ABI Patent Rights and which is necessary or useful to develop, Manufacture and/or commercialize the Product, including all information, reports, results, inventions, 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 Product, including non-patentable Improvements, and any nonpublic information relevant to the ABI Patent Rights, including preclinical and clinical data from ABI's past, current or future studies, relating to safety or bioavailability, or preclinical or clinical data relating to the use of HBL IFN and/or IFN for the treatment or prevention of human diseases. "ABI Patent Rights" means all Patent Rights that are under the Control of ABI as of the Effective Date and at any time during the Term that are necessary or useful to the use, development, Manufacture, marketing, promotion, distribution, sale and/or commercialization of the Product for use in the treatment of the Licensed Indication, and Improvements thereto developed by or on behalf of ABI during the Term. "ABI Technology" means the ABI Patent Rights and the ABI Know-How. "Acceptance for Filing" means GKI's receipt of a letter issued by the FDA indicating acceptance for filing of an NDA or equivalent marketing application pursuant to Applicable Laws in a country in the Territory. "Affiliate" means any entity, which directly or indirectly controls, is controlled by or is under common control with either GKI or ABI. The term "control" as used in the preceding sentence means the power to direct or control the affairs of such entity by reason of ownership of at least 50% of such entity by voting stock, equity interest, contract or otherwise. "Applicable Laws" means all applicable laws, rules, regulations and guidelines within or without the Territory that may apply to the marketing or sale of the Product in the Territory or the performance of either Party's obligations under this Agreement including laws, regulations and guidelines governing the marketing, distribution and sale of the Product in the Territory, to the extent applicable and relevant, and including all cGMP or current Good Clinical Practices standards or guidelines promulgated by the FDA or the Governmental Authorities and including trade association guidelines. "Approval Letter" means a letter issued by the Cambodian Ministry of Health or any other Governmental authority in any country of the Territory indicating approval of a product for commercialization. "Certificate of Compliance" means the certificate of compliance in the form attached hereto as Exhibit B. "CFR" means the United States Code of Federal Regulations. "cGMP" means current good manufacturing practices as defined in 21 CFR ss. 110 et seq. and established under the Act and applicable Regulations. Confidential ------------ **** Indicates that a portion of the text has been omitted and filed separately with the Commission. 6 "Competing Product" means a product for human use that contains IFN and is marketed, distributed or sold in the Territory that is likely to be confused with or used as a substitute for the Product, such confusion and likelihood of substitution being determined based on an analysis of factors such as, but not limited to, recommended dosage, similarity in indications for which it is marketed, distributed or sold, or similarity in tradedress or trademarks used in the marketing, distribution or sale thereof. "Confidential Information" means any confidential information (including Know-How) of a Party relating to any human interferon use, process, method, compound, research project, work in process, future development, scientific, engineering, Manufacturing, marketing, business plan, financial or personnel matter relating to the disclosing Party, its present or future product, sales, suppliers, customers, employees, investors or business, whether in oral, written, graphic or electronic form. Confidential Information shall not include any information which the receiving Party can prove by competent evidence: (a) is now, or hereafter becomes, through no act or failure to act on the part of the receiving Party, generally known or available; (b) is known by the receiving Party at the time of receiving such information, as evidenced by its written records maintained in the ordinary course of business; (c) is hereafter furnished to the receiving Party by a Third Party, as a matter of right and without restriction on disclosure; (d) is independently developed by the receiving Party, as evidenced by its written records, without knowledge of, and without the aid, application or use of, the disclosing Party's Confidential Information; or (e) is the subject of a written permission to disclose provided by the disclosing Party. "Control" means the possession of the ability to grant a license or sublicense as provided for herein without violating the terms of any agreement or other arrangement with any Third Party. "Existing Licensees" means, as applicable, Pharma Pacific Management Pty, Ltd. (PPM), HBL and Interferon Sciences, Inc. (ISI), their successors, transferees and licensees. "Existing Licenses" means, as applicable, the HBL Agreement, the PPM Agreement and the ISI Agreement. "FDA" means the United States Food and Drug Administration. "First Commercial Sale" means the first sale for use, consumption or resale of a Product by GKI, its Affiliates or its sublicensees in the Territory (excluding any sales for clinical trials). A sale to an Affiliate shall not constitute a First Commercial Sale unless the Affiliate is the end user of the Product. Confidential ------------ **** Indicates that a portion of the text has been omitted and filed separately with the Commission. 7 "GAAP" means United States generally accepted accounting principles, consistently applied in accordance with past practice. "Good Clinical Practices" means good clinical practices as defined in 21 CFR ss. 50 et. seq. and ss. 312 et. seq. "Governmental Approval" means all permits, licenses and authorizations, including Marketing Authorizations, required by the FDA or any other Governmental Authority as a prerequisite to the Manufacturing, packaging, marketing and selling of the Product. "Governmental Authority" means any federal, state, local or other government, administrative or regulatory agency, authority, body, commission, court, tribunal or similar entity, including the FDA and other entities in each country in the Territory responsible for the regulation of medicinal products intended for human use. "HBL" means Hayashibara Biochemical Laboratories, Inc. of Okayama, Japan. "HBL Agreement" means the Joint Development and Manufacturing/Supply Agreement by and between HBL and ABI dated as of March 13, 1992, as amended by the First Amendment to Joint Development and Manufacturing/Supply Agreement dated as of January 17, 1996 and the Addendum to Manufacturing/Supply Agreements dated as of May 10, 1996 and September 7, 2001. "HBL IFN" means the cell culture derived human lymphoblastoid IFN produced by HBL. "Improvements" means any and all developments, inventions or discoveries in the Licensed Indication relating to the ABI Patent Rights developed, or acquired by ABI at any time during the Term and shall include developments intended to enhance the safety and/or efficacy of the Product. "IFN" means human interferon alpha. "ISI Agreement" means the License Agreement dated October 20, 1989 by and between Interferon Sciences, Inc. and ABI, as successor-in-interest to Amarillo Cell Culture Company, Incorporated. "Know-How" means all know-how, trade secrets, inventions, data, processes, techniques, procedures, compositions, devices, methods, formulas, protocols and information, whether or not patentable, which are not generally publicly known, including, without limitation, all chemical, biochemical, toxicological, and scientific research information, whether in written, graphic or video form or any other form or format, related to human interferon alpha. "Licensed Indications" means any human indication treated or treatable by the oral administration of IFN. Confidential ------------ **** Indicates that a portion of the text has been omitted and filed separately with the Commission. 8 "Manufacture" or "Manufacturing Process" means the storage, handling, production, processing and packaging of the Product, in accordance with this Agreement and Applicable Laws. "Marketing Authorization" means all necessary and appropriate regulatory approvals, including Pricing and Reimbursement Approvals, where applicable, to put the Product on the market in the Territory. "Material Agreements" means the Existing Licenses, and the TAMU License Agreement. "NDA" means a new drug application, biological license application or establishment license application, as applicable, and all amendments and supplements thereto, filed or to be filed, with the FDA seeking authorization and approval to Manufacture, package, ship and sell the Product as more fully described in the Regulations. "Net Sales" means the invoice amounts actually received for sales of the Product by GKI, its Affiliates or sublicensees in a bona fide arm's length transaction, less the following items, provided that they are bona fide transactions designed to optimize the sales of Product (a) cash discounts and trade allowances actually granted, (b) rebates and chargebacks required by Applicable Laws or made pursuant to agreements with customers, (c) credits or allowances actually granted upon claims, damaged goods, outdated goods, rejections or returns of such Product, including recalls, (d) taxes, tariffs and similar obligations, duties or other governmental charges (other than income taxes) levied on, absorbed or otherwise imposed on sales of such Product in the Territory and shown separately on the invoice, (e) shipping charges and (f) insurance costs related to shipping. Components of Net Sales shall be determined in the ordinary course of business in accordance with historical practice and using the accrual method of accounting in accordance with GAAP, but shall not include any sales of the Product for pre-clinical or clinical testing or for other than commercial purposes. In the event GKI transfers the Product to a Third Party in a bona fide arm's length transaction, for consideration, in whole or in part, other than cash or to a Third Party in other than a bona fide arm's length transaction, the Net Sales price for such Product shall be deemed to be the standard invoice price then being invoiced by GKI in an arms length transaction with similar customers for similar amounts less the items set forth in (a) through (f) above. "Patent Rights" means all rights related to human interferon alpha under patents and patent applications, and any and all patents issuing there from (including utility, model and design patents and certificates of invention), together with any and all substitutions, extensions (including supplemental protection certificates), registrations, confirmations, reissues, divisional, continuations, continuations-in-part, re-examinations, renewals and foreign counterparts of the foregoing and all improvements, supplements, modifications or additions. "Phase III Study" means a well-controlled study of sufficient size and appropriate design to demonstrate the safety and efficacy of the Product for its intended use. Confidential ------------ **** Indicates that a portion of the text has been omitted and filed separately with the Commission. 9 "Phase IV" means, as applicable, a study or program designed to obtain additional safety or efficacy data, detect new uses for a drug, or to determine effectiveness for labeled indications under conditions of widespread usage, which is commenced after Government Approval of the Product in the applicable country in the Territory or any such study or program required by the FDA or other applicable Governmental Authority. "PPM Agreement" means the PPM/ACC Sublicense Agreement dated April 27, 1995 by and between Pharma Pacific Management Pty, Ltd. and ABI. "Pricing and Reimbursement Approvals" means any pricing and reimbursement approval that must be obtained before placing the Product on the market in the Territory in which such approval is required. "Prime Rate of Interest" means the prime rate of interest published from time to time in The Wall Street Journal as the prime rate; provided, however that if The Wall Street Journal does not publish the prime rate of interest, then the term "Prime Rate of Interest" shall mean the rate of interest publicly announced by Bank of America, N.A., as its prime rate, base rate, reference rate or the equivalent of such rate, whether or not such bank makes loans to customers at, above, or below said rate. "Product" means a formulation or composition containing IFN and designated, detailed, or labeled for oral use in the treatment of the Licensed Indications. "Regulations" means regulations, statutes, rules, guidelines and procedures promulgated by the FDA or other governmental agency pursuant to the Act or other law, including without limitation, those regulations currently contained in Title 21 of the CFR. "Shipment" or "Shipped" means each individual group of Product received by GKI from ABI or its agent. "Specifications" means the specifications for the Product as may be amended from time to time by GKI on notice to ABI or in compliance with Applicable Laws. The initial Specifications are attached hereto as Exhibit A. "TAMU License Agreement" means the License Agreement between The Texas A&M University System and ABI dated March 22, 1988, as amended by Amendment No. 1 dated September 17, 1998. "Territory" means the countries of Cambodia, Vietnam, and Laos. "Third Party" means any entity other than ABI or GKI or an Affiliate of ABI or GKI. "Unit" means a single finished dosage form of Product in the form designated by GKI, which initially, for clinical supplies, shall consist of a 200 mg by weight, with 150 international units by activity, tablet or lozenge. Clinical testing may result in a change in the optimal dose and require a new definition of "Unit." Confidential ------------ **** Indicates that a portion of the text has been omitted and filed separately with the Commission. 10 (b) Each of the following terms is defined in the Section or under the defined term set forth opposite such term below: ABI............................................................Preamble ADE........................................................Section 9.02 Agreement......................................................Preamble Clinical Records........................................Section 2.01(c) Disputed Amount.........................................Section 5.03(a) DMF.....................................................Section 2.02(b) Effective Date.................................................Preamble Force Majeure.............................................Section 15.08 GKI............................................................Preamble Indemnitee................................................Section 12.03 Indemnitor................................................Section 12.03 Interferon.....................................................Recitals Loss......................................................Section 12.01 Parties........................................................Preamble Party..........................................................Preamble Purchase Price.............................................Section 7.01 Representatives...........................................Section 14.01 Royalty Payment Date.......................................Section 4.01 Royalty Statement..........................................Section 4.03 SEC.......................................................Section 14.02 SOP........................................................Section 9.02 Term.......................................................Section 5.01 (c) Interpretation. The section headings contained in this Agreement are for reference purposes only and shall not affect the meaning or interpretation of this Agreement. Except where the context clearly requires to the contrary: (i) each reference in this Agreement to a designated "Section" or "Exhibit" is to the corresponding Section or Exhibit of or to this Agreement; (ii) instances of gender or entity-specific usage (e.g., "his" "her" "its" "person" or "individual") shall not be interpreted to preclude the application of any provision of this Agreement to any individual or entity; (iii) the word "or" shall not be applied in its exclusive sense; (iv) "including" shall mean "including, without limitation"; (v) references to laws, regulations and other governmental rules, as well as to contracts, agreements and other instruments, shall mean such rules and instruments as in effect at the time of determination (taking into account any amendments thereto effective at such time without regard to whether such amendments were enacted or adopted after the effective date of this Agreement) and shall include all successor rules and instruments thereto; (vi) references to "$" or "dollars" shall mean the lawful currency of the United States; (vii) references to "Federal" or "federal" shall be to laws, agencies or other attributes of the United States (and not to any State or locality thereof); (viii) the meaning of the terms "domestic" and "foreign" shall be determined by reference to the United States; (ix) references to "days" shall mean calendar days; (x) references to months or years shall be to the actual calendar months or years at issue (taking into account the actual number of days in any such month or year); (xi) days, business days and times of day shall be determined by reference to local time in Amarillo, Texas; and (xii) the English language version of this Agreement shall govern all questions of interpretation relating to this Agreement, notwithstanding that this Agreement may have been translated into, and executed in, other languages. Confidential ------------ **** Indicates that a portion of the text has been omitted and filed separately with the Commission. 11 ARTICLE II: RESEARCH AND DEVELOPMENT Section 2.01. GKI Obligations. (a) GKI will use commercially reasonable efforts to timely complete at the sole cost and expense of GKI (i) clinical trials and development of Product for the treatment of the Licensed Indictions, (ii) animal toxicology and other pre-clinical studies required for commercial launch of the Product, (iii) Phase III Studies, and (iv) other tasks supporting commercialization of the final formulation of the Product. (b) GKI shall use commercially reasonable efforts to timely secure any and all Governmental Approvals in the Territory and shall own and maintain all Governmental Approvals and related information as provided herein. The Parties agree and acknowledge that Governmental Approval for the Product will first be sought in Cambodia and then, subject to receipt of such Governmental Approvals, Vietnam and Laos. GKI shall seek Governmental Approval for the Product in other countries for the Territory no later than six (6) months, following receipt of an Approval Letter for the Product from the Cambodian Ministry of Health; provided that if clinical trials or studies in addition to those required in connection with the Governmental Approvals for Cambodia are required for any Governmental Approval in other countries of the Territory, GKI will seek such Governmental Approval in a commercially reasonable time period following receipt of an Approval Letter for the Product from Cambodia. (c) GKI shall maintain records in sufficient detail and in good scientific manner appropriate for patent and regulatory purposes and shall properly reflect all work done and results achieved in the performance of its duties hereunder (including all data in the form required to be maintained under any Applicable Laws), and any subsequent pre-clinical or clinical studies (the "Clinical Records"). The Clinical Records shall be owned by GKI, shall be considered Confidential Information of GKI and shall include books, records, reports, research notes, charts, graphs, comments, computations, analyses, recordings, photographs, computer programs and documentation thereof, computer information storage means, samples of materials and other graphic or written data generated in connection with GKI's research and development activities with respect to the Product. (d) ABI has the right, upon five business days prior written notice to GKI, to inspect the Clinical Records upon request and during normal business hours, and GKI shall, subject to Applicable Laws, provide ABI upon request with a summary of all requested Clinical Records, to the extent reasonably required for the exercise of ABI's rights under this Agreement. ABI may use the Clinical Records and the summaries thereof internally for non-commercial purposes. If ABI wants to provide a Third Party with the Clinical Records or a summary thereof or use information contained in such records for a commercial purpose, ABI shall give GKI written notice and the Parties will negotiate an agreement therefor, including appropriate compensation to GKI and confidentiality requirements, in good faith. Notwithstanding the above, ABI may provide HBL with copies of any summaries of Clinical Records provided to ABI by GKI hereunder provided that HBL agrees in writing to the restrictions set forth in this Agreement with respect to such information. Confidential ------------ **** Indicates that a portion of the text has been omitted and filed separately with the Commission. 12 Section 2.02. ABI Obligations. (a) As soon as reasonably practicable after the Effective Date, ABI will make available all ABI Know-How to GKI for GKI's inspection and at GKI's request will provide GKI with a copy of all ABI Know-How in tangible form and a written summary of all ABI Know-How not in tangible form. In the event GKI requests that more than 1,000 pages be copied in connection with the foregoing, GKI shall reimburse ABI for ABI's actual out-of-pocket costs for making copies in excess of 1,000 pages. GKI shall pay ABI such amounts within 10 days following GKI's receipt of an invoice therefor accompanied by documentation reasonably supporting such invoice. (b) ABI hereby grants to GKI reference rights to ABI's, and agrees to cause HBL to grant to GKI rights of reference to HBL's, as the case may be, FDA Drug Master File ("DMF"), when filed, and FDA Investigational New Drug Application, when filed, for HBL IFN and agrees to execute or cause HBL to execute any necessary authorization letters in this regard. (c) ABI agrees to maintain, or cause HBL to maintain, the DMF for HBL IFN up-to-date at all times during the Term. ABI shall cooperate fully with GKI in order to obtain all the Marketing Authorizations which now are or later become necessary to develop, Manufacture, use, market or sell any Product. Such cooperation shall include, but not be limited to, ABI providing GKI with the ABI Know-How and ABI appearing at and participating in meetings with regulatory agencies at the reasonable request of GKI to assist GKI in obtaining such Marketing Authorizations as are now required, or may in the future be required to Manufacture, use, market or sell any Product. ABI shall execute, or cause third parties to execute, upon request by GKI, any and all documents reasonably necessary to obtain such Marketing Authorizations. GKI shall reimburse ABI for any reasonable out-of-pocket costs, including reasonable attorney's fees, incurred by ABI in connection with such cooperation. (d) ABI shall provide to GKI or any sublicensee of GKI, at GKI's request and, unless otherwise set forth in this Agreement, sole expense, with any technical assistance reasonably necessary to enable GKI or such sublicensee to exercise fully its rights and fulfill its obligations under this Agreement. Section 2.03. Availability of Resources; Cooperation. Each Party shall maintain laboratories, offices and/or other facilities reasonably necessary to carry out the activities to be performed by such Party hereunder. Upon reasonable advance notice, each Party agrees to make its employees and non-employee consultants reasonably available at their respective work locations to consult with the other Party on issues arising during the collaboration and in connection with any request from any Governmental Authority, including regulatory, scientific, technical and clinical testing issues. Confidential ------------ **** Indicates that a portion of the text has been omitted and filed separately with the Commission. 13 Section 2.04. Reporting Obligations of GKI. On or prior to December 31st of each year during the Term of this Agreement GKI shall provide ABI with a report of ongoing development efforts, including a report of efforts by GKI with respect to clinical testing, regulatory approval efforts, marketing/sales strategy, and any other areas into which GKI'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 samples of labeling, instructions, promotional and other support materials, if any, developed for GKI's sales force, patients, physicians, or other outside parties. ARTICLE III: LICENSE Section 3.01. License and Supply Grant. Subject to the terms of this Agreement and the Existing Licenses, ABI hereby grants to GKI: (a) an exclusive sublicense, with rights to sublicense, under the ABI Technology to use the ABI Technology to market, advertise, promote, Manufacture, offer for sale, sell, and distribute the Product in the Territory; and (b) an exclusive sublicense, with rights to sublicense, under all rights granted to ABI pursuant to the HBL Agreement to market, advertise, promote, Manufacture, offer for sale, sell, and distribute the Product in the Territory. Section 3.02. Restrictions. GKI shall have the right to use and sell Product only in the Territory and only for use in the treatment of the Licensed Indications. GKI shall not seek customers, establish any branch or maintain any distribution depot for Product in any country outside the Territory. GKI shall not sell Product to any customer in any country outside the Territory or to any customer in the Territory if, to the knowledge of GKI, such customer intends to resell such Product in any country outside the Territory. Section 3.03. Retained Rights. ABI retains all rights other than as set forth in this Agreement to HBL IFN and IFN, including without limitation, the right to test, develop, license, sublicense, market, distribute or otherwise use IFN and HBL IFN for treatment of the Licensed Indications outside the Territory. Confidential ------------ **** Indicates that a portion of the text has been omitted and filed separately with the Commission. 14 ARTICLE IV: PAYMENTS AND ROYALTIES Section 4.01. Royalty Payments. During the Term, GKI will pay ABI a royalty on Product equal to **** of the aggregate Net Sales of Product in each calendar year. Royalties shall be due and payable thirty (30) days after the end of each calendar quarter (each a "Royalty Payment Date"). GKI may prepay, in whole or in part, any royalties prior to the applicable Royalty Payment Date. Section 4.02. Minimum Payment. GKI shall pay to ABI a Royalty Payment of at least **** dollars ($****) per calendar year starting in the year 2006. Failure to make this minimum payment shall be a reason for Termination pursuant to Section 5.03(e). Section 4.03. Reports. GKI shall furnish to ABI a quarterly written report (in sufficient detail to determine the relevant amounts and dates specified in this Section 4.04), which report shall contain at a minimum (a) the calculation of Net Sales; (b) royalties payable in U.S. dollars, if any, which shall have accrued hereunder based upon Net Sales; (c) withholding taxes, if any, required by law to be deducted with respect to such sales; (d) the dates of the First Commercial Sale of any Product; and (e) the exchange rates, if any, used to determine the amount of United States dollars (collectively, the "Royalty Statement"). Reports shall be due on the 30th day following the close of each quarter. Section 4.04. Records and Audits. During the Term and for a period of two years thereafter or upon written notice to GKI received prior to the expiration of such two year period as otherwise required in order for ABI to comply with Applicable Law, GKI shall keep complete and accurate records in sufficient detail to permit ABI to confirm the completeness and accuracy of the information presented in each Royalty Statement and all payments due hereunder. GKI shall permit an independent, certified public accountant reasonably acceptable to GKI to audit and/or inspect those records of GKI (including financial records) that relate to Net Sales for the sole purpose of verifying the completeness and accuracy of the Royalty Statements and the calculation of Net Sales and confirming royalty payments for the Product, during the preceding calendar year. Such inspection shall be conducted during GKI's normal business hours, no more than once in any 12 month period and upon at least ten days prior written notice by ABI to GKI. If such accounting firm concludes that such payments were underpaid during the periods reviewed by such accountants, GKI shall pay ABI the amount of any such underpayments, plus interest at a rate equal to the Prime Rate of Interest, within 30 days of the date ABI delivers to GKI such accounting firm's report so concluding that such payments were underpaid. If such accounting firm concludes that such payments were overpaid during such period, ABI shall pay to GKI the amount of any such overpayments, without interest, within 30 days of the date ABI delivers to GKI such accounting firm's report so concluding that such payments were overpaid. ABI shall bear the full cost of such audit unless such audit discloses an underpayment by more than 5% of the amount due during such period. In such case, GKI shall bear the full cost of such audit. Confidential ------------ **** Indicates that a portion of the text has been omitted and filed separately with the Commission. 15 Section 4.05. Exchange Rate; Manner and Place of Payment. All payments hereunder shall be payable in United States dollars. With respect to each calendar quarter, whenever conversion of payments from any foreign currency shall be required, such conversion shall be made at the rate of exchange reported in The Wall Street Journal on the last business day of the applicable calendar quarter. All payments owed under this Agreement shall be made by wire transfer to a bank account designated in writing by ABI, unless otherwise specified in writing by ABI. Section 4.06. Late Payments. Unless otherwise provided in this Agreement, upon the failure of GKI to pay any amount due under this Agreement within five days after receipt of notice by ABI that such amount has become due and payable and has not been paid, GKI shall pay a late fee of 10% of the amount due plus interest to ABI on such amount from the date such amount is due under this Agreement at the Prime Rate of Interest, calculated on the number of days such payment is delinquent, unless such payment is being disputed by GKI in good faith pursuant to Section 5.03(a). Nothing in this Section 4.06 shall relieve GKI of GKI's obligation to make payments or risk Termination pursuant to Section 5.03(a) or provide a Royalty Statement pursuant to Section 5.03(b). Section 4.07. Taxes. All taxes levied on account of the payments accruing to ABI under this Agreement shall be paid by ABI for its own account, including taxes levied thereon as income to ABI. If provision is made in law or regulation for withholding, such tax shall be deducted from the payment made by GKI, paid to the proper taxing authority and a receipt of payment of the tax secured and promptly delivered to ABI. ARTICLE V: TERM AND TERMINATION Section 5.01. Term. This Agreement will take effect on the Effective Date and will remain in force as long as GKI markets Product in the Territory (the "Term"), unless terminated earlier under provisions of this Article V. Section 5.02. Termination By GKI. GKI may terminate this Agreement by notice to ABI as follows: (a) at any time with or without cause upon three months prior written notice to ABI; Confidential ------------ **** Indicates that a portion of the text has been omitted and filed separately with the Commission. 16 (b) if ABI shall commit any material breach of the provisions of this Agreement; provided however, that: (i) GKI has first given ABI notice specifying the details of the material breach, and (ii) ABI has not cured such material breach, if such breach is capable of being cured within such time period, within 45 days of the date of notice of the material breach; (c) immediately, if the HBL Agreement is terminated; or (d) immediately, if GKI reasonably determines based upon the clinical trials and after consultation with ABI that receipt of Governmental Approval for a Product is unlikely. Section 5.03. Termination by ABI. ABI may terminate this Agreement by notice to GKI, upon any of the following conditions: (a) if GKI shall fail to make any payments to ABI on the date on which such payments are due hereunder and such failure continues for more than 15 days after GKI's receipt of notice of such failure to pay; provided, however, that this subsection (a) shall not apply to any payment, or portion thereof, under this Agreement, which is the subject of a good faith dispute (a "Disputed Amount") between GKI and ABI. Any Disputed Amount shall be resolved by the Parties within 30 days from the date GKI notifies ABI of a good faith dispute; provided, however, if the Disputed Amount cannot be resolved to the mutual satisfaction of the Parties within such 30 day period then either Party may request that the dispute be submitted to the Chief Executive Officers of ABI and GKI, respectively, or their designees, for joint resolution. If the Disputed Amount is not jointly resolved by the Parties' Chief Executive Officers, or their designees, within ten days after the submission thereto, then ABI shall be entitled to pursue any and all remedies at law available to it. In no event will the dispute resolution period for the activities set forth above exceed a maximum of 60 days unless otherwise agreed in writing by the Parties. Further, GKI may in its discretion elect to pay any such Disputed Amount and in the event such amount is finally determined not to have been payable by GKI, ABI shall reimburse GKI for such amount, without interest; or (b) if GKI shall fail to deliver to ABI a Royalty Statement by the Royalty Payment Date and shall fail to cure such default within 15 days after notice from ABI with respect thereto; or (c) if GKI shall commit any material breach of the provisions of this Agreement other than a breach set forth in subsections (a) or (b) above, provided that ABI has first given GKI notice specifying the details of the material breach, and GKI has not cured such material breach, if such breach is capable of being cured within such time period, within 15 days of the effective date of such notice; or (d) if GKI fails to market product in at least one country of the Territory within six (6) months of the Effective Date; or (e) if GKI Royalty Payments to ABI are not at least **** dollars ($****) in a calendar year. Confidential ------------ **** Indicates that a portion of the text has been omitted and filed separately with the Commission. 17 Section 5.04. Termination Upon Certain Events. This Agreement may be terminated by the Party specified below immediately upon written notice to the other Party of the occurrence of either of the following events: (a) by either Party upon a cessation of operations in the ordinary course of the other Party or the institution by or against such Party as debtor of any proceeding (whether voluntary or involuntary) in bankruptcy or for dissolution, liquidation, reorganization, arrangement or the appointment of a receiver, trustee or judicial administrator (or the equivalent thereof in the jurisdiction in question) or any other proceeding under the law for the relief of debtors, if, in the case of an involuntary proceeding, the same shall not have been dismissed or stayed within 45 days after its institution; or (b) by either Party if the other Party makes an assignment for the benefit of, or arrangement with, its creditors or becomes unable to pay its debts as they become due. (c) A Party's failure to terminate this Agreement for any of the reasons specified in this Section 5.04 shall not in any way be deemed a waiver of such Party's rights in respect thereof or otherwise limit its rights to enforce the obligations hereunder. Section 5.05. Remedies. All of the non-breaching Party's remedies shall be cumulative, and the exercise of one remedy hereunder by the non-defaulting Party shall not be deemed to be an election of remedies. These remedies shall include the non-breaching Party's right to sue for damages for such breach without terminating this Agreement. Section 5.06. Effect of Termination. With respect to termination by GKI pursuant to Sections 5.02(a) through 5.02(d), in the event of termination of this Agreement: (a) Each Party shall not thereby be discharged from any liability or obligation to the other Party that became due or payable prior to the effective date of such termination; (b) GKI shall discontinue, and shall cause its Affiliates and sublicensees to discontinue, the sale of the Product; (c) In the event of termination by ABI under Section 5.03, all duties of ABI (other than under Section 5.08) and all rights (but not duties) of GKI (other than under Section 5.08) under this Agreement shall immediately terminate without the necessity of any action being taken either by ABI or by GKI; and (d) GKI shall have a period of six months to sell off its inventory of Product existing on the date of termination of this Agreement and shall pay royalties to ABI with respect to such Product within 30 days after the expiration of such six-month period. Confidential ------------ **** Indicates that a portion of the text has been omitted and filed separately with the Commission. 18 Section 5.07. Bankruptcy. In the event that ABI as a debtor in possession, or a trustee in bankruptcy under the U.S. Bankruptcy Code, rejects this Agreement or GKI's right to continue the licenses under this Agreement, GKI may elect to retain its license rights under the Agreement by paying all applicable fees, and otherwise acting in accordance with Section 365(n) of the U.S. Bankruptcy Code. Thereafter, neither ABI as debtor in possession, nor a trustee in bankruptcy, shall interfere with the rights of GKI to use the ABI Technology under this Agreement. Section 5.08. Continuing Obligations. Expiration or termination of this Agreement shall not relieve the Parties of any obligation accruing prior to such expiration or termination. Except as otherwise set forth in this Agreement, the obligations and rights of the Parties under Articles X, XII, XIII (other than Section 13.03), XV and Sections 5.06-5.09, 11.04 and 14.01 (for the period set forth therein) shall survive expiration or termination of this Agreement. Section 5.09. Return of Confidential Information. Except to the extent necessary for GKI to exercise its rights to the ABI Technology under Sections 5.08 and 5.09, within 30 days following the expiration or termination of this Agreement, each Party shall return to the other Party, or destroy, upon the written request of the other Party, any and all Confidential Information of the other Party in its possession and upon a Party's request, such destruction (or delivery) shall be confirmed in writing to such Party by a responsible officer of the other Party. Notwithstanding the provisions of this Section 5.09, either Party may retain one (1) copy of such Confidential Information for the sole purpose of determining its continuing confidentiality obligation to the other Party under this Agreement. ARTICLE VI: SUPPLY, MANUFACTURE AND PURCHASE OF PRODUCT Section 6.01. Supply of Clinical Samples. Subject to the terms of this Agreement, ABI agrees to Manufacture or cause to be Manufactured for, and sell exclusively to GKI in the Territory, GKI's total requirements for the Product in the Territory on the terms and conditions set forth herein. ABI shall provide Product in either bulk or Unit form as directed in a forecast by GKI, at GKI's sole discretion. Specifically, ABI shall supply HBL IFN lozenges for clinical trials from Units already manufactured and stored in Canada at a designated sale price of $****per Unit. GKI shall take ownership of each Unit in Mississauga, Canada, and GKI shall be responsible for shipping to the Territory, including insurance, documents and any Customs fees. Each Unit provided for clinical trials shall have an expiration date, if refrigerated, of no earlier than April 30, 2006, subject to reassay. Subject to notice to and prior written approval of GKI, which approval shall not be unreasonably withheld, conditioned or delayed, ABI may, at its sole expense, subcontract any part of the Manufacturing Process for the Product to Third Parties provided the Product and the facilities used to Manufacture the Product continue to meet the requirements set forth in this Agreement. If subcontracting is initiated by ABI, GKI will bear the cost of validation and necessary stability testing. Confidential ------------ **** Indicates that a portion of the text has been omitted and filed separately with the Commission. 19 Section 6.02. Supply and Manufacturing Rights. Notwithstanding Section 6.01, during the Term, GKI shall have the right to purchase Product from ABI in accordance with the terms of this Supply Agreement Section 6.03. Quality Assurance. ABI shall Manufacture or cause to be Manufactured the Product in accordance with the Specifications and this Agreement. ABI shall promptly notify GKI in writing of any changes required by a Governmental Authority in the Specifications or GKI's quality assurance procedures that would render ABI or its supplier unable to supply the Product in accordance with the terms of this Agreement. The Parties agree to develop and execute an appropriate action plan in such situation. Any additional costs or expenses shall be shared between the Parties in such proportion as is equal to each Party's relative fault in causing such change or changes to occur; provided, however, that if the Parties cannot reach an agreement in good faith as to the relative fault of each Party or if neither Party is at fault, such additional costs and expenses shall be born equally by the Parties. Section 6.04. ABI's Duties. ABI agrees to furnish to GKI with every Shipment a written certificate of analysis and Certificate of Compliance that confirms conformity of the Product to the Specifications and this Agreement. GKI shall analyze each Shipment promptly upon receipt in accordance with Section 8.02. In addition, ABI shall: (a) provide GKI with written sampling and testing procedures used by ABI or its manufacturer to assure that the Product conforms to the Specifications; (b) retain a sample of each batch of Product for a period equal to the greater of (i) one year after the date of Manufacture of such batch of Product or (ii) such period as required by Applicable Laws. Upon the request of GKI, ABI shall make such samples available to GKI for inspection. The retained sample shall be sufficient in size to allow GKI to perform tests to determine whether the Product meets the Specifications. ABI shall store the retained sample in accordance with the Specifications and Applicable Law, (c) maintain records to ensure GKI's ability to perform a complete lot history via lot tracing of the Product, (d) keep on file all manufacturing records and analytical results pertaining to the Manufacture of each batch of Product for a period expiring not earlier than one year after the expiration date of the last lot of the last batch of Product Manufactured and Shipped to GKI. ABI shall make, and shall cause any Third Party manufacturer to make, such records available to GKI upon request, Confidential ------------ **** Indicates that a portion of the text has been omitted and filed separately with the Commission. 20 (e) provide GKI with notice within 48 hours following ABI's receipt of notification of any scheduled inspection, and as soon as possible following ABI's receipt of notification of any unscheduled inspection, by any Governmental Authority of ABI's facilities, books or records, or of the facilities, books or records of any subcontractor being utilized by ABI to perform any portion or all of the Manufacture or development of the Product. ABI shall inform such Governmental Authority that GKI may desire to be present at such inspection; provided that GKI's right to be present is subject to approval by such Governmental Authority and subject to GKI being available at the time and date established by such Governmental Authority and, with respect to any inspection of HBL's facilities, HBL's consent to the presence of GKI at such inspection. ABI shall use reasonable efforts to secure a time and date for such inspection that is reasonably acceptable to GKI; provided, however, that ABI alone shall have the right to make the final decision on all such matters; (f) maintain at its expense any and all licenses, permits and consents necessary or required to perform its obligations under this Agreement; and (g) ensure that all Product delivered, other than the clinical trial Units as set forth in Section 6.01, has a remaining shelf life from the time of manufacture of not less than five years if refrigerated to at least 2-8 degrees Centigrade or two years, if maintained below 30 degrees centigrade. Section 6.05. Failure to Supply. ABI shall immediately notify GKI if ABI is unable to fill any purchase order placed by GKI pursuant to Section 7.06, and advise GKI of the revised delivery date. GKI shall then have the option of terminating the purchase order without obligation of payment or of accepting the revised delivery date. If ABI is unable to cure to GKI's reasonable satisfaction the circumstances giving rise to such failure within 15 business days after such notice, GKI shall not be obligated to purchase any further Product from ABI under the then existing forecasts. Notwithstanding the foregoing, ABI shall not be deemed to be unable to fill any order placed by GKI if ABI's inability to fill any order arises as a result of a 50% increase in GKI's order over GKI's immediately prior forecast. For example, if GKI's forecast for the initial three month period was for 100 Units and GKI's forecast for the second three month period was for 200 Units, then, if after the time the second three month forecast becomes firm pursuant to Section 7.06(a), GKI changed its forecast by the maximum amount allowed of 100 Units (i.e., 50% times 200 Units), ABI would not be deemed to be unable to supply Product for any amount in excess of 300 Units for such three month period Confidential ------------ **** Indicates that a portion of the text has been omitted and filed separately with the Commission. 21 Section 6.06. Allocation. If ABI is unable to supply all of the requirements of the Product, and quantities ordered by GKI in accordance with Section 7.06, then ABI shall allocate the resources available to it so that GKI receives at least its proportional share of available supplies as determined based on reasonable forecasts (taking into consideration past sales and sales performance against forecast) of GKI. Section 6.07. Records and Audits. During the Term and for a period of two years thereafter or such longer period as is required in order for GKI to comply with Applicable Law, ABI shall keep complete and accurate records in sufficient detail to permit GKI to confirm the completeness and accuracy of the information presented in each invoice sent to GKI pursuant to this Agreement and all payments made by GKI relying on such invoices hereunder. ABI shall permit an independent, certified public accountant reasonably acceptable to ABI to audit and/or inspect those records of ABI (including financial records) that relate to such invoices for the sole purpose of verifying the completeness and accuracy of such invoices during the preceding calendar year. Such inspection shall be conducted during ABI's normal business hours, no more than once in any 12 month period and upon at least ten days prior written notice by GKI to ABI. If such accounting firm concludes that such payments were overpaid during the periods reviewed by such accountants, ABI shall pay GKI the amount of any such overpayments, plus interest at a rate equal to the Prime Rate of Interest, within 30 days of the date GKI delivers to ABI such accounting firm's report so concluding that such payments were overpaid. GKI shall bear the full cost of such audit unless such audit discloses an overpayment by more than 20% of the amount due during such period. In such case, ABI shall bear the full cost of such audit. ARTICLE VII: PURCHASE AND SALE Section 7.01. Purchase Price and Payment. ABI shall sell, and GKI shall purchase, Product at a purchase price equal to, except as set forth in Section 6.01 with respect to the Initial Supply, the actual amount (exclusive of the Royalties as defined in the HBL Agreement) paid to HBL under the HBL Agreement as in effect on the Effective Date, plus ten percent (10%) and all other reasonable costs of Manufacture plus ten percent (10%) actually paid by ABI to Third Parties with respect to such Product for all Product supplied by ABI to GKI pursuant to this Agreement (the "Purchase Price"). ABI shall invoice GKI monthly for all Product Shipped by ABI to GKI, which invoice shall be accompanied by reasonable documentation, i.e., invoices from Third Parties paid by ABI, supporting the amounts set forth in the invoice, and payment shall be due immediately upon receipt of the invoice. Payment must be delivered to ABI before GKI takes physical possession of Product and before Shipment. The HBL Agreement specifies the price for ingredients is ****cents ($****) per 200 IU, 200 mg lozenge, but if bulk HBL IFN is formulated, at ABI's request, into lozenges by HBL in Japan, then, in addition to the transfer fee, HBL shall be entitled to be reimbursed for incremental costs actually incurred by HBL with regard to tableting and packaging. Therefore, the exact cost of finished packaged product as lozenges provided from HBL is not ascertainable in advance. Confidential ------------ **** Indicates that a portion of the text has been omitted and filed separately with the Commission. 22 Section 7.02. Labeling and Artwork. After execution of this Agreement, ABI shall review and comment on any labeling and proposed changes to the labeling of the Product and shall be entitled to participate in discussions with the Governmental Authorities concerning any labeling or proposed labeling change so long as GKI is purchasing the Product from ABI. Notwithstanding the above, GKI shall make the final decision with regard to any labeling or labeling revisions Both Parties will approve all artwork developed for inclusion in the Product packaging, including carton labels, package inserts, etc., which approval will not be unreasonably withheld, conditioned or delayed by either Party. If GKI wishes to institute changes in labeling artwork, both Parties will develop a mutually acceptable implementation schedule. The actual cost of implementing such change will be at GKI's sole cost and expense, including any materials made obsolete by GKI's changes to the artwork. Neither Party shall alter, change or in any way modify the artwork, which has previously been approved, for any reason, without prior written authorization from the other Party, which approval will not be unreasonably withheld, conditioned or delayed, and provided that such approved artwork shall conform to all Applicable Laws. Section 7.03. Purchase Forms. Purchase orders, purchase order releases, confirmations, acceptances and similar documents submitted by a Party in conducting the activities contemplated under this Agreement are for administrative purposes only and shall not add to or modify the terms of the Agreement. To the extent of any conflict or inconsistency between this Agreement and any such document, the terms of this Agreement shall govern. Section 7.04. Confirmation. ABI shall confirm each purchase order within ten business days from the date of receipt of a purchase order and shall supply the Product within a maximum of 30 days from the date of acceptance of a purchase order, or later if so specified in the purchase order. Failure of ABI to confirm any purchase order shall not relieve ABI of its obligation to supply Product ordered by GKI in conformity with this Agreement. Section 7.05. Delivery. Delivery terms for Product shall be FOB ABI's or its subcontractor's facility, which is currently located in Okayama, Japan, or Canada (pursuant to Section 6.01) or such other location designated by ABI as GKI may agree to in writing. ABI shall ship Product in accordance with GKI's purchase order form or as otherwise directed by GKI in writing. Title to any Product purchased by GKI shall pass to GKI upon the earlier of (a) a common carrier accepting possession or control of such Product, or (b) passage of such Product from the loading dock of ABI's or its subcontractor's facilities to GKI or its agent. Confidential ------------ **** Indicates that a portion of the text has been omitted and filed separately with the Commission. 23 Section 7.06. Forecasts and Orders. Not later than six months after submission of the NDA for a Product or other applicable regulatory filing on a country-by-country basis, GKI will provide ABI with a 12 month forecast of GKI's requirement of each Product, which forecast will include designation of whether such Product shall be provided in bulk or Unit form, for which an NDA, or other applicable regulatory filing, has been submitted, on a Product basis, as follows: (a) During the period commencing six months after submission of an NDA, or other applicable regulatory filing, for a Product through the end of the fourth full calendar quarter following the First Commercial Sale of that Product, the forecasts shall be provided quarterly, no less than 45 days prior to the beginning of each quarter. Said requirements will be based on standard production planning parameters, including sales forecasts, sales demand forecasts, promotional forecasts, inventory requirements, and the like. The first two quarters of the 12 month forecast will be stated in monthly requirements. The second two quarters of the 12 month forecast will be total requirement by stock keeping unit and will be stated as quarterly requirements. The first three months of the 12 month forecast will be firm orders to purchase. The second three months will be allowed to be flexed from the previous forecast by plus or minus 25% per month until fixed by the subsequent forecast; provided that the aggregate adjustment from the quantity set forth in the previous forecast for such three month period shall not exceed 50% in aggregate during that three month period. For example, if GKI's forecast for the first three months was for 100 Units and its forecast for the second three months was for 200 Units, the maximum number of Units GKI could order at the time the second three month period becomes fixed would be 300 Units (i.e., 50% of 200 Units plus the 200 Units originally forecast). The last two quarters of any 12 month forecast will be an estimate and not binding. (b) Following the end of the fourth full calendar quarter following the First Commercial Sale of a Product, GKI will provide to ABI a rolling 12 month forecast for each Product with the first three months of the rolling 12 month forecast a firm order to purchase. Each forecast under this subsection (ii) shall be provided monthly, no less than 20 days prior to the beginning of each month. All orders will be for full batch quantities. It is understood that ABI will not maintain Product inventory in excess of the applicable forecast, but will produce Product upon receipt of that portion of GKI's forecasts that constitute firm orders to purchase. Nothing in this Agreement shall obligate ABI to deliver Product if HBL is unable for any reason to provide Product. GKI agrees to purchase a sufficient amount of Product to enable GKI to carry sufficient inventory to allow for fluctuations in sales demand so as to allow ABI reasonable lead-time to meet increased demand. ABI will use commercially reasonable efforts to meet any increase in demand in excess of the allowed adjustment, but will not be obligated to do so. All forecasts will be made by GKI to ABI in good faith based upon standard commercial parameters. From time to time after the Effective Date, the Parties shall consider whether, in light of market demand, manufacturing capacity, inventory levels and other pertinent factors, to revise the schedule for delivery of forecasts and, if appropriate, negotiate in good faith to revise such schedule. Confidential ------------ **** Indicates that a portion of the text has been omitted and filed separately with the Commission. 24 ARTICLE VIII: WARRANTY, REJECTION AND INSPECTIONS Section 8.01. ABI Warranty ABI represents and warrants to GKI that the Product delivered pursuant to this Agreement (a) shall comply with the Specifications and this Agreement and conform to the certificate of analysis for each such Product; (b) are not adulterated or misbranded under Applicable Laws; and (c) at the time of Manufacture and Shipment to GKI, will be and are free from any failure or defects. EXCEPT AS OTHERWISE SET FORTH HEREIN, ABI MAKES NO OTHER WARRANTIES OF ANY OTHER KIND, INCLUDING BUT NOT LIMITED TO ANY WARRANTY OF MERCHANTABILITY OR FITNESS OF THE PRODUCT FOR ANY PURPOSE, AND ABI EXPRESSLY DISCLAIMS ANY SUCH OTHER WARRANTIES WITH RESPECT TO THE PRODUCT, EITHER EXPRESSED OR IMPLIED. Section 8.02. Rejection of Product for Failure to Conform to Specifications. GKI shall have 45 days after the receipt of any Shipment to determine conformity of the Shipment to the Specifications and/or Applicable Laws, except for hidden defects. A "hidden defect" shall mean a defect in the Product not discovered by GKI during its testing of the Product in accordance with generally accepted industry testing procedures and which would not be a defect normally expected to be discovered in accordance with such testing. If testing of such Shipment shows a failure of the Shipment to meet the Specifications and/or Applicable Laws, GKI may return the entire Shipment, or any portion thereof, to ABI at ABI's expense within a reasonable time following the above described testing, provided that notice of non-conformity is received by ABI from GKI within 45 days of GKI's receipt of said Shipment. GKI shall have the right to request that ABI provide to GKI, within 30 days after such notice is received by it, Product that meets the Specifications and Applicable Laws or to promptly provide GKI with full credit for the Purchase Price paid by GKI for the returned Product. In the case of a hidden defect, GKI shall have the right to request that ABI provide to GKI, within thirty (30) days after a notice concerning a hidden defect is received by GKI, Product that meets the Specifications and Applicable Laws or to promptly provide GKI with full credit for the Purchase Price paid by GKI for the returned Product. In either case, the cost of freight and handling to return or replace Product or shall be at the expense of ABI. If GKI does not notify ABI of the non-conformity of the Product within 45 days of receipt of said Shipment, the Product shall be deemed to meet the Specifications (including those related to packaging of the Product) and Applicable Laws, except with respect to hidden defects. Notwithstanding anything in this Agreement to the contrary, the Parties may agree to a return of the Product or an adjustment in the Purchase Price in the event of any failure or defect in the Product. Should there be a discrepancy between GKI's test results and the results of testing performed by ABI, such discrepancies shall be finally resolved by testing performed by an independent Third Party mutually agreed upon by GKI and ABI. The costs of such testing shall be borne by the Party against whom the discrepancy is resolved. In the event Product have been previously returned to ABI and such independent Third Party determines that the Product meets the Specifications, GKI shall be responsible for all costs associated with the return. Confidential ------------ **** Indicates that a portion of the text has been omitted and filed separately with the Commission. 25 Section 8.03. GKI Inspections. ABI shall, and shall cause HBL or other subcontractors of ABI used to Manufacture the Product to, upon reasonable (but not less than fifteen (15) days) prior written notice by GKI and during normal business hours, allow GKI to inspect and audit ABI's facilities and the facilities of HBL or other subcontractors of ABI used to Manufacture the Product, twice annually, to confirm that the such facilities and the equipment, personnel and operating and testing procedures used by ABI or such subcontractors in the Manufacture, testing, storage and distribution of the Product are in compliance with Applicable Laws and the Governmental Approvals; provided that such inspection does not interfere with ABI's or such subcontractor's normal operations or cause ABI or such subcontractor's to violate or be in breach of any confidentiality agreements with any Third Parties. ARTICLE IX: REGULATORY COMPLIANCE Section 9.01. Maintenance of Marketing Authorizations. GKI will own all Marketing Authorizations. GKI agrees, at its sole cost and expense, to maintain the Marketing Authorizations including obtaining any variations or renewals thereof, including all fees and licenses, including user fees, related to the Manufacture of the Product by GKI. Each Party agrees that neither it nor its Affiliates or permitted sublicensees will do anything to adversely affect a Marketing Authorization. Section 9.02. Adverse Drug Event Reporting and Phase IV Surveillance. Each Party, including its permitted sublicensees, shall advise the other Party, by telephone or facsimile, immediately but in no event later than 24 hours after a Party, or its sublicensees, becomes aware of any potentially serious or unexpected adverse event (including adverse drug experiences, as defined in Applicable Laws) involving the Product (each, an "ADE"). Such advising Party shall provide the other Party with a written report delivered by confirmed facsimile of any adverse reaction, stating the full facts known to such Party, including customer name, address, telephone number, batch, lot and serial numbers, and other information as required by Applicable Laws. During the Term, GKI shall have full responsibility for (i) monitoring such adverse reactions; and (ii) data collection activities that occur between GKI and the patient or medical professional, as appropriate, including any follow-up inquiries which GKI deems necessary or appropriate. In the event either Party requires information, regarding adverse drug events with respect to reports required to be filed by it in order to comply with Applicable Laws, including obligations to report ADEs to the Governmental Authorities, each Party agrees to provide such information to the other on a timely basis. Confidential ------------ **** Indicates that a portion of the text has been omitted and filed separately with the Commission. 26 The Parties agree to follow GKI's standard operating procedure for reporting and identifying adverse drug reactions (the "SOP") in effect from time to time, a copy of which GKI will provide to ABI. In the event the SOP is modified or amended during the Term, GKI shall provide ABI with copies of any such modification or amendment to the SOP for ABI's prior approval, which will not be unreasonably withheld, conditioned or delayed, at least five business days prior to such amendment taking effect. GKI shall designate a qualified person under Applicable Laws to be responsible for ADE reporting in each country in the Territory. If the report of an ADE causes a Governmental Authority to request a labeling revision as a result of an ADE or that a Phase IV surveillance program be conducted, then the Parties shall promptly enter into discussions and shall mutually agree on all of the material terms and conditions of such labeling revision or Phase IV surveillance program; provided, however the costs of such labeling revision or Phase IV surveillance program shall be paid by GKI. GKI shall have the authority to make the final decision with regard to any labeling revisions provided that GKI will consider, in making its decision, the effect any such labeling revisions will have on the marketing and sale of the Product outside the Territory. GKI agrees that should Applicable Laws require that any such interim data and results from such Phase IV surveillance programs be prepared in written form, GKI shall comply with such requirements and provide all such information in writing to ABI and the Governmental Authorities in accordance with Applicable Laws. GKI further agrees that ABI shall have the right to incorporate, refer to and cross-reference such results and underlying data in any regulatory filing or any other filing or requirement ABI is required to undertake with respect to the Product, if any. Section 9.03. Commercial Sale Testing and Reporting. If, after the date of First Commercial Sale in any country in the Territory, a Governmental Authority requires (a) additional testing, modification or communication related to approved indications of the Product or (b) GKI to conduct a Phase IV study as a condition to receiving a Marketing Authorization, then GKI shall design and implement any such testing, modification or communication and the costs shall be paid by GKI. Section 9.04. Assistance. Each Party shall provide reasonable assistance to the other at the other's request, in connection with their obligations pursuant to this Article IX, subject to reimbursement of all of its out-of-pocket costs by the requesting Party. Section 9.05. Compliance. GKI shall be responsible for compliance with Applicable Laws and the Governmental Approvals relating to the design, possession, promotion, marketing, sale, advertising and distribution of the Product and Units, including obtaining all necessary permits, licenses and any other requirements relating to the import, sale and distribution of the Product. ABI shall be responsible for compliance with Applicable Laws and Governmental Approvals relating to the Manufacture of the Product, as applicable, and with cGMP relating to the Manufacture and testing of the Product, as applicable. GKI and ABI shall comply with all Applicable Laws within the Territory as set forth in this Agreement, including the provision of information by GKI and ABI to each other necessary for ABI and GKI to comply with any applicable reporting requirements. Each Party shall promptly notify the other Party of any comments, responses or notices received from, or inspections by, the FDA, or other Governmental Authority, which relate to or may impact the Product or the Manufacture of the Product or the sales and marketing of the Product, and shall promptly inform the other Party of any responses to such comments, responses, notices or inspections and the resolution of any issue raised by the FDA or other Governmental Authority. Confidential ------------ **** Indicates that a portion of the text has been omitted and filed separately with the Commission. 27 ARTICLE X: REPRESENTATIONS, WARRANTIES AND COVENANTS Section 10.01. Corporate Power. Each Party hereby represents and warrants that such Party is duly organized and validly existing under the laws of the state of its incorporation and has full corporate power and authority to enter into this Agreement and to carry out the provisions hereof. Section 10.02. Due Authorization. Each Party hereby represents and warrants that such Party is duly authorized to execute and deliver this Agreement and to perform its obligations hereunder. Section 10.03. Binding Obligation. Each Party hereby represents and warrants that this Agreement is a legal and valid obligation binding upon it and is enforceable in accordance with its terms. The execution, delivery and performance of this Agreement by such Party does not conflict with any agreement, instrument or understanding, oral or written, to which it is a party or by which it may be bound, nor violate any law or regulation of any court, governmental body or administrative or other agency having authority over it. Section 10.04. Ownership of ABI Rights. As of the Effective Date, ABI represents and warrants that (a) it has all right, title and interest in and to HBL IFN and the ABI Technology necessary to grant GKI the licenses hereunder, (b) except for those rights granted to Existing Licensees under the Existing Licenses and except with respect to GKI, it has not granted any license to any Third Party under the ABI Technology (or any component thereof) and is under no obligation to grant any such license, (c) there are no outstanding liens, encumbrances, agreements or understanding of any kind, either written, oral or implied, regarding either the ABI Technology, any component thereof or the rights of ABI in and to HBL IFN pursuant to the HBL Agreement. Confidential ------------ **** Indicates that a portion of the text has been omitted and filed separately with the Commission. 28 Section 10.05. Material Agreements. ABI represents and warrants that: (a) each Material Agreement is valid, binding, and enforceable in accordance with its terms against ABI and, to the knowledge of ABI, each other party thereto, and is in full force and effect. (b) ABI has performed in all material respects all obligations imposed on it under each Material Agreement and neither ABI nor to the knowledge of ABI, any other party to a Material Agreement is in material default under any Material Agreement nor is there any event that with notice or lapse of time, or both, would constitute a material default by ABI, or, to the knowledge of ABI, any other party thereunder; (c) true and complete copies of each Material Agreement, including any amendments thereto, have been delivered to GKI or its counsel by ABI, (d) each of the HBL Agreement and the TAMU Agreement were duly and validly executed in accordance with Applicable Law and no Person is materially renegotiating any amount paid or payable under either agreement or any material term or provision of the HBL Agreement or the TAMU Agreement. Section 10.06. Adverse Properties. ABI represents and warrants that it knows of no adverse effects or other properties that may raise objections from the FDA or other Governmental Authorities or may affect the use, effectiveness or merchantability of the Product. Section 10.07. Preservation of Name and Reputation. During the Term, each of the Parties shall endeavor to preserve the good name and reputation of the other Party and shall conduct itself in a manner as to maintain the good name and reputation of the other Party. Section 10.08. Debarment. During the Term, neither of the Parties shall utilize any employee, representative, agent, assistant or associate who has been debarred pursuant to the Act in connection with any of the activities to be carried out under this Agreement. Section 10.09. Limitation on Warranties. Neither Party makes any warranties, express or implied, concerning the success or commercial utility of the Product. Confidential ------------ **** Indicates that a portion of the text has been omitted and filed separately with the Commission. 29 Section 10.10. Limitation of Liability. EXCEPT FOR WILLFUL MISCONDUCT, GROSS NEGLIGENCE, BREACHES BY A PARTY OF SECTION 15.01 OR INFRINGEMENT OF THIRD PARTY PROPRIETARY RIGHTS, NEITHER PARTY SHALL BE ENTITLED TO RECOVER FROM THE OTHER PARTY ANY SPECIAL, INCIDENTAL, CONSEQUENTIAL OR PUNITIVE DAMAGES IN CONNECTION WITH THIS AGREEMENT OR ANY LICENSE GRANTED HEREUNDER. ARTICLE XI: COVENANTS OF GKI AND ABI Section 11.01. Access to Books and Records. GKI shall permit ABI, at ABI's expense and during normal business hours, to exercise the inspection rights granted to ABI by GKI under Section 4.05. Section 11.02. Further Actions. Upon the terms and subject to the conditions hereof, each of the Parties hereto shall use its commercially reasonable efforts to (a) take, or cause to be taken, all appropriate action and do, or cause to be done, all things necessary, proper or advisable under Applicable Law or otherwise to consummate and make effective the transactions contemplated by this Agreement, (b) obtain from Governmental Authorities any consents, licenses, permits, waivers, approvals, authorizations or orders required to be obtained or made by the Parties in connection with the authorization, execution and delivery of this Agreement and the consummation of the transactions contemplated by this Agreement and (c) make all necessary filings, and thereafter make any other required submissions, with respect to this transaction under (i) the Securities Exchange Act of 1934, as amended and the Securities Act of 1933, as amended, and the rules and regulations thereunder and any other applicable federal or state securities laws and (ii) any other Applicable Law. The Parties hereto shall cooperate with each other in connection with the making of all such filings, including by providing copies of all such documents to the other Party's counsel (subject to appropriate confidentiality restrictions) prior to filing and, if requested, by accepting all reasonable additions, deletions or changes suggested in connection therewith. Without limiting the generality of the foregoing, each Party shall take or omit to take such action as the other Party shall reasonably request to cause the Parties to obtain any material Governmental Approvals and/or the expiration of applicable waiting periods, provided that the foregoing shall not obligate either Party to take or to omit to take any action (including, without limitation, the expenditure of funds or any holding separate and agreeing to sell or otherwise dispose of assets, categories of assets or businesses) as in the good faith opinion of such Party, would cause a material adverse effect on a Party. Section 11.03. Equitable Relief. The Parties understand and agree that because of the difficulty of measuring economic losses to the non-breaching Party as a result of a breach of the covenants set forth in this Article XI or Section 14.01, and because of the immediate and irreparable damage that may be caused to the non-breaching Party for which monetary damages would not be a sufficient remedy, the Parties agree that the non-breaching Party will be entitled to seek specific performance, temporary and permanent injunctive relief, and such other equitable remedies to which it may then be entitled against the breaching Party. This Section 11.04 shall not limit any other legal or equitable remedies that the non-breaching Party may have against the breaching Party for violation of the covenants set forth in this Article XI or Section 14.01. The Parties agree that the non-breaching Party shall have the right to seek relief for any violation or threatened violation of this Article XI or Section 14.01 by the breaching Party from any court of competent jurisdiction in any jurisdiction authorized to grant the relief necessary to prohibit the violation or threatened violation of this Article XI or Section 14.01. This Article XI shall apply with equal force to the breaching Party's Affiliates. Confidential ------------ **** Indicates that a portion of the text has been omitted and filed separately with the Commission. 30 ARTICLE XII: INDEMNIFICATION Section 12.01. GKI Indemnified by ABI. ABI shall indemnify and hold GKI harmless from and against any liabilities or obligations, damages, losses, claims, encumbrances, costs or expenses (including attorneys' fees) (any or all of the foregoing herein referred to as "Loss") insofar as a Loss or actions in respect thereof, whether existing or occurring prior to, on or subsequent to the Effective Date, arises out of or is based upon (a) any misrepresentation or breach of any of the warranties, covenants or agreements made by ABI in this Agreement; (b) the Manufacture of any Product that is identifiable as having been Manufactured by or on behalf of ABI; (c) any claims that a Product (as a result of the use of the ABI Technology therein) or its Manufacture (as a result of the use of ABI Technology therein), use or sale infringes the patent, trademark or other intellectual property right of a Third Party. Section 12.02. ABI Indemnified by GKI. GKI shall indemnify and hold harmless ABI from and against any Loss insofar as such Loss or actions in respect thereof occurs subsequent to the Effective Date, whether existing or occurring prior to, on or subsequent to the date hereof, arises out of or is based upon (a) any misrepresentation or breach of any of the warranties, covenants or agreements made by GKI in this Agreement or (b) GKI's material violation of any Applicable Law. Section 12.03. Prompt Notice Required. No claim for indemnification hereunder shall be valid unless notice of the matter which may give rise to such claim is given in writing by the (the "Indemnitee") to the persons against whom indemnification may be sought (the "Indemnitor") as soon as reasonably practicable after such Indemnitee becomes aware of such claim; provided that the failure to notify the Indemnitor shall not relieve it from any liability which it may have to the Indemnitee otherwise than under this Article XII. Such notice shall state that the Indemnitor is required to indemnify the Indemnitee for a Loss and shall specify the amount of Loss and relevant details thereof. The Indemnitor shall notify Indemnitee no later than 60 days from such notice of its intention to assume the defense of any such claim. In the event the Indemnitor fails to give such notice within that time, the Indemnitor shall no longer be entitled to assume such defense. Confidential ------------ **** Indicates that a portion of the text has been omitted and filed separately with the Commission. 31 Section 12.04. Indemnitor May Settle. The Indemnitor shall at its expense, have the right to settle and defend, through counsel reasonably satisfactory to the Indemnitee, any action which may be brought in connection with all matters for which indemnification is available. In such event, the Indemnitee of the Loss in question and any successor thereto shall permit the Indemnitor full and free access to its books and records and otherwise fully cooperate with the Indemnitor in connection with such action; provided that this Indemnitee shall have the right fully to participate in such defense at its own expense. The defense by the Indemnitor of any such actions shall not be deemed a waiver by the Indemnitor of its right to assert a claim with respect to the responsibility of the Indemnitor with respect to the Loss in question. The Indemnitor shall have the right to settle or compromise any claim against the Indemnitee without the consent of the Indemnitee provided that the terms thereof: (a) provide for the unconditional release of the Indemnitee; (b) require the payment of compensatory monetary damages by Indemnitor only; and (c) expressly state that neither the fact of settlement nor the settlement agreement shall constitute, or be construed or interpreted as, an admission by the Indemnitee of any issue, fact, allegation or any other aspect of the claim being settled. No Indemnitee shall pay or voluntarily permit the determination of any liability, which is subject to any such action while the Indemnitor is negotiating the settlement thereof or contesting the matter, except with the prior written consent of the Indemnitor, which consent shall not be unreasonably withheld or delayed. If the Indemnitor fails to give Indemnitee notice of its intention to defend any such action as provided herein, the Indemnitee involved shall have the right to assume the defense thereof with counsel of its choice, at the Indemnitor's expense, and defend, settle or otherwise dispose of such action. With respect to any such action, which the Indemnitor shall fail to promptly defend, the Indemnitor shall not thereafter question the liability of the Indemnitor hereunder to the Indemnitee for any Loss (including counsel fees and other expenses of defense). ARTICLE XIII: DISPUTE RESOLUTION Section 13.01. Disputes. The Parties recognize that disputes as to certain matters may from time to time arise during the Term, which relate to either Party's rights and/or obligations hereunder. It is the objective of the Parties to establish procedures to facilitate the resolution of disputes arising under this Agreement in an expedient manner by mutual cooperation and without resort to litigation. To accomplish this objective, the Parties agree to follow the procedures set forth in this Article XIII if and when a dispute arises under this Agreement. Unless otherwise specifically recited in this Agreement, disputes among the Parties will be resolved as recited in this Article XIII. Disputes among the Parties first shall be presented to the chief executive officers of ABI and GKI, or their respective designees, for resolution. In the event that the chief executive officers of ABI and GKI, or their respective designees, cannot resolve the dispute within ten days of being requested by a Party to resolve a dispute, either Party may, by written notice to the other, invoke the provisions of Section 13.02. Confidential ------------ **** Indicates that a portion of the text has been omitted and filed separately with the Commission. 32 Section 13.02. Trial Without Jury. If the Parties fail to resolve the dispute through negotiation in accordance with Section 13.01, each Party shall have the right to pursue any of the remedies legally available to resolve the dispute; provided, however, that the Parties expressly waive any right to a jury trial in any legal proceedings under this Section 13.02. Section 13.03. Performance to Continue. Each Party shall continue to perform its obligations under this Agreement pending final resolution of any dispute arising out of or related to this Agreement; provided, however, that a Party may suspend performance of its obligations during any period in which the other Party fails or refuses to perform its obligations. Section 13.04. Provisional Remedies. Although the procedures specified in this Article XIII are the sole and exclusive procedures for the resolution of disputes arising out of or related to this Agreement, either Party may seek a preliminary injunction or other provisional equitable relief, if, in its reasonable judgment, such action is necessary to avoid irreparable harm to itself or to preserve its rights under this Agreement. Section 13.05. Determination of Patents and Other Intellectual Property. Notwithstanding the foregoing, any dispute relating to the determination of validity of claims, infringement or claim interpretation relating to a Party's patents shall be submitted exclusively to federal court. ARTICLE XIV: CONFIDENTIALITY Section 14.01. Confidentiality. During the Term and for a period of five years thereafter, each Party shall maintain all Confidential Information of the other Party as confidential and shall not disclose any such Confidential Information to any Third Party or use any such Confidential Information for any purpose, except (a) as expressly authorized by this Agreement, (b) as required by law, rule, regulation or court order (provided that the disclosing Party shall first notify the other Party and shall use commercially reasonable efforts to obtain confidential treatment of any such information required to be disclosed), or (c) to its Affiliates and its employees, agents, consultants and other representatives ("Representatives") to accomplish the purposes of this Agreement, so long as such persons are under an obligation of confidentiality no less stringent than as set forth herein. Each Party may use such Confidential Information only to the extent required to accomplish the purposes of this Agreement. Each Party shall use at least the same standard of care as it uses to protect its own Confidential Information to ensure that it and its Affiliates and Representatives do not disclose or make any unauthorized use of the other Party's Confidential Information. Each Party shall be responsible for any breach of this Agreement by its Representatives. Each Party shall promptly notify the other Party upon discovery of any unauthorized use or disclosure of the other Party's Confidential Information. Confidential ------------ **** Indicates that a portion of the text has been omitted and filed separately with the Commission. 33 Section 14.02. Publicity Review. The Parties agree that the public announcement of the execution of this Agreement shall be in the form of press releases issued by each of the Parties on or before the Effective Date and thereafter each Party shall be entitled to make or publish any public statement consistent with the contents thereof. The Parties acknowledge the importance of supporting each other's efforts to publicly disclose results and significant developments regarding the Product. The principles to be observed by ABI and GKI in such public disclosures will be: accuracy, compliance with FDA regulations and other FDA guidance documents and other Applicable Laws, the advantage a competitor of ABI or GKI may gain from any public statements under this Section 14.02, and the standards and customs in the biotechnology and pharmaceutical industries for such disclosures by companies comparable to ABI and GKI. The terms of this Agreement may also be disclosed by a Party to: (a) government agencies where required by law, including filings required to be made by law with the United States Securities and Exchange Commission ("SEC"), national securities exchanges or the Nasdaq Stock Market, (b) Third Parties with the prior written consent of the other Party, which consent shall not be unreasonably withheld, or (c) lenders, investment bankers and other financial institutions solely for purposes of financing the business operations of such Party, so long as such disclosure in (b) and (c) above is made under an agreement of confidentiality at least as restrictive as the confidentiality provisions in Section 14.01, to the extent possible highly sensitive terms and conditions such as financial terms are extracted from the Agreement (including in any disclosure required by law or the SEC) or deleted upon the request of the other Party, and as the disclosing Party gives reasonable advance notice of the disclosure under the circumstances requiring the disclosure. ARTICLE XV: MISCELLANEOUS Section 15.01. Commercially Reasonable Efforts. Each Party shall use commercially reasonable and diligent efforts to perform its responsibilities under this Agreement. As used herein, the term "commercially reasonable and diligent efforts" means, unless the Parties agree otherwise, those efforts consistent with the exercise of prudent scientific and business judgment, as applied to other products of similar scientific and commercial potential within the relevant product lines of the Parties. Section 15.02. Notices. All notices, requests and other communications to any party hereunder shall be in writing and shall be deemed to have been given if delivered personally, mailed by certified mail (return receipt requested) or sent by cable, telegram or recognized overnight delivery service to the parties at the following addresses or at such other addresses as, specified by the parties by like notice: Confidential ------------ **** Indicates that a portion of the text has been omitted and filed separately with the Commission. 34 If to ABI : Dr. Joseph M. Cummins, Chairman & CEO Amarillo Biosciences, Inc. 4134 Business Park Drive Amarillo, TX 79110 Facsimile: (806) 376-9301 With a copy to: Edward L. Morris, Legal Counsel SandersBaker, PC 320 S. Polk, Ste. 700 Amarillo, TX 79101 Facsimile: (806) 372-2020 If to GKI: Jerry Frasier 4628 Kent Court Kent, WA 98032 Facsimile: 253-270-9973 Telephone: 360-387-7540 Notice so given shall be deemed given and received (i) if by mail on the fourth day after posting; (ii) by cable, telegram, telex or personal delivery on the date of actual transmission, with evidence of transmission acceptance, or (as the case may be) personal or other delivery; and (iii) if by overnight delivery courier, on the next business day following the day such notice is delivered to the courier service. Section 15.03. Severability. Whenever possible, each clause, subclause, provision or condition of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any clause, subclause, provision or condition of this Agreement should be prohibited or invalid under applicable law, such clause, subclause, provision or condition shall be considered separate and severable from this Agreement to the extent of such prohibition or invalidity without invalidating the remaining clauses, subclauses, provisions and conditions of this Agreement. Section 15.04. Entire Agreement/Merger. This Agreement sets forth the entire agreement between the Parties hereto pertaining to the subject matter hereof and supersedes all negotiations, preliminary agreements, memoranda or letters of proposal or intent, discussions and understandings of the Parties hereto in connection with the subject matter hereof. All discussions between the Parties have been merged into this Agreement, and neither Party shall be bound by any definition, condition, understanding, representation, warranty, covenant or provision other than as expressly stated in or contemplated by this Agreement or as subsequently shall be set forth in writing and executed by a duly authorized representative of the Party to be bound thereby. Confidential ------------ **** Indicates that a portion of the text has been omitted and filed separately with the Commission. 35 Section 15.05. Amendment. No amendment, change or modification of any of the terms, provisions or conditions of this Agreement shall be effective unless made in writing and signed on behalf of the Parties hereto by their duly authorized representatives. Section 15.06. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original document, but all such separate counterparts shall constitute only one and the same instrument. This Agreement may be signed and delivered to the other Party by facsimile signature; such transmission shall be deemed a valid signature. Section 15.07. No Waiver of Rights. No waiver of any term, provision, or condition of this Agreement, whether by conduct or otherwise, in any one or more instances, shall be deemed to be or construed as a further or continuing waiver of any such term, provision, or condition of this Agreement. Section 15.08. Force Majeure. Neither Party shall be liable hereunder to the other Party nor shall be in breach for failure to deliver, provided failure to deliver is no greater than the delay in time caused by circumstances beyond the control for either Party, including acts of God, fires, floods, riots, wars, civil disturbances, sabotage, accidents, labor disputes, shortages, government actions (including priorities, requisitions, allocations and price adjustment restrictions) and inability to obtain material, equipment, labor or transportation (collectively, "Force Majeure"). Section 15.09. Further Assurances. The Parties hereto shall each perform such acts, execute and deliver such instruments and documents and do all such other things as may be reasonably necessary to accomplish the transactions contemplated in this Agreement. Section 15.10. Assignment and Sublicense. Neither this Agreement nor any of the rights, interests, options or obligations hereunder may be assigned, sublicensed or delegated by either of the Parties without the prior written consent of the other Party, provided, however, that either GKI or ABI may, without such consent, assign this Agreement and its rights and obligations hereunder in connection with the transfer or sale of all or substantially all of its business pertaining to this Agreement, or in the event of its merger or consolidation or change in control or similar transaction. Any permitted assignee shall assume all obligations of its assignor under this Agreement. Further, a Party may assign or sublicense any and all of its rights, interests, options, and delegate all obligations hereunder, to any Affiliate of such Party (and such Affiliate may further assign or sublicense this Agreement to such Party or any other Affiliate of such Party) without the consent of the other Party. In the event of an assignment or sublicense to an Affiliate, the assigning Party shall guarantee the performance of such assignee or sublicensee. The assignment or sublicense to an Affiliate shall not operate to discharge the assignor or sublicensor from any obligation under this Agreement. Any assignment that contravenes this Section 15.10 shall be void ab initio. Confidential ------------ **** Indicates that a portion of the text has been omitted and filed separately with the Commission. 36 Section 15.11. Expenses. The Parties hereto shall each bear their own costs and expenses (including attorneys' fees) incurred in connection with the negotiation and preparation of this Agreement and consummation of the transactions contemplated hereby. Section 15.12. Binding Effect. This Agreement, and all of the terms, provisions and conditions hereof, shall be binding upon and shall inure to the benefit of the Parties hereto and their respective permitted successors and assigns. Section 15.13. Governing Law. This Agreement shall be construed and interpreted in accordance with the laws of the State of Texas. Section 15.14. Survival of Representations and Warranties. All statements contained herein, or in any schedule hereto, shall be considered a representation, warranty or covenant of the Party making such statement. All representations, warranties, covenants contained herein, or in any schedule hereto, shall survive the closing of this transaction. Section 15.15. No Strict Construction. This Agreement has been prepared jointly and shall not be strictly construed against either Party. Section 15.16. Independent Contractors. The status of the Parties under this Agreement shall be that of independent contractor. No Party shall have the right to enter into any agreements on behalf of the other Party nor shall it represent to any Person that it has such right or authority. Confidential ------------ **** Indicates that a portion of the text has been omitted and filed separately with the Commission. 37 IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the Effective Date. AMARILLO BIOSCIENCES, INC. By: /s/ Joseph M. Cummins -------------------------------------- Joseph M. Cummins, President and Chief Executive Officer GLOBAL KINETICS, INC. By: /s/ Jerry Frasier --------------------------------------- Jerry Frasier President and Chief Executive Officer Confidential ------------ **** Indicates that a portion of the text has been omitted and filed separately with the Commission. 38 EXHIBIT A SPECIFICATIONS Lozenges Test Item and Specification Appearance Color: White Shape: Cylindrical cut squarish No cracked and no foreign matter Identification No IFN activity after neutralization by anti-IFN antibody Moisture Content <2.0% Weight Variation Not more than 2 of 20 lozenges tested may deviate by more than 7.5% from 200 mg. Disintegration No residue nor spongy substance after 30 min.; if 1 or 2 lozenges failed, repeat the test on 12 additional lozenges; all the 12 tested lozenges should disintegrate completely. Content Uniformity IFN activity of all 10 lozenges tested should be in the range of 100+/-30% of the labeled activity. Results given as the single lozenge furthest from 100%. If the activity of 1 lozenge is in the range of 80-140% of the labeled activity, repeat the test with additional 20 lozenges: The IFN activity of all the 20 lozenges should be in the range of 70-130% of the labeled activity. IFN Activity The average IFN activity of the 10 lozenges should be from 70-130% of the labeled activity. A-1 Bulk/Solution Test Item Specification Sterility Bacteria, Fungi Negative Mycoplasma Negative Specific activity Not less than 5 x 10(7) U/mg protein DNA Not more than 10 pg/5 x 10(6) IU Endotoxin Negative/1 x 10(6) IU Subtype ratio (alpha)2: 74+/-9%, (alpha)8: 26+/-9% Foreign proteins Total not more than 0.1 ug/1 x 10(6) IU Hamster protein Not more than 0.1 ug/1 x 10(6) IU CAF Not more than 0.1 ug/1 x 10(6) IU Sendai virus protein Not more than 0.1 ug/1 x 10(6) IU Mouse IgG Not more than 0.1 ug/1 x 10(6) IU Inducing virus Negative/5 x 10(6) IU Adventitious virus Negative Pyrogen Negative/6 x 10(5) IU Molecular weight 17+/-4 kDa IFN activity Not less than 1 x 10(7) IU/Ml Physical characteristics Colorless and clear solution, no smell, a little salty Identification Neutralization Neutralized by anti-IFN antibody Antiviral activity Positive pH 6.0-7.5 Purity Heavy metal Not more than 1 ppm Arsenic Not more than 0.2 ppm Abnormal Toxicity Negative/5 x 10(6) IU Histamine Negative/1 x 10(6) IU Residue on Ignition Not more than 2.5 mg/1 x 10(6) IU Antigenicity Negative A-2 EXHIBIT B FORM OF CERTIFICATE OF COMPLIANCE Issue Date: -------------------------------- CERTIFICATE OF COMPLIANCE FOR ----- CUSTOMER --------- LOT NUMBER -------- FILL DATE PREP/EX DATE -------- --- DOSAGE ---- QUANTITY --------- The batch production record for this Product has been reviewed for accuracy, completeness, and compliance with the Specifications set forth in the License and Supply Agreement between Amarillo Biosciences, Inc. and GKI Pharmaceuticals dated March ___, 2005 (the "Agreement") and the Agreement, and in accordance with cGMP requirements. Any deviations/abnormal occurrences from the aforementioned requirements have been appropriately documented, reviewed, and approved. Reviewed By: ---------------------- Batch Record Auditor Date: ---------------------- Amarillo Biosciences, Inc. Approved By: ---------------------- Acting Supervisor Manager, Documentation Date: ---------------------- cc: All Customers EX-10.48 3 v039467_ex10-48.txt Exhibit 10.48 LICENSE AND SUPPLY AGREEMENT between BUMIMEDIC (MALAYSIA) SDN. BHD. and AMARILLO BIOSCIENCES, INC. January 18th, 2006 CONFIDENTIAL **** Indicates that a portion of the text has been omitted and filed separately with the Commission. TABLE OF CONTENTS ARTICLE I: DEFINITIONS.......................................................5 ARTICLE II: RESEARCH AND DEVELOPMENT........................................11 Section 2.01. ABI Obligations........................................11 Section 2.03. Availability of Resources; Cooperation.................13 Section 2.04. Reporting Obligations of BME...........................13 ARTICLE III: LICENSE........................................................13 Section 3.01. License and Supply Grant...............................13 Section 3.02. Restrictions...........................................14 Section 3.03. Retained Rights........................................14 Section 3.04. First Right of Refusal.................................14 ARTICLE IV: PAYMENTS AND ROYALTIES..........................................14 Section 4.01. Initial Fee............................................14 Section 4.02. Royalty Payments.......................................15 Section 4.03. Milestone Payments.....................................15 Section 4.04. Minimum Payment........................................15 Section 4.05. Reports................................................15 Section 4.06. Records and Audits.....................................15 Section 4.07. Exchange Rate; Manner and Place of Payment.............16 Section 4.08. Late Payments..........................................16 Section 4.09. Taxes..................................................16 ARTICLE V: TERM AND TERMINATION.............................................17 Section 5.01. Term...................................................17 Section 5.02. Termination By BME.....................................17 Section 5.03. Termination by ABI.....................................17 Section 5.04. Termination Upon Certain Events........................18 Section 5.05. Remedies...............................................18 Section 5.06. Effect of Termination..................................18 Section 5.07. Bankruptcy.............................................19 Section 5.08. Continuing Obligations.................................19 Section 5.09. Return of Confidential Information.....................19 ARTICLE VI: SUPPLY, MANUFACTURE AND PURCHASE OF PRODUCT.....................19 Section 6.01. Supply of Product......................................19 Section 6.02. Supply and Manufacturing Rights........................20 Section 6.03. Quality Assurance......................................20 Section 6.04. ABI's Duties...........................................20 Section 6.05. BME's Duties if Manufacturing..........................21 Section 6.06. Failure to Supply......................................22 Section 6.07. Allocation.............................................22 Section 6.08. Records and Audits.....................................22 ARTICLE VII: PURCHASE AND SALE..............................................23 Section 7.01. Purchase Price and Payment.............................23 Section 7.02. Labeling and Artwork...................................23 Section 7.03. Purchase Forms.........................................23 Section 7.04. Confirmation...........................................23 Section 7.05. Delivery...............................................24 Section 7.06. Forecasts and Orders...................................24 CONFIDENTIAL **** Indicates that a portion of the text has been omitted and filed separately with the Commission. ARTICLE VIII: WARRANTY, REJECTION AND INSPECTIONS...........................25 Section 8.01. ABI Warranty...........................................25 Section 8.03. BME Inspections........................................26 ARTICLE IX: REGULATORY COMPLIANCE...........................................26 Section 9.01. Maintenance of Marketing Authorizations................26 Section 9.02. Adverse Drug Event Reporting and Phase IV Surveillance.26 Section 9.03. Commercial Sale Testing and Reporting..................27 Section 9.04. Assistance.............................................27 Section 9.05. Compliance.............................................28 ARTICLE X: REPRESENTATIONS, WARRANTIES AND COVENANTS........................28 Section 10.01. Corporate Power........................................28 Section 10.02. Due Authorization......................................28 Section 10.03. Binding Obligation.....................................28 Section 10.04. Ownership of ABI Rights................................28 Section 10.05. Material Agreements....................................29 Section 10.06. Adverse Properties.....................................29 Section 10.07. Preservation of Name and Reputation....................29 Section 10.08. Debarment..............................................29 Section 10.09. Limitation on Warranties...............................30 Section 10.10. Limitation of Liability................................30 ARTICLE XI: PATENTS AND TRADEMARK...........................................30 Section 11.01. Filing, Maintenance and Protection of Patents.........30 Section 11.02. Cooperation...........................................30 Section 11.03. ABI to Prosecute Infringement.........................30 Section 11.04. Infringement Claimed by Third Parties.................31 Section 11.05. Trademark.............................................31 ARTICLE XII: COVENANTS OF BME AND ABI.......................................31 Section 12.01. Access to Books and Records............................31 Section 12.02. Further Actions........................................31 Section 12.03. Equitable Relief.......................................32 ARTICLE XIII: INDEMNIFICATION...............................................32 Section 13.01. BME Indemnified by ABI.................................32 Section 13.02. ABI Indemnified by BME.................................33 Section 13.03. Prompt Notice Required.................................33 Section 13.04. Indemnitor May Settle..................................33 ARTICLE XIV: DISPUTE RESOLUTION.............................................34 Section 14.01. Disputes...............................................34 Section 14.02. Trial Without Jury.....................................34 Section 14.03. Performance to Continue................................34 Section 14.04. Provisional Remedies...................................34 Section 14.05. Determination of Patents and Other Intellectual Property.34 ARTICLE XV: CONFIDENTIALITY.................................................35 Section 15.01. Confidentiality........................................35 Section 15.02. Publicity Review.......................................35 ARTICLE XVI: MISCELLANEOUS..................................................36 Section 16.01. Commercially Reasonable Efforts........................36 Section 16.02. Notices................................................36 CONFIDENTIAL **** Indicates that a portion of the text has been omitted and filed separately with the Commission. Section 16.03. Severability...........................................37 Section 16.04. Entire Agreement/Merger................................37 Section 16.05. Amendment..............................................37 Section 16.06. Counterparts...........................................37 Section 16.07. No Waiver of Rights....................................37 Section 16.08. Force Majeure..........................................38 Section 16.09. Further Assurances.....................................38 Section 16.10. Assignment and Sublicense..............................38 Section 16.11. Expenses...............................................38 Section 16.12. Binding Effect.........................................38 Section 16.13. Governing Law..........................................38 Section 16.14. Survival of Representations and Warranties.............39 Section 16.15. No Strict Construction.................................39 Section 16.16. Independent Contractors................................39 Exhibit A - Specifications............................................A-1 Exhibit B - Certificate of Compliance.................................B-1 CONFIDENTIAL **** Indicates that a portion of the text has been omitted and filed separately with the Commission. LICENSE AND SUPPLY AGREEMENT This License and Supply Agreement ("Agreement") is made as of January 18th 2006 (the "Effective Date"), by and between Bumimedic (Malaysia) SDN. BHD, a Malaysian corporation ("BME"), with its principal place of business located at No. 3 Jalan 19/1, Seksyen 19, 46300 Petaling Jaya, Selangor Darul Ehsan, MALAYSIA, and Amarillo Biosciences, Inc., a Texas corporation ("ABI"), with its principal place of business located at 4134 Business Park Drive, Amarillo, Texas 79110, USA. ABI and BME are sometimes referred to collectively herein as the "Parties" and individually as a "Party." WHEREAS, ABI and its contract supplier, Hayashibara Biochemical Laboratories, Inc. ("HBL") have substantial expertise in the production and oral use of human interferon alpha ("IFN") and have proprietary rights and Know-How in the field of production, purification and formulation of IFN; WHEREAS, ABI is willing to disclose to BME the ABI Know-How consisting of human clinical data and all other data, including safety, bioavailability, and clinical trial data necessary for BME to obtain regulatory approval for a product for the treatment of human diseases in the Territory; and WHEREAS, ABI has an exclusive worldwide license (except Japan) to market and distribute the oral formulation of HBL IFN, and desires to provide HBL IFN to BME on the terms and conditions herein set forth, and BME desires to obtain the right to perform clinical trials on, distribute and market HBL IFN on the terms and conditions herein set forth; WHEREAS, ABI owns certain proprietary information, intellectual property, Patents and ABI Know-How, and other rights relating to the use of low dose IFN for the treatment or prevention of human diseases; WHEREAS, subject to the terms of this Agreement, ABI desires to grant to BME, and BME wishes to obtain from ABI, an exclusive supply agreement license, subject to existing rights, to such Know-How and related intellectual property rights in the Territory in connection with the Product; and WHEREAS, ABI is willing to grant such rights and licenses to BME under the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the mutual promises, covenants and agreements hereinafter set forth, the Parties mutually agree as follows: ARTICLE I: DEFINITIONS (a) The following terms as used in the Agreement shall, unless the context clearly indicates to the contrary, have the meaning set forth below: CONFIDENTIAL **** Indicates that a portion of the text has been omitted and filed separately with the Commission. "ABI Know-How" means all Know-How under the Control of ABI as of the Effective Date and at any time during the Term related to (but not claimed under) the ABI Patent Rights and which is necessary or useful to develop, Manufacture and/or commercialize the Product, including all information, reports, results, inventions, 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 Product, including non-patentable Improvements, and any nonpublic information relevant to the ABI Patent Rights, including preclinical and clinical data from ABI's past, current or future studies, relating to safety or bioavailability, or preclinical or clinical data relating to the use of HBL IFN and/or IFN for the treatment or prevention of human diseases. "ABI Patent Rights" means all Patent Rights that are under the Control of ABI as of the Effective Date and at any time during the Term that are necessary or useful to the use, development, Manufacture, marketing, promotion, distribution, sale and/or commercialization of the Product for use in the treatment of the Licensed Indication, and Improvements thereto developed by or on behalf of ABI during the Term. "ABI Technology" means the ABI Patent Rights and the ABI Know-How. "Affiliate" means any entity, which directly or indirectly controls, is controlled by or is under common control with either BME or ABI. The term "control" as used in the preceding sentence means the power to direct or control the affairs of such entity, and control shall be presumed where BME or ABI or their Affiliates (as the case may be) own ten percent (10%) or more of the voting stock or other equity interests of such entity. "Applicable Laws" means all applicable laws, rules, regulations and guidelines within or without the Territory that may apply to the marketing or sale of the Product in the Territory or the performance of either Party's obligations under this Agreement including laws, regulations and guidelines governing the marketing, distribution and sale of the Product in the Territory, to the extent applicable and relevant, and including all cGMP or current Good Clinical Practices standards or guidelines promulgated by the FDA or the Governmental Authorities and including trade association guidelines. "Bulk IFN" means concentrated liquid HBL IFN which can be used to Manufacture Product. "Certificate of Compliance" means the certificate of compliance in the form attached hereto as Exhibit B. "CFR" means the United States Code of Federal Regulations. "cGMP" means current good manufacturing practices as defined in 21 CFR ss. 110 et seq. and established under the Act and applicable Regulations. "Confidential Information" means any confidential information (including Know-How) of a Party relating to any human interferon use, process, method, compound, research project, work in process, future development, scientific, engineering, Manufacturing, marketing, business plan, financial or personnel matter relating to the disclosing Party, its present or future product, sales, suppliers, customers, employees, investors or business, whether in oral, written, graphic or electronic form. Confidential Information shall not include any information, which the receiving Party can prove by competent evidence: CONFIDENTIAL **** Indicates that a portion of the text has been omitted and filed separately with the Commission. (a) is now, or hereafter becomes, through no act or failure to act on the part of the receiving Party, generally known or available; (b) is known by the receiving Party at the time of receiving such information, as evidenced by its written records maintained in the ordinary course of business; (c) is hereafter furnished to the receiving Party by a Third Party, as a matter of right and without restriction on disclosure; (d) is independently developed by the receiving Party, as evidenced by its written records, without knowledge of, and without the aid, application or use of, the disclosing Party's Confidential Information; or (e) is the subject of a written permission to disclose provided by the disclosing Party. "Control" means the possession of the ability to grant a license or sublicense as provided for herein without violating the terms of any agreement or other arrangement with any Third Party. "Existing Licensees" means, as applicable, Pharma Pacific Management Pty, Ltd. (PPM), HBL and Interferon Sciences, Inc. (ISI), their successors, transferees and licensees. "Existing Licenses" means, as applicable, the HBL Agreement, the PPM Agreement and the ISI Agreement. "FDA" means the United States Food and Drug Administration. "First Commercial Sale" means the first sale for use, consumption or resale of a Product by BME, its Affiliates or its sublicensees in the Territory (excluding any sales for clinical trials). A sale to an Affiliate shall not constitute a First Commercial Sale unless the Affiliate is the end user of the Product. "GAAP" means United States generally accepted accounting principles, consistently applied in accordance with past practice. "Good Clinical Practices" means good clinical practices as defined in 21 CFR ss. 50 et. seq. and ss. 312 et. seq. "Governmental Approval" means all permits, licenses and authorizations, including Marketing Authorizations, required by the FDA or any other Governmental Authority as a prerequisite to the Manufacturing, packaging, marketing and selling of the Product. "Governmental Authority" means any federal, state, local or other government, administrative or regulatory agency, authority, body, commission, court, tribunal or similar entity, including the FDA and other entities in each country in the Territory responsible for the regulation of medicinal products intended for human use. CONFIDENTIAL **** Indicates that a portion of the text has been omitted and filed separately with the Commission. "HBL" means Hayashibara Biochemical Laboratories, Inc. of Okayama, Japan. "HBL Agreement" means the Joint Development and Manufacturing/Supply Agreement by and between HBL and ABI dated as of March 13, 1992, as amended by the First Amendment to Joint Development and Manufacturing/Supply Agreement dated as of January 17, 1996 and the Addendum to Manufacturing/Supply Agreements dated as of May 10, 1996 and September 7, 2001. "HBL IFN" means the cell culture derived human lymphoblastoid IFN produced by HBL. "Improvements" means any and all developments, inventions or discoveries in the Licensed Indication relating to the ABI Patent Rights developed, or acquired by ABI at any time during the Term and shall include developments intended to enhance the safety and/or efficacy of the Product. "IFN" means human interferon alpha. "ISI Agreement" means the License Agreement dated October 20, 1989 by and between Interferon Sciences, Inc. and ABI, as successor-in-interest to Amarillo Cell Culture Company, Incorporated. "Know-How" means all know-how, trade secrets, inventions, data, processes, techniques, procedures, compositions, devices, methods, formulas, protocols and information, whether or not patentable, which are not generally publicly known, including, without limitation, all chemical, biochemical, toxicological, and scientific research information, whether in written, graphic or video form or any other form or format, related to human interferon alpha. "Licensed Indications" means influenza and one other human indication treated or treatable by the oral administration of IFN. "Manufacture" or "Manufacturing Process" means the storage, handling, production, processing and packaging of the Product, in accordance with this Agreement and Applicable Laws. "Marketing Authorization" means all necessary and appropriate regulatory approvals, including Pricing and Reimbursement Approvals, where applicable, to put the Product on the market in the Territory. "Material Agreements" means the Existing Licenses, and the TAMU License Agreement. "NDA" means a new drug application, biological license application or establishment license application, as applicable, and all amendments and supplements thereto, filed or to be filed, with the FDA seeking authorization and approval to Manufacture, package, ship and sell the Product as more fully described in the Regulations. CONFIDENTIAL **** Indicates that a portion of the text has been omitted and filed separately with the Commission. "Net Sales" means the invoice amounts actually received for sales of the Product by BME, its Affiliates or sub-licensees in a bona fide arm's length transaction, less the following items, provided that they are bona fide transactions designed to optimize the sales of Product (a) cash discounts and trade allowances actually granted, (b) rebates and charge backs required by Applicable Laws or made pursuant to agreements with customers, (c) credits or allowances actually granted upon claims, damaged goods, outdated goods, rejections or returns of such Product, including recalls, (d) taxes, tariffs and similar obligations, duties or other governmental charges (other than income taxes) levied on, absorbed or otherwise imposed on sales of such Product in the Territory and shown separately on the invoice, (e) shipping charges and (f) insurance costs related to shipping. Components of Net Sales shall be determined in the ordinary course of business in accordance with historical practice and using the accrual method of accounting in accordance with GAAP, but shall not include any sales of the Product for pre-clinical or clinical testing or for other than commercial purposes. In the event BME transfers the Product to a Third Party in a bona fide arm's length transaction, for consideration, in whole or in part, other than cash or to a Third Party in other than a bona fide arm's length transaction, the Net Sales price for such Product shall be deemed to be the standard invoice price then being invoiced by BME in an arms length transaction with similar customers for similar amounts less the items set forth in (a) through (f) above. "Patent Rights" means all rights related to human interferon alpha under patents and patent applications, and any and all patents issuing there from (including utility, model and design patents and certificates of invention), together with any and all substitutions, extensions (including supplemental protection certificates), registrations, confirmations, reissues, divisional, continuations, continuations-in-part, re-examinations, renewals and foreign counterparts of the foregoing and all improvements, supplements, modifications or additions. "Phase III Study" means a well-controlled study of sufficient size and appropriate design to demonstrate the safety and efficacy of the Product for its intended use. "Phase IV" means, as applicable, a study or program designed to obtain additional safety or efficacy data, detect new uses for a drug, or to determine effectiveness for labeled indications under conditions of widespread usage, which is commenced after Government Approval of the Product in the applicable country in the Territory or any such study or program required by the FDA or other applicable Governmental Authority. "PPM Agreement" means the PPM/ACC Sublicense Agreement dated April 27, 1995 by and between Pharma Pacific Management Pty, Ltd. and ABI. "Pricing and Reimbursement Approvals" means any pricing and reimbursement approval that must be obtained before placing the Product on the market in the Territory in which such approval is required. "Prime Rate of Interest" means the prime rate of interest published from time to time in The Wall Street Journal as the prime rate; provided, however that if The Wall Street Journal does not publish the prime rate of interest, then the term "Prime Rate of Interest" shall mean the rate of interest publicly announced by Bank of America, N.A., as its prime rate, base rate, reference rate or the equivalent of such rate, whether or not such bank makes loans to customers at, above, or below said rate. CONFIDENTIAL **** Indicates that a portion of the text has been omitted and filed separately with the Commission. "Product" means a formulation or composition containing IFN and designated, detailed, or labeled for oral use in the treatment of the Licensed Indications. "Regulations" means regulations, statutes, rules, guidelines and procedures promulgated by the FDA or other governmental agency pursuant to the Act or other law, including without limitation, those regulations currently contained in Title 21 of the CFR. "Shipment" or "Shipped" means each individual group of Product received by BME from ABI or its agent. "Specifications" means the specifications for the Product as may be amended from time to time by BME on notice to ABI or in compliance with Applicable Laws. The initial Specifications are attached hereto as Exhibit A. "TAMU License Agreement" means the License Agreement between The Texas A&M University System and ABI dated March 22, 1988, as amended by Amendment No. 1 dated September 17, 1998. "Territory" means the country of Malaysia. "Third Party" means any entity other than ABI or BME or an Affiliate of ABI or BME. "Unit" means a single finished dosage form of Product in the form designated by BME, which initially, for clinical supplies, shall consist of a 200 mg by weight, with 150 international units by activity, tablet or lozenge. Clinical testing may result in a change in the optimal dose and require a new definition of "Unit." (b) Each of the following terms is defined in the Section or under the defined term set forth opposite such term below: ABI.............................................................Preamble ADE.........................................................Section 9.02 Agreement.......................................................Preamble Clinical Records.........................................Section 2.01(c) Disputed Amount..........................................Section 5.03(a) DMF......................................................Section 2.02(b) Effective Date..................................................Preamble Force Majeure..............................................Section 16.08 BME.............................................................Preamble Indemnitee.................................................Section 13.03 Indemnitor.................................................Section 13.03 Interferon......................................................Recitals Loss.......................................................Section 13.01 Parties.........................................................Preamble Party...........................................................Preamble Patent Rights .............................................Section 10.01 Purchase Price..............................................Section 7.01 Representatives............................................Section 15.01 Royalty Payment Date........................................Section 4.02 Milestone Payments..........................................Section 4.03 SEC........................................................Section 15.02 SOP.........................................................Section 9.02 Term........................................................Section 5.01 CONFIDENTIAL **** Indicates that a portion of the text has been omitted and filed separately with the Commission. (c) Interpretation. The section headings contained in this Agreement are for reference purposes only and shall not affect the meaning or interpretation of this Agreement. Except where the context clearly requires to the contrary: (i) each reference in this Agreement to a designated "Section" or "Exhibit" is to the corresponding Section or Exhibit of or to this Agreement; (ii) instances of gender or entity-specific usage (e.g., "his" "her" "its" "person" or "individual") shall not be interpreted to preclude the application of any provision of this Agreement to any individual or entity; (iii) the word "or" shall not be applied in its exclusive sense; (iv) "including" shall mean "including, without limitation"; (v) references to laws, regulations and other governmental rules, as well as to contracts, agreements and other instruments, shall mean such rules and instruments as in effect at the time of determination (taking into account any amendments thereto effective at such time without regard to whether such amendments were enacted or adopted after the effective date of this Agreement) and shall include all successor rules and instruments thereto; (vi) references to "$" or "dollars" shall mean the lawful currency of the United States; (vii) references to "Federal" or "federal" shall be to laws, agencies or other attributes of the United States (and not to any State or locality thereof); (viii) the meaning of the terms "domestic" and "foreign" shall be determined by reference to the United States; (ix) references to "days" shall mean calendar days; (x) references to months or years shall be to the actual calendar months or years at issue (taking into account the actual number of days in any such month or year); (xi) days, business days and times of day shall be determined by reference to local time in Amarillo, Texas; and (xii) the English language version of this Agreement shall govern all questions of interpretation relating to this Agreement, notwithstanding that this Agreement may have been translated into, and executed in, other languages. ARTICLE II: RESEARCH AND DEVELOPMENT Section 2.01. ABI Obligations. (a) As soon as reasonably practicable after the Effective Date, ABI will make available all ABI Know-How to BME for BME's inspection and at BME's request will provide BME with a copy of all ABI Know-How in tangible form and a written summary of all ABI Know-How not in tangible form. In the event BME requests that more than 1,000 pages be copied in connection with the foregoing, BME shall reimburse ABI for ABI's actual out-of-pocket costs for making copies in excess of 1,000 pages. BME shall pay ABI such amounts within 30 days following BME's receipt of an invoice therefor accompanied by documentation reasonably supporting such invoice. CONFIDENTIAL **** Indicates that a portion of the text has been omitted and filed separately with the Commission. (b) ABI hereby grants to BME reference rights to ABI's, and agrees to cause HBL to grant to BME rights of reference to HBL's, as the case may be, FDA Drug Master File ("DMF"), when filed, and FDA Investigational New Drug Application, when filed, for HBL IFN and agrees to execute or cause HBL to execute any necessary authorization letters in this regard. (c) ABI agrees to maintain, or cause HBL to maintain, the DMF for HBL IFN up-to-date at all times during the Term. ABI shall cooperate fully with BME in order to obtain all the Marketing Authorizations which now are or later become necessary to develop, Manufacture, use, market or sell any Product. Such cooperation shall include, but not be limited to, ABI providing BME with the ABI Know-How and ABI appearing at and participating in meetings with regulatory agencies at the reasonable request of BME to assist BME in obtaining such Marketing Authorizations as are now required, or may in the future be required to Manufacture, use, market or sell any Product. ABI shall execute, or cause third parties to execute, upon request by BME, any and all documents reasonably necessary to obtain such Marketing Authorizations. BME shall reimburse ABI for any reasonable out-of-pocket costs, including reasonable attorney's fees and travel expenses incurred by ABI in connection with such cooperation. (d) ABI shall provide to BME or any sub-licensee of BME, at BME's request and, unless otherwise set forth in this Agreement, sole expense, with ABI Technology reasonably necessary to enable BME or such sub-licensee to exercise fully its rights and fulfill its obligations under this Agreement Section 2.02. BME Obligations. (a) BME will use commercially reasonable efforts to timely complete at the sole cost and expense of BME (i) clinical trials and development of Product for the treatment of the Licensed Indications, (ii) animal toxicology and other pre-clinical studies required for commercial launch of the Product, (iii) Phase III Studies, and (iv) other tasks supporting commercialization of the final formulation of the Product. (b) BME shall use commercially reasonable efforts to timely secure any and all Governmental Approvals in the Territory and shall own and maintain all Governmental Approvals and related information as provided herein. The Parties agree and acknowledge that Governmental Approval for the Product will be sought in Malaysia. (c) BME shall maintain records in sufficient detail and in good scientific manner appropriate for patent and regulatory purposes and shall properly reflect all work done and results achieved in the performance of its duties hereunder (including all data in the form required to be maintained under any Applicable Laws), and any subsequent pre-clinical or clinical studies (the "Clinical Records"). The Clinical Records shall be jointly owned by BME and ABI, shall be considered Confidential Information of both BME and ABI, and shall include books, records, reports, research notes, charts, graphs, comments, computations, analyses, compilations, recordings, photographs, computer programs and documentation thereof, computer information storage means, samples of materials and other graphic or written data generated in connection with BME's research and development activities with respect to the Product. CONFIDENTIAL **** Indicates that a portion of the text has been omitted and filed separately with the Commission. (d) ABI has the right, upon five business days prior written notice to BME, to inspect the Clinical Records upon request and during normal business hours, and BME shall, subject to Applicable Laws, provide ABI upon request with a copy of all requested Clinical Records, to the extent reasonably required for the exercise of ABI's rights under this Agreement. ABI may use the Clinical Records and the summaries thereof for commercial purposes. If ABI wants to provide a Third Party with the Clinical Records or a summary thereof or use information contained in such records for a commercial purpose, ABI may do so. Section 2.03. Availability of Resources; Cooperation. Each Party shall maintain laboratories, offices and/or other facilities reasonably necessary to carry out the activities to be performed by such Party hereunder. Upon reasonable advance notice, each Party agrees to make its employees and non-employee consultants reasonably available at their respective work locations to consult with the other Party on issues arising during the collaboration and in connection with any request from any Governmental Authority, including regulatory, scientific, technical and clinical testing issues. Section 2.04. Reporting Obligations of BME. On or prior to December 31st of each year during the Term of this Agreement BME shall provide ABI with a report of ongoing development efforts, including a report of efforts by BME with respect to clinical testing, regulatory approval efforts, marketing/sales strategy, and any other areas into which BME'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 samples of labeling, instructions, promotional and other support materials, if any, developed for BME's sales force, patients, physicians, or other outside parties. ARTICLE III: LICENSE Section 3.01. License and Supply Grant. Subject to the terms of this Agreement and the Existing Licenses, ABI hereby grants to BME: (a) an exclusive sublicense, with rights to sublicense, under the ABI Technology to use the ABI Technology to market, advertise, promote, Manufacture, offer for sale, sell, and distribute the Product in the Territory; and (b) an exclusive sublicense, with rights to sublicense, under all rights granted to ABI pursuant to the HBL Agreement to market, advertise, promote, Manufacture, offer for sale, sell, and distribute the Product in the Territory. In addition to the transfer fees and Royalty, ABI shall receive fifty percent (50%) of any license fee, option fee, or other payment, which BME may receive for the sublicense of rights under this Agreement to the sale and/or use of Product. CONFIDENTIAL **** Indicates that a portion of the text has been omitted and filed separately with the Commission. Section 3.02. Restrictions. BME shall have the right to use and sell Product only in the Territory and only for use in the treatment of the Licensed Indications. BME shall not seek customers, establish any branch or maintain any distribution depot for Product in any country outside the Territory. BME shall not sell Product to any customer in any country outside the Territory or to any customer in the Territory if, to the knowledge of BME, such customer intends to resell such Product in any country outside the Territory. Section 3.03. Retained Rights. ABI retains all rights other than as set forth in this Agreement to HBL IFN and IFN, including without limitation, the right to test, develop, license, sublicense, market, distribute or otherwise use IFN and HBL IFN for treatment of the Licensed Indications outside the Territory. Section 3.04. First Right of Refusal. BME shall have a first right of refusal to add to this Agreement as Licensed Indications, in the Territory, other clinical indications treated or treatable by the oral administration of IFN, as such may become available from ABI from time to time in the future, within the term of this Agreement. In the event ABI should determine to license such an indication or indications in the Territory, ABI shall provide written notice of such intention to BME. If ABI proposes to license such indication or indications to any person or entity other than BME, ABI shall provide to BME, along with such written notice, a complete outline of the substantive terms of such proposed license; BME shall thereupon have a period of thirty (30) days to notify ABI, in writing, that it elects to enter into the license, on the terms and conditions set forth in such notice from ABI to BME. If BME does not so notify ABI of its election to license, then ABI shall be free to license such indication or indications to the party or parties identified in such notice, or to any other party or parties, during a period of ninety (90) days after the expiration of the aforesaid thirty (30) days, and if ABI does not so license the indication or indications within said ninety (90) day period, BME's first right of refusal shall be reinstituted, with respect to any future license by ABI of such indication or indications, in the Territory. The first right of refusal contained in this Section 3.04 shall not constitute an obligation on the part of ABI to license any further indication or indications in the Territory and ABI may elect not to develop treatments for any further indications, or if it does develop such, ABI may elect not to license them in the Territory. ARTICLE IV: PAYMENTS AND ROYALTIES Section 4.01. Initial Fee. On the Effective Date as an initial license fee BME shall pay to ABI a fee equal to **** US Dollars ($****) which fee shall be applied by ABI toward patent filings, prosecution and maintenance outside Malaysia. CONFIDENTIAL **** Indicates that a portion of the text has been omitted and filed separately with the Commission. Section 4.02. Royalty Payments. During the Term, BME will pay ABI a royalty on Product equal to **** of the aggregate Net Sales of Product in each calendar year; Royalties shall be due and payable thirty (30) days after the end of each calendar quarter (each a "Royalty Payment Date"). BME may prepay, in whole or in part, any royalties prior to the applicable Royalty Payment Date. Section 4.03. Milestone Payments. BME shall pay to ABI, as licensing fees, the following milestone payments within 30 calendar days after the occurrence of the specified milestone event with respect to the Product: (a) **** US Dollars ($****) upon BME's receipt of the Governmental Approval to market Product for human use from the applicable Governmental Authority in Malaysia and upon BME's completion of all required Product registration procedures. (b) **** US Dollars ($****) upon BME's first commercial sale of the Product in Malaysia. Section 4.04. Minimum Payment. BME shall pay to ABI a Minimum Payment which shall be the greater of **** dollars ($****) per calendar year, or **** dollars ($****) per fifteen (15) lozenges, of Product sales by BME, its affiliates or sub-licensees in bonafide arm's length, transactions per calendar year, starting from the date of completion of product registration procedures. Failure to make this minimum payment shall be a reason for Termination pursuant to Section 5.03(e). Minimum Payments made under this Section 4.04 shall be applied toward the royalty payable under Section 4.02, above. Section 4.05. Reports. BME shall furnish to ABI a quarterly written report (in sufficient detail to determine the relevant amounts and dates specified in this Section 4.05), which report shall contain at a minimum (a) the Minimum Payment provided in Section 4.04, including the number of lozenges sold; (b) the calculation of Net Sales; (c) royalties payable in U.S. dollars, if any, which shall have accrued hereunder based upon Net Sales; (d) withholding taxes, if any, required by law to be deducted with respect to such sales; (e) the dates of the First Commercial Sale of any Product; and (f) the exchange rates, if any, used to determine the amount of United States dollars (collectively, the "Royalty Statement"). Reports shall be due on the 30th day following the close of each quarter. Section 4.06. Records and Audits. During the Term and for a period of two years thereafter or upon written notice to BME received prior to the expiration of such two year period as otherwise required in order for ABI to comply with Applicable Law, BME shall keep complete and accurate records in sufficient detail to permit ABI to confirm the completeness and accuracy of the information presented in each Royalty Statement and all payments due hereunder. BME shall permit an independent, certified public accountant reasonably acceptable to BME to audit and/or inspect those records of BME (including financial records) that relate to number of lozenges sold and Net Sales for the sole purpose of verifying the completeness and accuracy of the Royalty Statements and the calculation of Minimum Payments, Net Sales and confirming royalty payments for the Product, during the preceding calendar year. Such inspection shall be conducted during BME's normal business hours, no more than once in any 12-month period and upon at least ten days' prior written notice by ABI to BME. If such accounting firm concludes that such payments were underpaid during the periods reviewed by such accountants, BME shall pay ABI the amount of any such underpayments, plus interest at a rate equal to the Prime Rate of Interest, within 30 days of the date ABI delivers to BME such accounting firm's report so concluding that such payments were underpaid. If such accounting firm concludes that such payments were overpaid during such period, ABI shall pay to BME the amount of any such overpayments, without interest, within 30 days of the date ABI delivers to BME such accounting firm's report so concluding that such payments were overpaid. ABI shall bear the full cost of such audit unless such audit discloses an underpayment by more than 5% of the amount due during such period. In such case, BME shall bear the full cost of such audit. CONFIDENTIAL **** Indicates that a portion of the text has been omitted and filed separately with the Commission. Section 4.07. Exchange Rate; Manner and Place of Payment. All payments hereunder shall be payable in United States dollars. With respect to each calendar quarter, whenever conversion of payments from any foreign currency shall be required, such conversion shall be made at the rate of exchange reported in The Wall Street Journal on the last business day of the applicable calendar quarter. All payments owed under this Agreement shall be made by wire transfer to a bank account designated in writing by ABI, unless otherwise specified in writing by ABI. Section 4.08. Late Payments. Unless otherwise provided in this Agreement, upon the failure of BME to pay any amount due under this Agreement within five days after receipt of notice by ABI that such amount has become due and payable and has not been paid, BME shall pay interest to ABI on such amount from the date such amount is due under this Agreement at the rate of 8% per annum calculated on the number of days such payment is delinquent, unless such payment is being disputed by BME in good faith pursuant to Section 5.03(a). Nothing in this Section 4.06 shall relieve BME of BME's obligation to make payments, risk Termination pursuant to Section 5.03(a), or provide a Royalty Statement pursuant to Section 5.03(b). Section 4.09. Taxes. All taxes levied on account of the payments accruing to ABI under this Agreement shall be paid by ABI for its own account, including taxes levied thereon as income to ABI. If provision is made in law or regulation for withholding, such tax shall be deducted from the payment made by BME, paid to the proper taxing authority and a receipt of payment of the tax secured and promptly delivered to ABI. CONFIDENTIAL **** Indicates that a portion of the text has been omitted and filed separately with the Commission. ARTICLE V: TERM AND TERMINATION Section 5.01. Term. This Agreement will take effect on the Effective Date and will remain in force through December 31, 2015 (the "Term") after which it shall automatically be renewed for successive periods of one year each, unless terminated earlier under provisions of this Article V or if notice of termination is given by either Party at least one hundred twenty (120) days prior to the December 31st anniversary each year after 2015. Section 5.02. Termination By BME. BME may terminate this Agreement by notice to ABI as follows: (a) at any time with or without cause upon three months' prior written notice to ABI; (b) immediately, if the HBL Agreement is terminated; or (c) immediately, if BME reasonably determines based upon the clinical trials and after consultation with ABI that receipt of Governmental Approval for a Product is unlikely. Section 5.03. Termination by ABI. ABI may terminate this Agreement by notice to BME, upon any of the following conditions: (a) if BME shall fail to make any payments to ABI on the date on which such payments are due hereunder and such failure continues for more than 30 days after BME's receipt of notice of such failure to pay; provided, however, that this subsection (a) shall not apply to any payment, or portion thereof, under this Agreement, which is the subject of a good faith dispute (a "Disputed Amount") between BME and ABI. Any Disputed Amount shall be resolved by the Parties within 30 days from the date BME notifies ABI of a good faith dispute; provided, however, if the Disputed Amount cannot be resolved to the mutual satisfaction of the Parties within such 30-day period then either Party may request that the dispute be submitted to the Chief Executive Officers of ABI and BME, respectively, or their designees, for joint resolution. If the Disputed Amount is not jointly resolved by the Parties' Chief Executive Officers, or their designees, within ten days after the submission thereto, then ABI shall be entitled to pursue any and all remedies at law available to it. In no event will the dispute resolution period for the activities set forth above exceed a maximum of 60 days unless otherwise agreed in writing by the Parties. Further, BME may in its discretion elect to pay any such Disputed Amount and in the event such amount is finally determined not to have been payable by BME, ABI shall reimburse BME for such amount, without interest; or (b) if BME shall fail to deliver to ABI a Royalty Statement by the Royalty Payment Date and shall fail to cure such default within 30 days after notice from ABI with respect thereto; or CONFIDENTIAL **** Indicates that a portion of the text has been omitted and filed separately with the Commission. (c) if BME shall commit any material breach of the provisions of this Agreement other than a breach set forth in subsections (a) or (b) above, provided that ABI has first given BME notice specifying the details of the material breach, and BME has not cured such material breach, if such breach is capable of being cured within such time period, within 45 days of the effective date of such notice; or (d) if BME fails to market product in the Territory within six (6) months of the Effective Date, provided all such product registration, governmental approvals, manufacturing process etc. have been completed and BME has had reasonably sufficient time to market the product; or (e) immediately, if the HBL Agreement is terminated. Section 5.04. Termination Upon Certain Events. This Agreement may be terminated by the Party specified below immediately upon written notice to the other Party of the occurrence of either of the following events: (a) by either Party upon a cessation of operations in the ordinary course of the other Party or the institution by or against such Party as debtor of any proceeding (whether voluntary or involuntary) in bankruptcy or for dissolution, liquidation, reorganization, arrangement or the appointment of a receiver, trustee or judicial administrator (or the equivalent thereof in the jurisdiction in question) or any other proceeding under the law for the relief of debtors, if, in the case of an involuntary proceeding, the same shall not have been dismissed or stayed within 45 days after its institution; or (b) by either Party if the other Party makes an assignment for the benefit of, or arrangement with, its creditors or becomes unable to pay its debts as they become due. (c) A Party's failure to terminate this Agreement for any of the reasons specified in this Section 5.04 shall not in any way be deemed a waiver of such Party's rights in respect thereof or otherwise limit its rights to enforce the obligations hereunder. Section 5.05. Remedies. All of the non-breaching Party's remedies shall be cumulative, and the exercise of one remedy hereunder by the non-defaulting Party shall not be deemed to be an election of remedies. These remedies shall include the non-breaching Party's right to sue for damages for such breach without terminating this Agreement. Section 5.06. Effect of Termination. In the event of termination of this Agreement: (a) Neither Party shall be discharged from any liability or obligation to the other Party that became due or payable prior to the effective date of such termination; (b) BME shall discontinue, and shall cause its Affiliates and sublicensees to discontinue, the sale of the Product; and CONFIDENTIAL **** Indicates that a portion of the text has been omitted and filed separately with the Commission. (c) In the event of termination by ABI under Section 5.03, all duties of ABI (other than under Section 5.08) and all rights (but not duties) of BME (other than under Section 5.08) under this Agreement shall immediately terminate without the necessity of any action being taken either by ABI or by BME, and BME shall have a period of six months to sell off its inventory of Product existing on the date of termination and shall pay royalties to ABI with respect to such Product sales within 30 days after the expiration of such six-month period. Section 5.07. Bankruptcy. In the event that ABI as a debtor in possession, or a trustee in bankruptcy under the U.S. Bankruptcy Code, rejects this Agreement or BME's right to continue the licenses under this Agreement, BME may elect to retain its license rights under the Agreement by paying all applicable fees, and otherwise acting in accordance with Section 365(n) of the U.S. Bankruptcy Code. Thereafter, neither ABI as debtor in possession, nor a trustee in bankruptcy, shall interfere with the rights of BME to use the ABI Technology under this Agreement. Section 5.08. Continuing Obligations. Expiration or termination of this Agreement shall not relieve the Parties of any obligation accruing prior to such expiration or termination. Except as otherwise set forth in this Agreement, the obligations and rights of the Parties under Articles X, XII, XIII (other than Section 13.03), XV and Sections 5.06-5.09, 11.04 and 14.01 (for the period set forth therein) shall survive expiration or termination of this Agreement. Section 5.09. Return of Confidential Information. Except to the extent necessary for BME to exercise its rights to the ABI Technology under Sections 5.08 and 5.09, within 30 days following the expiration or termination of this Agreement, each Party shall return to the other Party, or destroy, upon the written request of the other Party, any and all Confidential Information of the other Party in its possession and upon a Party's request, such destruction (or delivery) shall be confirmed in writing to such Party by a responsible officer of the other Party. Notwithstanding the provisions of this Section 5.09, either Party may retain one (1) copy of such Confidential Information for the sole purpose of determining its continuing confidentiality obligation to the other Party under this Agreement. ARTICLE VI: SUPPLY, MANUFACTURE AND PURCHASE OF PRODUCT Section 6.01. Supply of Product. Subject to the terms of this Agreement, ABI agrees to Manufacture or cause to be Manufactured for, and sell exclusively to BME in the Territory, BME's total requirements for the Product in the Territory on the terms and conditions set forth herein. ABI shall provide Product or Bulk IFN as directed in a forecast by BME, at BME's sole discretion. Subject to notice to and prior written approval of BME, which approval shall not be unreasonably withheld, conditioned or delayed, ABI may, at BME's sole expense, subcontract any part of the Manufacturing Process for the Product to Third Parties provided the Product and the facilities used to Manufacture the Product continue to meet the requirements set forth in this Agreement. If subcontracting is initiated by ABI, BME will bear the cost of validation and necessary stability testing. CONFIDENTIAL **** Indicates that a portion of the text has been omitted and filed separately with the Commission. Section 6.02. Supply and Manufacturing Rights. During the Term, BME shall have the right to purchase Product or Bulk IFN from ABI in accordance with the terms of this Agreement. BME shall have the right to Manufacture Product from Bulk IFN. Section 6.03. Quality Assurance. ABI shall Manufacture or cause to be Manufactured the Product in accordance with the Specifications and this Agreement. ABI shall promptly notify BME in writing of any changes required by a Governmental Authority in the Specifications or BME's quality assurance procedures that would render ABI or its supplier unable to supply the Product in accordance with the terms of this Agreement. The Parties agree to develop and execute an appropriate action plan in such situation. Any additional costs or expenses shall be shared between the Parties in such proportion as is equal to each Party's relative fault in causing such change or changes to occur; provided, however, that if the Parties cannot reach an agreement in good faith as to the relative fault of each Party or if neither Party is at fault, such additional costs and expenses shall be born equally by the Parties. Section 6.04. ABI's Duties. ABI agrees to furnish to BME with every Shipment a written certificate of analysis and Certificate of Compliance that confirms conformity of the Product to the Specifications and this Agreement. BME shall analyze each Shipment promptly upon receipt in accordance with Section 8.02. In addition, ABI shall: (a) provide BME with written sampling and testing procedures used by ABI or its manufacturer to assure that the Product conforms to the Specifications; (b) retain a sample of each batch of Product for a period equal to the greater of (i) one year after the date of Manufacture of such batch of Product or (ii) such period as required by Applicable Laws. Upon the request of BME, ABI shall make such samples available to BME for inspection. The retained sample shall be sufficient in size to allow BME to perform tests to determine whether the Product meets the Specifications. ABI shall store the retained sample in accordance with the Specifications and Applicable Law, (c) maintain records to ensure BME's ability to perform a complete lot history via lot tracing of the Product, (d) keep on file all manufacturing records and analytical results pertaining to the Manufacture of each batch of Product for a period expiring not earlier than one year after the expiration date of the last lot of the last batch of Product Manufactured and Shipped to BME. ABI shall make, and shall cause any Third Party manufacturer to make, such records available to BME upon request, CONFIDENTIAL **** Indicates that a portion of the text has been omitted and filed separately with the Commission. (e) provide BME with notice within 48 hours following ABI's receipt of notification of any scheduled inspection, and as soon as possible following ABI's receipt of notification of any unscheduled inspection, by any Governmental Authority of ABI's facilities, books or records, or of the facilities, books or records of any subcontractor being utilized by ABI to perform any portion or all of the Manufacture or development of the Product. ABI shall inform such Governmental Authority that BME may desire to be present at such inspection; provided that BME's right to be present is subject to approval by such Governmental Authority and subject to BME being available at the time and date established by such Governmental Authority and, with respect to any inspection of HBL's facilities, HBL's consent to the presence of BME at such inspection. ABI shall use reasonable efforts to secure a time and date for such inspection that is reasonably acceptable to BME; provided, however, that ABI alone shall have the right to make the final decision on all such matters; (f) maintain at its expense any and all licenses, permits and consents necessary or required to perform its obligations under this Agreement; and (g) ensure that all Products delivered, have a remaining shelf life from the time of manufacture of not less than five years if refrigerated to at least 2-8 degrees Centigrade or two years, if maintained below 25 degrees centigrade. Section 6.05. BME's Duties if Manufacturing. BME agrees to furnish to ABI with every Shipment a written certificate of analysis and Certificate of Compliance that confirms conformity of the Product to the Specifications and this Agreement. ABI shall analyze each Shipment promptly upon receipt in accordance with Section 8.02. In addition, BME shall: (a) provide ABI with written sampling and testing procedures used by BME or its manufacturer to assure that the Product conforms to the Specifications; (b) retain a sample of each batch of Product for a period equal to the greater of (i) one year after the date of Manufacture of such batch of Product or (ii) such period as required by Applicable Laws. Upon the request of ABI, BME shall make such samples available to ABI for inspection. The retained sample shall be sufficient in size to allow ABI to perform tests to determine whether the Product meets the Specifications. BME shall store the retained sample in accordance with the Specifications and Applicable Law, (c) maintain records to ensure ABI's ability to perform a complete lot history via lot tracing of the Product, (d) keep on file all manufacturing records and analytical results pertaining to the Manufacture of each batch of Product for a period expiring not earlier than one year after the expiration date of the last lot of the last batch of Product Manufactured by BME. BME shall make, and shall cause any Third Party manufacturer to make, such records available to ABI upon request. CONFIDENTIAL **** Indicates that a portion of the text has been omitted and filed separately with the Commission. Section 6.06. Failure to Supply. ABI shall immediately notify BME if ABI is unable to fill any purchase order placed by BME pursuant to Section 7.06, and advise BME of the revised delivery date. BME shall then have the option of terminating the purchase order without obligation of payment or of accepting the revised delivery date. If ABI is unable to cure to BME's reasonable satisfaction the circumstances giving rise to such failure within 15 business days after such notice, BME shall not be obligated to purchase any further Product from ABI under the then existing forecasts. Notwithstanding the foregoing, ABI shall not be deemed to be unable to fill any order placed by BME if ABI's inability to fill any order arises as a result of a 50% or greater increase in BME's order over BME's immediately prior forecast. For example, if BME's forecast for the initial three-month period was for 100 Units and BME's forecast for the second three-month period was for 200 Units, then, if after the time the second three-month forecast becomes firm pursuant to Section 7.06(a), BME changed its forecast by the maximum amount allowed of 100 Units (i.e., 50% times 200 Units), ABI would not be deemed to be unable to supply Product for any amount in excess of 300 Units for such three-month period Section 6.07. Allocation. If ABI is unable to supply all of the requirements of the Product, and quantities ordered by BME in accordance with Section 7.06, then ABI shall allocate the resources available to it so that BME receives at least its proportional share of available supplies as determined based on reasonable forecasts (taking into consideration past sales and sales performance against forecast) of BME. Section 6.08. Records and Audits. During the Term and for a period of two years thereafter or such longer period as is required in order for BME to comply with Applicable Law, ABI shall keep complete and accurate records in sufficient detail to permit BME to confirm the completeness and accuracy of the information presented in each invoice sent to BME pursuant to this Agreement and all payments made by BME relying on such invoices hereunder. ABI shall permit an independent, certified public accountant reasonably acceptable to ABI to audit and/or inspect those records of ABI (including financial records) that relate to such invoices for the sole purpose of verifying the completeness and accuracy of such invoices during the preceding calendar year. Such inspection shall be conducted during ABI's normal business hours, no more than once in any 12-month period and upon at least ten days prior written notice by BME to ABI. If such accounting firm concludes that such payments were overpaid during the periods reviewed by such accountants, ABI shall pay BME the amount of any such overpayments, plus interest at a rate equal to the Prime Rate of Interest, within 30 days of the date BME delivers to ABI such accounting firm's report so concluding that such payments were overpaid. BME shall bear the full cost of such audit unless such audit discloses an overpayment by more than 5% of the amount due during such period. In such case, ABI shall bear the full cost of such audit. CONFIDENTIAL **** Indicates that a portion of the text has been omitted and filed separately with the Commission. ARTICLE VII: PURCHASE AND SALE Section 7.01. Purchase Price and Payment. ABI shall sell, and BME shall purchase, Product at a purchase price equal to, the actual amount (exclusive of the Royalties as defined in the HBL Agreement) paid to HBL under the HBL Agreement as in effect at the time of such sale and purchase, plus ten percent (10%), and all other reasonable costs of Manufacture actually paid by ABI with respect to such Product, plus ten percent (10%), for all Product supplied by ABI to BME pursuant to this Agreement (the "Purchase Price"). ABI shall invoice BME for all Product manufactured by ABI for BME, which invoice shall be accompanied by reasonable documentation, i.e., invoices for amounts paid by ABI, supporting the amounts set forth in the invoice, and payment shall be made to ABI before BME takes physical possession of Product. Section 7.02. Labeling and Artwork. After execution of this Agreement, ABI shall review and comment on any labeling and proposed changes to the labeling of the Product and shall be entitled to participate in discussions with the Governmental Authorities concerning any labeling or proposed labeling change so long as BME is purchasing the Product from ABI. Notwithstanding the above, BME shall make the final decision with regard to any labeling or labeling revisions Both Parties will approve all artwork developed for inclusion in the Product packaging, including carton labels, package inserts, etc., which approval will not be unreasonably withheld, conditioned or delayed by either Party. If BME wishes to institute changes in labeling artwork, both Parties will develop a mutually acceptable implementation schedule. The actual cost of implementing such change will be at BME's sole cost and expense, including any materials made obsolete by BME's changes to the artwork. Neither Party shall alter, change or in any way modify the artwork, which has previously been approved, for any reason, without prior written authorization from the other Party, which approval will not be unreasonably withheld, conditioned or delayed, and provided that such approved artwork shall conform to all Applicable Laws. Section 7.03. Purchase Forms. Purchase orders, purchase order releases, confirmations, acceptances and similar documents submitted by a Party in conducting the activities contemplated under this Agreement are for administrative purposes only and shall not add to or modify the terms of the Agreement. To the extent of any conflict or inconsistency between this Agreement and any such document, the terms of this Agreement shall govern. Section 7.04. Confirmation. ABI shall confirm each purchase order within ten business days from the date of receipt of a purchase order and shall supply the Product within a maximum of 30 days from the date of acceptance of a purchase order, or later if so specified in the purchase order. Failure of ABI to confirm any purchase order shall not relieve ABI of its obligation to supply Product ordered by BME in conformity with this Agreement. CONFIDENTIAL **** Indicates that a portion of the text has been omitted and filed separately with the Commission. Section 7.05. Delivery. Delivery for Product shall be at ABI's or its subcontractor's facility, which is currently located in Okayama, Japan, or Canada or such other location designated by ABI as BME may agree to in writing. Product shall be delivered, not cleared for export, to the carrier nominated by BME at the designated location, and BME, or its designated carrier, shall be responsible for loading. ABI shall ship Product in accordance with BME's purchase order form or as otherwise directed by BME in writing. Title to any Product purchased by BME shall pass to BME upon the earlier of (a) a common carrier accepting possession or control of such Product, or (b) passage of such Product from the loading dock of ABI's or its subcontractor's facilities to BME or its agent. Section 7.06. Forecasts and Orders. Not later than six months after submission of the NDA for a Product or other applicable regulatory filing on a country-by-country basis, BME will provide ABI with a 12-month forecast of BME's requirement of each Product, which forecast will include designation of whether such Product shall be provided in bulk or Unit form, for which an NDA, or other applicable regulatory filing, has been submitted, on a Product basis, as follows: (a) During the period commencing six months after submission of an NDA, or other applicable regulatory filing, for a Product through the end of the fourth full calendar quarter following the First Commercial Sale of that Product, the forecasts shall be provided quarterly, no less than 45 days prior to the beginning of each quarter. Said requirements will be based on standard production planning parameters, including sales forecasts, sales demand forecasts, promotional forecasts, inventory requirements, and the like. The first two quarters of the 12-month forecast will be stated in monthly requirements. The second two quarters of the 12-month forecast will be total requirement by stock keeping unit and will be stated as quarterly requirements. The first three months of the 12-month forecast will be firm orders to purchase. The second three months will be allowed to be flexed from the previous forecast by plus or minus 25% per month until fixed by the subsequent forecast; provided that the aggregate adjustment from the quantity set forth in the previous forecast for such three-month period shall not exceed 50% in aggregate during that three-month period. For example, if BME's forecast for the first three months was for 100 Units and its forecast for the second three months was for 200 Units, the maximum number of Units BME could order at the time the second three-month period becomes fixed would be 300 Units (i.e., 50% of 200 Units plus the 200 Units originally forecast). The last two quarters of any 12-month forecast will be an estimate and not binding. (b) Following the end of the fourth full calendar quarter following the First Commercial Sale of a Product, BME will provide to ABI a rolling 12-month forecast for each Product with the first three months of the rolling 12-month forecast a firm order to purchase. Each forecast under this subsection (ii) shall be provided monthly, no less than 20 days prior to the beginning of each month. All orders will be for full batch quantities. CONFIDENTIAL **** Indicates that a portion of the text has been omitted and filed separately with the Commission. It is understood that ABI will not maintain Product inventory in excess of the applicable forecast, but will produce Product upon receipt of that portion of BME's forecasts that constitute firm orders to purchase. Nothing in this Agreement shall obligate ABI to deliver Product if HBL is unable for any reason to provide Product. BME agrees to purchase a sufficient amount of Product to enable BME to carry sufficient inventory to allow for fluctuations in sales demand so as to allow ABI reasonable lead-time to meet increased demand. ABI will use commercially reasonable efforts to meet any increase in demand in excess of the allowed adjustment, but will not be obligated to do so. All forecasts will be made by BME to ABI in good faith based upon standard commercial parameters. From time to time after the Effective Date, the Parties shall consider whether, in light of market demand, manufacturing capacity, inventory levels and other pertinent factors, to revise the schedule for delivery of forecasts and, if appropriate, negotiate in good faith to revise such schedule. ARTICLE VIII: WARRANTY, REJECTION AND INSPECTIONS Section 8.01. ABI Warranty ABI represents and warrants to BME that the Product delivered pursuant to this Agreement (a) shall comply with the Specifications and this Agreement and conform to the certificate of analysis for each such Product; (b) are not adulterated or misbranded under Applicable Laws; and (c) at the time of Manufacture and Shipment to BME, will be and are free from any failure or defects. EXCEPT AS OTHERWISE SET FORTH HEREIN, ABI MAKES NO OTHER WARRANTIES OF ANY OTHER KIND, INCLUDING BUT NOT LIMITED TO ANY WARRANTY OF MERCHANTABILITY OR FITNESS OF THE PRODUCT FOR ANY PURPOSE, AND ABI EXPRESSLY DISCLAIMS ANY SUCH OTHER WARRANTIES WITH RESPECT TO THE PRODUCT, EITHER EXPRESSED OR IMPLIED. Section 8.02. Rejection of Product for Failure to Conform to Specifications. BME shall have 45 days after the receipt of any Shipment to determine conformity of the Shipment to the Specifications and/or Applicable Laws, except for hidden defects. A "hidden defect" shall mean a defect in the Product not discovered by BME during its testing of the Product in accordance with generally accepted industry testing procedures and which would not be a defect normally expected to be discovered in accordance with such testing. If testing of such Shipment shows a failure of the Shipment to meet the Specifications and/or Applicable Laws, BME may return the entire Shipment, or any portion thereof, to ABI at ABI's expense within a reasonable time following the above described testing, provided that notice of non-conformity is received by ABI from BME within 45 days of BME's receipt of said Shipment. BME shall have the right to request that ABI provide to BME, within 30 days after such notice is received by it, Product that meets the Specifications and Applicable Laws or to promptly provide BME with full credit for the Purchase Price paid by BME for the returned Product. In the case of a hidden defect, BME shall have the right to request that ABI provide to BME, within thirty (30) days after a notice concerning a hidden defect is received by BME, Product that meets the Specifications and Applicable Laws or to promptly provide BME with full credit for the Purchase Price paid by BME for the returned Product. In either case, the cost of freight and handling to return or replace Product or shall be at the expense of ABI. If BME does not notify ABI of the non-conformity of the Product within 45 days of receipt of said Shipment, the Product shall be deemed to meet the Specifications (including those related to packaging of the Product) and Applicable Laws, except with respect to hidden defects. Notwithstanding anything in this Agreement to the contrary, the Parties may agree to a return of the Product or an adjustment in the Purchase Price in the event of any failure or defect in the Product. Should there be a discrepancy between BME's test results and the results of testing performed by ABI, such discrepancies shall be finally resolved by testing performed by an independent Third Party mutually agreed upon by BME and ABI. The costs of such testing shall be borne by the Party against whom the discrepancy is resolved. In the event Product have been previously returned to ABI and such independent Third Party determines that the Product meets the Specifications, BME shall be responsible for all costs associated with the return. CONFIDENTIAL **** Indicates that a portion of the text has been omitted and filed separately with the Commission. Section 8.03. BME Inspections. ABI shall, and shall cause HBL or other subcontractors of ABI used to Manufacture the Product to, upon reasonable (but not less than fifteen (15) days) prior written notice by BME and during normal business hours, allow BME to inspect and audit ABI's facilities and the facilities of HBL or other subcontractors of ABI used to Manufacture the Product, twice annually, to confirm that the such facilities and the equipment, personnel and operating and testing procedures used by ABI or such subcontractors in the Manufacture, testing, storage and distribution of the Product are in compliance with Applicable Laws and the Governmental Approvals; provided that such inspection does not interfere with ABI's or such subcontractor's normal operations or cause ABI or such subcontractor's to violate or be in breach of any confidentiality agreements with any Third Parties. ARTICLE IX: REGULATORY COMPLIANCE Section 9.01. Maintenance of Marketing Authorizations. BME will own all Marketing Authorizations. BME agrees, at its sole cost and expense, to maintain the Marketing Authorizations including obtaining any variations or renewals thereof, including all fees and licenses, including user fees, related to the Manufacture of the Product by BME. Each Party agrees that neither it nor its Affiliates or permitted sublicensees will do anything to adversely affect a Marketing Authorization. Section 9.02. Adverse Drug Event Reporting and Phase IV Surveillance. Each Party, including its permitted sublicensees, shall advise the other Party, by telephone or facsimile, immediately but in no event later than 24 hours after a Party, or its sublicensees, becomes aware of any potentially serious or unexpected adverse event (including adverse drug experiences, as defined in Applicable Laws) involving the Product (each, an "ADE"). Such advising Party shall provide the other Party with a written report delivered by confirmed facsimile of any adverse reaction, stating the full facts known to such Party, including customer name, address, telephone number, batch, lot and serial numbers, and other information as required by Applicable Laws. During the Term, BME shall have full responsibility for (i) monitoring such adverse reactions; and (ii) data collection activities that occur between BME and the patient or medical professional, as appropriate, including any follow-up inquiries which BME or ABI deem necessary or appropriate. CONFIDENTIAL **** Indicates that a portion of the text has been omitted and filed separately with the Commission. In the event either Party requires information, regarding adverse drug events with respect to reports required to be filed by it in order to comply with Applicable Laws, including obligations to report ADEs to the Governmental Authorities, each Party agrees to provide such information to the other on a timely basis. The Parties agree to follow BME's standard operating procedure for reporting and identifying adverse drug reactions (the "SOP") in effect from time to time, a copy of which BME will provide to ABI. In the event the SOP is modified or amended during the Term, BME shall provide ABI with copies of any such modification or amendment to the SOP for ABI's prior approval, which will not be unreasonably withheld, conditioned or delayed, at least five business days prior to such amendment taking effect. BME shall designate a qualified person under Applicable Laws to be responsible for ADE reporting in each country in the Territory. If the report of an ADE causes a Governmental Authority to request a labeling revision as a result of an ADE or that a Phase IV surveillance program be conducted, then the Parties shall promptly enter into discussions and shall mutually agree on all of the material terms and conditions of such labeling revision or Phase IV surveillance program; provided, however the costs of such labeling revision or Phase IV surveillance program shall be paid by BME. BME shall have the authority to make the final decision with regard to any labeling revisions provided that BME will consider, in making its decision, the effect any such labeling revisions will have on the marketing and sale of the Product outside the Territory. BME agrees that should Applicable Laws require that any such interim data and results from such Phase IV surveillance programs be prepared in written form, BME shall comply with such requirements and provide all such information in writing to ABI and the Governmental Authorities in accordance with Applicable Laws. BME further agrees that ABI shall have the right to incorporate, refer to and cross-reference such results and underlying data in any regulatory filing or any other filing or requirement ABI is required to undertake with respect to the Product, if any. Section 9.03. Commercial Sale Testing and Reporting. If, after the date of First Commercial Sale in any country in the Territory, a Governmental Authority requires (a) additional testing, modification or communication related to approved indications of the Product or (b) BME to conduct a Phase IV study as a condition to receiving a Marketing Authorization, then BME shall design and implement any such testing, modification or communication and the costs shall be paid by BME. Section 9.04. Assistance. Each Party shall provide reasonable assistance to the other at the other's request, in connection with their obligations pursuant to this Article IX, subject to reimbursement of all of its out-of-pocket costs by the requesting Party. CONFIDENTIAL **** Indicates that a portion of the text has been omitted and filed separately with the Commission. Section 9.05. Compliance. BME shall be responsible for compliance with Applicable Laws and the Governmental Approvals relating to the design, possession, promotion, marketing, sale, advertising and distribution of the Product and Units, including obtaining all necessary permits, licenses and any other requirements relating to the import, sale and distribution of the Product. ABI shall be responsible for compliance with Applicable Laws and Governmental Approvals relating to the Manufacture of the Product, as applicable, and with cGMP relating to the Manufacture and testing of the Product, as applicable. BME and ABI shall comply with all Applicable Laws within the Territory as set forth in this Agreement, including the provision of information by BME and ABI to each other necessary for ABI and BME to comply with any applicable reporting requirements. Each Party shall promptly notify the other Party of any comments, responses or notices received from, or inspections by, the FDA, or other Governmental Authority, which relate to or may impact the Product or the Manufacture of the Product or the sales and marketing of the Product, and shall promptly inform the other Party of any responses to such comments, responses, notices or inspections and the resolution of any issue raised by the FDA or other Governmental Authority. ARTICLE X: REPRESENTATIONS, WARRANTIES AND COVENANTS Section 10.01. Corporate Power. Each Party hereby represents and warrants that such Party is duly organized and validly existing under the laws of the state of its incorporation and has full corporate power and authority to enter into this Agreement and to carry out the provisions hereof. Section 10.02. Due Authorization. Each Party hereby represents and warrants that such Party is duly authorized to execute and deliver this Agreement and to perform its obligations hereunder. Section 10.03. Binding Obligation. Each Party hereby represents and warrants that this Agreement is a legal and valid obligation binding upon it and is enforceable in accordance with its terms. The execution, delivery and performance of this Agreement by such Party does not conflict with any agreement, instrument or understanding, oral or written, to which it is a party or by which it may be bound, nor violate any law or regulation of any court, governmental body or administrative or other agency having authority over it. Section 10.04. Ownership of ABI Rights. As of the Effective Date, ABI represents and warrants that (a) it has all right, title and interest in and to HBL IFN and the ABI Technology necessary to grant BME the licenses hereunder, (b) except for those rights granted to Existing Licensees under the Existing Licenses and except with respect to BME, it has not granted any license to any Third Party under the ABI Technology (or any component thereof) and is under no obligation to grant any such license, (c) there are no outstanding liens, encumbrances, agreements or understanding of any kind, either written, oral or implied, regarding either the ABI Technology, any component thereof or the rights of ABI in and to HBL IFN pursuant to the HBL Agreement. CONFIDENTIAL **** Indicates that a portion of the text has been omitted and filed separately with the Commission. Section 10.05. Material Agreements. ABI represents and warrants that: (a) each Material Agreement is valid, binding, and enforceable in accordance with its terms against ABI and, to the knowledge of ABI, each other party thereto, and is in full force and effect. (b) ABI has performed in all material respects all obligations imposed on it under each Material Agreement and neither ABI nor to the knowledge of ABI, any other party to a Material Agreement is in material default under any Material Agreement nor is there any event that with notice or lapse of time, or both, would constitute a material default by ABI, or, to the knowledge of ABI, any other party thereunder; (c) true and complete copies of each Material Agreement, including any amendments thereto, have been delivered to BME or its counsel by ABI, (d) each of the HBL Agreement and the TAMU Agreement were duly and validly executed in accordance with Applicable Law and no Person is materially renegotiating any amount paid or payable under either agreement or any material term or provision of the HBL Agreement or the TAMU Agreement. Section 10.06. Adverse Properties. ABI represents and warrants that it knows of no adverse effects or other properties that may raise objections from the FDA or other Governmental Authorities or may affect the use, effectiveness or merchantability of the Product. Section 10.07. Preservation of Name and Reputation. During the Term, each of the Parties shall endeavor to preserve the good name and reputation of the other Party and shall conduct itself in a manner as to maintain the good name and reputation of the other Party. Section 10.08. Debarment. During the Term, neither of the Parties shall utilize any employee, representative, agent, assistant or associate who has been debarred pursuant to the Act in connection with any of the activities to be carried out under this Agreement. CONFIDENTIAL **** Indicates that a portion of the text has been omitted and filed separately with the Commission. Section 10.09. Limitation on Warranties. Neither Party makes any warranties, express or implied, concerning the success or commercial utility of the Product. Section 10.10. Limitation of Liability. EXCEPT FOR WILLFUL MISCONDUCT, GROSS NEGLIGENCE, BREACHES BY A PARTY OF SECTION 15.01 OR INFRINGEMENT OF THIRD PARTY PROPRIETARY RIGHTS, NEITHER PARTY SHALL BE ENTITLED TO RECOVER FROM THE OTHER PARTY ANY SPECIAL, INCIDENTAL, CONSEQUENTIAL OR PUNITIVE DAMAGES IN CONNECTION WITH THIS AGREEMENT OR ANY LICENSE GRANTED HEREUNDER. ARTICLE XI: PATENTS AND TRADEMARK Section 11.01. Filing, Maintenance and Protection of Patents. ABI shall, at BME's expense, file, maintain and protect the ABI Patent Rights, if any, in the Territory during the Term; provided however, that upon written request by ABI, BME shall, at BME's cost or expense, provide such assistance as may be necessary to enable ABI to comply with the administrative formalities necessary to maintain any ABI Patent Rights. Section 11.02. Cooperation. BME shall, at BME's cost or expense, make available to ABI or its authorized attorneys, agents or representatives, its employees, agents or consultants necessary or appropriate to enable ABI to file, prosecute and maintain patent applications for a period of time sufficient for ABI to obtain the assistance needed from such personnel. Section 11.03. ABI to Prosecute Infringement. During the Term, each Party shall give prompt notice to the other of any Third Party act that may infringe the ABI Patent Rights and shall cooperate with each other to terminate such infringement without litigation. ABI shall, at its sole expense, prosecute the judicial or administrative proceedings against such Third Party infringement. BME shall provide such assistance and cooperation to ABI as may be necessary to successfully prosecute any action against Third Party infringement at ABI's expense and may deduct the expenses thereof from any amounts payable to ABI under this Agreement. In the event ABI fails to institute proceedings and terminate any Third Party infringement of the ABI Patent Rights within 45 days after the later of (i) receiving notice from BME of any such infringement or (ii) sending notice to ABI of such infringement, BME may take (but shall have no obligation to do so) such action as it deems appropriate, including without limitation, the filing of a lawsuit against such Third Party. In such event ABI will provide such assistance and cooperation to BME as may be necessary, at ABI's expense, and BME may deduct all costs and expenses incurred in connection with such action, not otherwise recovered in connection with such action or paid or reimbursed to BME, from any amount payable to ABI under this Agreement and retain all amounts awarded in such action. BME may settle any such claim so long as the terms of such settlement do not impair ABI's rights hereunder or ABI's rights in the ABI Technology. CONFIDENTIAL **** Indicates that a portion of the text has been omitted and filed separately with the Commission. Section 11.04. Infringement Claimed by Third Parties. In the event a Third Party commences, or threatens to commence, a judicial or administrative proceeding against a Party to this Agreement and such proceeding claims that the ABI Technology infringes such Third Party's intellectual property rights, the Party against whom such proceeding is threatened or commenced shall give prompt notice to the other Party. ABI shall, at its sole expense, defend such claims or proceedings and BME shall provide such assistance and cooperation to ABI as may be necessary to successfully defend any such claim or proceeding at ABI's expense. ABI may settle any such claim so long as the terms of such settlement contains a complete release of BME and do not impair BME's rights hereunder, increase the costs to BME hereunder or require any relief other than monetary damages. Notwithstanding the above, if such claim or proceeding relates to or arises from the actions, activities or omissions of BME other than the use by BME of the ABI Technology, then BME shall defend such claims or proceedings, at BME's sole expense, and BME shall indemnify ABI for any liabilities, costs and expenses, including, without limitation, attorneys' fees, incurred with respect to such claim or proceeding. Section 11.05. Trademark. If BME uses a trademark in Malaysia provided by ABI, then BME will compensate ABI with an additional **** percent (****%) royalty on Net Sales. ARTICLE XII: COVENANTS OF BME AND ABI Section 12.01. Access to Books and Records. BME shall permit ABI, at ABI's expense and during normal business hours, to exercise the inspection rights granted to ABI by BME under Section 4.06. Section 12.02. Further Actions. Upon the terms and subject to the conditions hereof, each of the Parties hereto shall use its commercially reasonable efforts to (a) take, or cause to be taken, all appropriate action and do, or cause to be done, all things necessary, proper or advisable under Applicable Law or otherwise to consummate and make effective the transactions contemplated by this Agreement, (b) obtain from Governmental Authorities any consents, licenses, permits, waivers, approvals, authorizations or orders required to be obtained or made by the Parties in connection with the authorization, execution and delivery of this Agreement and the consummation of the transactions contemplated by this Agreement and (c) make all necessary filings, and thereafter make any other required submissions, with respect to this transaction under (i) the Securities Exchange Act of 1934, as amended and the Securities Act of 1933, as amended, and the rules and regulations thereunder and any other applicable federal or state securities laws and (ii) any other Applicable Law. The Parties hereto shall cooperate with each other in connection with the making of all such filings, including by providing copies of all such documents to the other Party's counsel (subject to appropriate confidentiality restrictions) prior to filing and, if requested, by accepting all reasonable additions, deletions or changes suggested in connection therewith. Without limiting the generality of the foregoing, each Party shall take or omit to take such action as the other Party shall reasonably request to cause the Parties to obtain any material Governmental Approvals and/or the expiration of applicable waiting periods, provided that the foregoing shall not obligate either Party to take or to omit to take any action (including, without limitation, the expenditure of funds or any holding separate and agreeing to sell or otherwise dispose of assets, categories of assets or businesses) as in the good faith opinion of such Party, would cause a material adverse effect on a Party. CONFIDENTIAL **** Indicates that a portion of the text has been omitted and filed separately with the Commission. Section 12.03. Equitable Relief. The Parties understand and agree that because of the difficulty of measuring economic losses to the non-breaching Party as a result of a breach of the covenants set forth in this Article XII or Section 15.01, and because of the immediate and irreparable damage that may be caused to the non-breaching Party for which monetary damages would not be a sufficient remedy, the Parties agree that the non-breaching Party will be entitled to seek specific performance, temporary and permanent injunctive relief, and such other equitable remedies to which it may then be entitled against the breaching Party. This Section 12.03 shall not limit any other legal or equitable remedies that the non-breaching Party may have against the breaching Party for violation of the covenants set forth in this Article XII or Section 15.01. The Parties agree that the non-breaching Party shall have the right to seek relief for any violation or threatened violation of this Article XII or Section 15.01 by the breaching Party from any court of competent jurisdiction in any jurisdiction authorized to grant the relief necessary to prohibit the violation or threatened violation of this Article XII or Section 15.01. This Article XII shall apply with equal force to the breaching Party's Affiliates. ARTICLE XIII: INDEMNIFICATION Section 13.01. BME Indemnified by ABI. ABI shall indemnify and hold BME harmless from and against any liabilities or obligations, damages, losses, claims, encumbrances, costs or expenses (including attorneys' fees) (any or all of the foregoing herein referred to as "Loss") insofar as a Loss or actions in respect thereof, whether existing or occurring prior to, on or subsequent to the Effective Date, arises out of or is based upon (a) any misrepresentation or breach of any of the warranties, covenants or agreements made by ABI in this Agreement; (b) the Manufacture of any Product that is identifiable as having been Manufactured by or on behalf of ABI; (c) any claims that a Product (as a result of the use of the ABI Technology therein) or its Manufacture (as a result of the use of ABI Technology therein), use or sale infringes the patent, trademark or other intellectual property right of a Third Party. CONFIDENTIAL **** Indicates that a portion of the text has been omitted and filed separately with the Commission. Section 13.02. ABI Indemnified by BME. BME shall indemnify and hold harmless ABI from and against any Loss insofar as such Loss or actions in respect thereof occurs subsequent to the Effective Date, whether existing or occurring prior to, on or subsequent to the date hereof, arises out of or is based upon (a) any misrepresentation or breach of any of the warranties, covenants or agreements made by BME in this Agreement or (b) BME's material violation of any Applicable Law. Section 13.03. Prompt Notice Required. No claim for indemnification hereunder shall be valid unless notice of the matter which may give rise to such claim is given in writing by the persons seeking indemnification (the "Indemnitee") to the persons against whom indemnification may be sought (the "Indemnitor") as soon as reasonably practicable after such Indemnitee becomes aware of such claim; provided that the failure to notify the Indemnitor shall not relieve it from any liability which it may have to the Indemnitee otherwise than under this Article XII. Such notice shall state that the Indemnitor is required to indemnify the Indemnitee for a Loss and shall specify the amount of Loss and relevant details thereof. The Indemnitor shall notify Indemnitee no later than 60 days from such notice of its intention to assume the defense of any such claim. In the event the Indemnitor fails to give such notice within that time, the Indemnitor shall no longer be entitled to assume such defense. Section 13.04. Indemnitor May Settle. The Indemnitor shall at its expense, have the right to settle and defend, through counsel reasonably satisfactory to the Indemnitee, any action which may be brought in connection with all matters for which indemnification is available. In such event, the Indemnitee of the Loss in question and any successor thereto shall permit the Indemnitor full and free access to its books and records and otherwise fully cooperate with the Indemnitor in connection with such action; provided that this Indemnitee shall have the right fully to participate in such defense at its own expense. The defense by the Indemnitor of any such actions shall not be deemed a waiver by the Indemnitor of its right to assert a claim with respect to the responsibility of the Indemnitor with respect to the Loss in question. The Indemnitor shall have the right to settle or compromise any claim against the Indemnitee without the consent of the Indemnitee provided that the terms thereof: (a) provide for the unconditional release of the Indemnitee; (b) require the payment of compensatory monetary damages by Indemnitor only; and (c) expressly state that neither the fact of settlement nor the settlement agreement shall constitute, or be construed or interpreted as, an admission by the Indemnitee of any issue, fact, allegation or any other aspect of the claim being settled. No Indemnitee shall pay or voluntarily permit the determination of any liability, which is subject to any such action while the Indemnitor is negotiating the settlement thereof or contesting the matter, except with the prior written consent of the Indemnitor, which consent shall not be unreasonably withheld or delayed. If the Indemnitor fails to give Indemnitee notice of its intention to defend any such action as provided herein, the Indemnitee involved shall have the right to assume the defense thereof with counsel of its choice, at the Indemnitor's expense, and defend, settle or otherwise dispose of such action. With respect to any such action, which the Indemnitor shall fail to promptly defend, the Indemnitor shall not thereafter question the liability of the Indemnitor hereunder to the Indemnitee for any Loss (including counsel fees and other expenses of defense). CONFIDENTIAL **** Indicates that a portion of the text has been omitted and filed separately with the Commission. ARTICLE XIV: DISPUTE RESOLUTION Section 14.01. Disputes. The Parties recognize that disputes as to certain matters may from time to time arise during the Term, which relate to either Party's rights and/or obligations hereunder. It is the objective of the Parties to establish procedures to facilitate the resolution of disputes arising under this Agreement in an expedient manner by mutual cooperation and without resort to litigation. To accomplish this objective, the Parties agree to follow the procedures set forth in this Article XIV if and when a dispute arises under this Agreement. Unless otherwise specifically recited in this Agreement, disputes among the Parties will be resolved as recited in this Article XIV. Disputes among the Parties first shall be presented to the chief executive officers of ABI and BME, or their respective designees, for resolution. In the event that the chief executive officers of ABI and BME, or their respective designees, cannot resolve the dispute within ten days of being requested by a Party to resolve a dispute, either Party may, by written notice to the other, invoke the provisions of Section 14.02. Section 14.02. Trial Without Jury. If the Parties fail to resolve the dispute through negotiation in accordance with Section 14.01, each Party shall have the right to pursue any of the remedies legally available to resolve the dispute; provided, however, that the Parties expressly waive any right to a jury trial in any legal proceedings under this Section 14.02. Section 14.03. Performance to Continue. Each Party shall continue to perform its obligations under this Agreement pending final resolution of any dispute arising out of or related to this Agreement; provided, however, that a Party may suspend performance of its obligations during any period in which the other Party fails or refuses to perform its obligations. Section 14.04. Provisional Remedies. Although the procedures specified in this Article XIV are the sole and exclusive procedures for the resolution of disputes arising out of or related to this Agreement, either Party may seek a preliminary injunction or other provisional equitable relief, if, in its reasonable judgment, such action is necessary to avoid irreparable harm to itself or to preserve its rights under this Agreement. Section 14.05. Determination of Patents and Other Intellectual Property. Notwithstanding the foregoing, any dispute relating to the determination of validity of claims, infringement or claim interpretation relating to a Party's patents shall be submitted exclusively to federal court. CONFIDENTIAL **** Indicates that a portion of the text has been omitted and filed separately with the Commission. ARTICLE XV: CONFIDENTIALITY Section 15.01. Confidentiality. During the Term and for a period of five years thereafter, each Party shall maintain all Confidential Information of the other Party as confidential and shall not disclose any such Confidential Information to any Third Party or use any such Confidential Information for any purpose, except (a) as expressly authorized by this Agreement, (b) as required by law, rule, regulation or court order (provided that the disclosing Party shall first notify the other Party and shall use commercially reasonable efforts to obtain confidential treatment of any such information required to be disclosed), or (c) to its Affiliates and its employees, agents, consultants and other representatives ("Representatives") to accomplish the purposes of this Agreement, so long as such persons are under an obligation of confidentiality no less stringent than as set forth herein. Each Party may use such Confidential Information only to the extent required to accomplish the purposes of this Agreement. Each Party shall use at least the same standard of care as it uses to protect its own Confidential Information to ensure that it and its Affiliates and Representatives do not disclose or make any unauthorized use of the other Party's Confidential Information. Each Party shall be responsible for any breach of this Agreement by its Representatives. Each Party shall promptly notify the other Party upon discovery of any unauthorized use or disclosure of the other Party's Confidential Information. Section 15.02. Publicity Review. The Parties agree that the public announcement of the execution of this Agreement shall be in the form of press releases issued by each of the Parties on or before the Effective Date and thereafter each Party shall be entitled to make or publish any public statement consistent with the contents thereof. The Parties acknowledge the importance of supporting each other's efforts to publicly disclose results and significant developments regarding the Product. The principles to be observed by ABI and BME in such public disclosures will be: accuracy, compliance with FDA regulations and other FDA guidance documents and other Applicable Laws, the advantage a competitor of ABI or BME may gain from any public statements under this Section 15.02, and the standards and customs in the biotechnology and pharmaceutical industries for such disclosures by companies comparable to ABI and BME. The terms of this Agreement may also be disclosed by a Party to: (a) government agencies where required by law, including filings required to be made by law with the United States Securities and Exchange Commission ("SEC"), (b) Third Parties with the prior written consent of the other Party, which consent shall not be unreasonably withheld, or (c) lenders, investment bankers and other financial institutions solely for purposes of financing the business operations of such Party, so long as such disclosure in (b) and (c) above is made under an agreement of confidentiality at least as restrictive as the confidentiality provisions in Section 15.01, to the extent possible highly sensitive terms and conditions such as financial terms are extracted from the Agreement (including in any disclosure required by law or the SEC) or deleted upon the request of the other Party, and as the disclosing Party gives reasonable advance notice of the disclosure under the circumstances requiring the disclosure. CONFIDENTIAL **** Indicates that a portion of the text has been omitted and filed separately with the Commission. ARTICLE XVI: MISCELLANEOUS Section 16.01. Commercially Reasonable Efforts. Each Party shall use commercially reasonable and diligent efforts to perform its responsibilities under this Agreement. As used herein, the term "commercially reasonable and diligent efforts" means, unless the Parties agree otherwise, those efforts consistent with the exercise of prudent scientific and business judgment, as applied to other products of similar scientific and commercial potential within the relevant product lines of the Parties. Section 16.02. Notices. All notices, requests and other communications to any party hereunder shall be in writing and shall be deemed to have been given if delivered personally, mailed by certified mail (return receipt requested) or sent by cable, telegram or recognized overnight delivery service to the parties at the following addresses or at such other addresses as, specified by the parties by like notice: If to ABI : Dr. Joseph M. Cummins, Chairman & CEO Amarillo Biosciences, Inc. 4134 Business Park Drive Amarillo, TX 79110 Facsimile: (806) 376-9301 With a copy to:Edward L. Morris, Legal Counsel SandersBaker, PC 320 S. Polk, Ste. 700 Amarillo, TX 79101 Facsimile: (806) 372-3725 If to BME: Ralph Yapp, Chief Executive Officer Bumimedic (Malaysia) Sdn. Bhd. No. 3, Jalan 19/1, 46300 Petaling Jaya, Selangor, Malaysia Facsimile: 603-7955-2007 Telephone: 603-7956-7677 Notice so given shall be deemed given and received (i) if by mail on the 15th day after posting; (ii) by cable, telegram, telex or personal delivery on the date of actual transmission, with evidence of transmission acceptance, or (as the case may be) personal or other delivery; and (iii) if by overnight delivery courier, on the next business day following the day such notice is delivered to the courier service. CONFIDENTIAL **** Indicates that a portion of the text has been omitted and filed separately with the Commission. Section 16.03. Severability. Whenever possible, each clause, subclause, provision or condition of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any clause, subclause, provision or condition of this Agreement should be prohibited or invalid under applicable law, such clause, subclause, provision or condition shall be considered separate and severable from this Agreement to the extent of such prohibition or invalidity without invalidating the remaining clauses, subclauses, provisions and conditions of this Agreement. Section 16.04. Entire Agreement/Merger. This Agreement sets forth the entire agreement between the Parties hereto pertaining to the subject matter hereof and supersedes all negotiations, preliminary agreements, memoranda or letters of proposal or intent, discussions and understandings of the Parties hereto in connection with the subject matter hereof. All discussions between the Parties have been merged into this Agreement, and neither Party shall be bound by any definition, condition, understanding, representation, warranty, covenant or provision other than as expressly stated in or contemplated by this Agreement or as subsequently shall be set forth in writing and executed by a duly authorized representative of the Party to be bound thereby. Section 16.05. Amendment. No amendment, change or modification of any of the terms, provisions or conditions of this Agreement shall be effective unless made in writing and signed on behalf of the Parties hereto by their duly authorized representatives. Section 16.06. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original document, but all such separate counterparts shall constitute only one and the same instrument. This Agreement may be signed and delivered to the other Party by facsimile signature; such transmission shall be deemed a valid signature. Section 16.07. No Waiver of Rights. No waiver of any term, provision, or condition of this Agreement, whether by conduct or otherwise, in any one or more instances, shall be deemed to be or construed as a further or continuing waiver of any such term, provision, or condition of this Agreement. CONFIDENTIAL **** Indicates that a portion of the text has been omitted and filed separately with the Commission. Section 16.08. Force Majeure. Neither Party shall be liable hereunder to the other Party nor shall be in breach for failure to deliver, provided failure to deliver is no greater than the delay in time caused by circumstances beyond the control for either Party, including acts of God, fires, floods, riots, wars, civil disturbances, sabotage, accidents, labor disputes, shortages, government actions (including priorities, requisitions, allocations and price adjustment restrictions) and inability to obtain material, equipment, labor or transportation (collectively, "Force Majeure"). Section 16.09. Further Assurances. The Parties hereto shall each perform such acts, execute and deliver such instruments and documents and do all such other things as may be reasonably necessary to accomplish the transactions contemplated in this Agreement. Section 16.10. Assignment and Sublicense. Neither this Agreement nor any of the rights, interests, options or obligations hereunder may be assigned, sublicensed or delegated by either of the Parties without the prior written consent of the other Party, provided, however, that either BME or ABI may, without such consent, assign this Agreement and its rights and obligations hereunder in connection with the transfer or sale of all or substantially all of its business pertaining to this Agreement, or in the event of its merger or consolidation or change in control or similar transaction. Any permitted assignee shall assume all obligations of its assignor under this Agreement. Further, a Party may assign or sublicense any and all of its rights, interests, options, and delegate all obligations hereunder, to any Affiliate of such Party (and such Affiliate may further assign or sublicense this Agreement to such Party or any other Affiliate of such Party) without the consent of the other Party. In the event of an assignment or sublicense to an Affiliate, the assigning Party shall guarantee the performance of such assignee or sublicensee. The assignment or sublicense to an Affiliate shall not operate to discharge the assignor or sublicensor from any obligation under this Agreement. Any assignment that contravenes this Section 16.10 shall be void ab initio. Section 16.11. Expenses. The Parties hereto shall each bear their own costs and expenses (including attorneys' fees) incurred in connection with the negotiation and preparation of this Agreement and consummation of the transactions contemplated hereby. Section 16.12. Binding Effect. This Agreement, and all of the terms, provisions and conditions hereof, shall be binding upon and shall inure to the benefit of the Parties hereto and their respective permitted successors and assigns. Section 16.13. Governing Law. This Agreement shall be construed and interpreted in accordance with the laws of Malaysia if a lawsuit against BME is initiated by ABI , and any such suit shall be brought in Malaysia; this Agreement shall be construed and interpreted in accordance with the laws of Texas , USA, if a lawsuit against ABI is initiated by BME , and any such suit shall be brought in Texas, USA. CONFIDENTIAL **** Indicates that a portion of the text has been omitted and filed separately with the Commission. Section 16.14. Survival of Representations and Warranties. All statements contained herein, or in any schedule hereto, shall be considered a representation, warranty or covenant of the Party making such statement. All representations, warranties, covenants contained herein, or in any schedule hereto, shall survive the closing of this transaction. Section 16.15. No Strict Construction. This Agreement has been prepared jointly and shall not be strictly construed against either Party. Section 16.16. Independent Contractors. The status of the Parties under this Agreement shall be that of independent contractor. No Party shall have the right to enter into any agreements on behalf of the other Party nor shall it represent to any Person that it has such right or authority. IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the Effective Date. AMARILLO BIOSCIENCES, INC. By: /s/ Joseph M. Cummins - ------------------------- Joseph M. Cummins, President and Chief Executive Officer BUMIMEDIC (MALAYSIA) SDN. BHD. By: /s/ Ralph Yapp - ------------------ Ralph Yapp Chief Executive Officer CONFIDENTIAL **** Indicates that a portion of the text has been omitted and filed separately with the Commission. EXHIBIT A SPECIFICATIONS Lozenges Test Item and Specification Appearance Color: White Shape: Cylindrical cut squarish No cracked and no foreign matter Identification No IFN activity after neutralization by anti-IFN antibody Moisture Content <2.0% Weight Variation Not more than 2 of 20 lozenges tested may deviate by more than 7.5% from 200 mg. Disintegration No residue nor spongy substance after 30 min.; if 1 or 2 lozenges failed, repeat the test on 12 additional lozenges; all the 12 tested lozenges should disintegrate completely. Content Uniformity IFN activity of all 10 lozenges tested should be in the range of 100+/-30% of the labeled activity. Results given as the single lozenge furthest from 100%. If the activity of 1 lozenge is in the range of 80-140% of the labeled activity, repeat the test with additional 20 lozenges: The IFN activity of all the 20 lozenges should be in the range of 70-130% of the labeled activity. IFN Activity The average IFN activity of the 10 lozenges should be from 70-130% of the labeled activity. Test Item Specification Sterility Bacteria, Fungi Negative Mycoplasma Negative Specific activity Not less than 5 x 10(7) U/mg protein DNA Not more than 10 pg/5 x 10(6) IU Endotoxin Negative/1 x 10(6) IU Subtype ratio (alpha)2: 74+/-9%, (alpha)8: 26+/-9% Foreign proteins Total not more than 0.1 ug/1 x 10(6) IU Hamster protein Not more than 0.1 ug/1 x 10(6) IU CAF Not more than 0.1 ug/1 x 10(6) IU Sendai virus protein Not more than 0.1 ug/1 x 10(6) IU Mouse IgG Not more than 0.1 ug/1 x 10(6) IU Inducing virus Negative/5 x 10(6) IU Adventitious virus Negative Pyrogen Negative/6 x 10(5) IU Molecular weight 17+/-4 kDa IFN activity Not less than 1 x 10(7) IU/Ml Physical characteristics Colorless and clear solution, no smell, a little salty Identification Neutralization Neutralized by anti-IFN antibody Antiviral activity Positive pH 6.0-7.5 Purity Heavy metal Not more than 1 ppm Arsenic Not more than 0.2 ppm Abnormal Toxicity Negative/5 x 10(6) IU Histamine Negative/1 x 10(6) IU Residue on Ignition Not more than 2.5 mg/1 x 10(6) IU Antigenicity Negative EXHIBIT B FORM OF CERTIFICATE OF COMPLIANCE Issue Date: __________________ CERTIFICATE OF COMPLIANCE FOR CUSTOMER LOT NUMBER FILL DATE PREP/EX DATE DOSAGE QUANTITY The batch production record for this Product has been reviewed for accuracy, completeness, and compliance with the Specifications set forth in the License and Supply Agreement between Amarillo Biosciences, Inc. and BME Pharmaceuticals dated March ___, 2005 (the "Agreement") and the Agreement, and in accordance with cGMP requirements. Any deviations/abnormal occurrences from the aforementioned requirements have been appropriately documented, reviewed, and approved. Reviewed By:_________________________ Batch Record Auditor Date:_________________________ Amarillo Biosciences, Inc. Approved By:_________________________ Acting Supervisor Manager, Documentation Date:_________________________ cc: All Customers EX-31.1 4 v039467_ex31-1.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: March 31, 2006 /s/ Joseph M. Cummins ----------------------------------------------- Name: Joseph M. Cummins Title: President and Chief Executive Officer and Chief Financial Officer EX-99.1 5 v039467_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 Annual Report of Amarillo Biosciences, Inc. on Form 10-KSB for the period ended December 31, 2005 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: March 31, 2006 By: /s/ Joseph M. Cummins ----------------------------------- Joseph M. Cummins President, Chief Executive Officer and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----