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AMARQ > SEC Filings for AMARQ > Form 10-Q on 15-May-2014All Recent SEC Filings




Quarterly Report

ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

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.

Company Goal - FDA Approval and Commercialization of Oral Interferon Amarillo Biosciences, Inc. (OTCBB or OTCQB: AMARQ) is in the development of low-dose interferon for oral delivery, having completed more than 100 pre-clinical (animal) and human studies related to this technology to date. Our current focus is research aimed at the treatment of human disease indications, particularly influenza, hepatitis C et al, thrombocytopenia, and other indications using interferon alpha that is administered in a proprietary low dose oral form.

Intellectual Property
Since inception, the Company has worked to build an extensive patent portfolio for low-dose orally administered interferon. This portfolio consists of patents with claims that encompass method of use or treatment, and/or composition of matter and manufacturing. We presently own or license six issued patents, including one patent on our dietary supplement, Maxisal®. We currently have one pending patent which applies low dose oral interferon to the treatment of Thrombocytopenia.

Technology - Non-toxic Interferon
Injectable interferon is FDA-approved to treat some neoplastic, viral and autoimmune diseases. Many patients experience moderate to severe side effects that result in discontinuance of injectable interferon therapy. Our main product has been a natural human interferon alpha delivered into the oral cavity as a lozenge in low (nanogram) doses. The lozenge dissolves in the mouth where interferon binds to surface (mucosal) cells in the mouth and throat resulting in stimulation of immune mechanisms. Orally delivered interferon has been shown to activate hundreds of immune system genes in the peripheral blood. Human studies have shown that oral interferon is safe and effective against viral and autoimmune diseases. Oral interferon is given in concentrations 10,000 times less than that usually given by injection. The Company's low dose formulation results in almost no side effects; high dose injectable interferon causes adverse effects in at least 50% of recipients.

Governmental or FDA approval is required for our principal product. Our progress toward approval is discussed under each specific indication, below.

Strategic Alliance with HBL
Hayashibara Biochemical Laboratories, Inc. ("HBL") produced a natural form of human interferon alpha and also developed technology relating to the production of interferon alpha-containing lozenges by which the stability of the interferon alpha can be maintained at room temperature. We believe that the use of such lozenges gives us advantages over competitive technologies in terms of cost, taste and ease of handling.

On March 13, 1992, we entered into a Joint Development and Manufacturing/Supply Agreement with HBL (the "Development Agreement"). As of February 1, 2012, HBL began operating under the name Hayashibara Company, Ltd. ("HBC") as a wholly-owned subsidiary of Nagase Corporation. In correspondence received April 23, 2012, HBC informed us that they had decided to permanently halt production of interferon. Written notice was received on September 23, 2012, and the Development Agreement was officially terminated as of December 22, 2012.

The Development Agreement provided us with a source of natural human interferon alpha for use in the Company's interferon alpha-containing products. Termination of the Development Agreement leaves the Company without a current source of interferon with which to conduct clinical trials. The Company is currently exploring its options and is talking with alternate suppliers of interferon.

Historically, the research and development was conducted by ABI using a unique form of natural human interferon supplied by HBL. This interferon no longer provides a competitive edge insomuch as the industry as a whole is rapidly moving toward the use of recombinant interferon rather than natural human interferon. ABI's thirty years of data has been generated from the numerous studies performed using natural human interferon. Since human interferon is virtually impossible to obtain, those studies will have to be repeated using recombinant interferon. Repeating the studies will be both costly and time consuming. While the pharmaceutical industry is creating and marketing new and effective anti-viral medications, ABI believes that there is still sufficient time to develop commercialize low dose interferon for treatment of such diseases as Influenza, Chronic Cough in COPD, Hepatitis B, C, and D, and Thrombocytopenia caused by other diseases and as a side effect of treatment of other diseases.

Strategic Alliance with Bumimedic
In January 2006, a license and distribution agreement was executed with Bumimedic (Malaysia) Sdn. Bhd, a Malaysian pharmaceutical company that is a part of the Antah HealthCare Group, to market our low-dose interferon (natural human IFN) in Malaysia. Given the problems associated with the natural human interferon supply, it is likely that the agreement with Bumimedic will be terminated as the Company can no longer supply Bumimedic with natural human IFN produced by Hayashibara. Once the problems associated with the interferon supply are solved, the Company will most likely endeavor to enter into another such agreement with Bumimedic.

Strategic Alliance with Intas Pharmaceuticals On January 7, 2010, the Company entered into a License and Supply Agreement with Intas Pharmaceuticals Ltd., an India-based pharmaceutical company with three decades of experience in the healthcare industry and a global presence in 42 countries worldwide. Given the termination notice received from HBC, it is likely that the agreement with Intas will be terminated as the Company can no longer supply Intas with natural human IFN produced by Hayashibara. Once the problems associated with the interferon supply are solved, the Company will most likely endeavor to enter into another such agreement with Intas Pharmaceuticals.

Equity Funding. There have been no sales of stock in the first quarter of 2014.

Results of Operations for Quarters Ended March 31, 2014 and 2013:

Revenues. During the quarters ended March 31, 2014, and March 31, 2013 there were no sales of dietary supplements. During the quarters ended March 31, 2014, and March 31, 2013 there were no ACM sales.

Research and Development Expenses. Research and development expenses of $15,270 were incurred for the quarter ended March 31, 2014, compared to $34,129 for the quarter ended March 31, 2013, a decrease of $18,859 (55%). The amount was lower in 2014 than 2013 due to less R&D personnel costs.

Selling, General and Administrative Expenses. Selling, general and administrative expenses of $159,744 were incurred for the first quarter in 2014, compared to $127,162 for the first quarter of 2013, an increase of $32,582 (26%). This increase was mostly due to the addition of Reorganization Expense related to the bankruptcy filing.

Net Operating Loss. In the three-month period ended March 31, 2014, the Company's operating loss was $175,014 compared to an operating loss for the three-month period ended March 31, 2013 of $161,291, a $13,723 increase. There were less expenses overall during the first quarter of 2014, but the addition of Reorganization Expense related to the bankruptcy filing increased the loss.

Change in Fair Value of Derivative Instruments. Change in fair value of derivative instruments was $0 in the first quarter of 2014 compared to a $4,217 gain in the first quarter of 2013.

Interest Expense. During the three-month period ended March 31, 2014, interest expense was $46, compared to $29,483 for the three-month period ended March 31, 2013. The interest expense recognized in the first quarter of 2014 is due to the Post-Petition Financing Facility.

Net Loss. In the three-month period ended March 31, 2014, the Company's net loss was $175,060 compared to a net loss for the three-month period ended March 31, 2013 of $186,557 a $11,497 (6%) decrease. This decrease was mainly due to increased reorganization expense and decrease in interest.

Liquidity Needs. At March 31, 2014, we had available cash of $3,760, and had a working capital deficit of $5,054,909. This includes $43,812 of accrued salaries to an officer; $3,050,746 from loans ($2,000,000) and accrued interest ($1,006,253 from HBL and $44,493 from a related party); loans for $200,000 from a Director; and loans of $1,435,015 from related parties. Negative cash flow from operating activities plus reorganization expense and patent filings (burn rate) is approximately $50,000 per month. Continued losses and lack of liquidity indicate that we are having great difficulty being able to continue as a going concern for a reasonable period of time. The ability to continue as a going concern is dependent upon confirmation of a Plan of Reorganization and successful emergence from Chapter 11 Bankruptcy which includes interim and permanent financing.

There can be no assurance that we will be successful in our efforts to reorganize the Company. If we are not successful in our efforts to reorganize, we will be forced to cease operations.

Forward-Looking Statements: Certain statements made in throughout this document are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Act"). Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate or imply future results, performance, achievements, costs or expenses and may contain words such as "believe," "anticipate," "expect," "estimate," "project," "budget," or words or phrases of similar meaning. Forward-looking statements involve risks and uncertainties which may

cause actual results to differ materially from those projected in the forward-looking statements. Such risks and uncertainties are detailed from time to time in reports filed by the Company with the Securities and Exchange Commission, including Forms 8-K, 10-Q and 10-K and include among others the following: promulgation and implementation of regulations by the U.S. Food and Drug Administration ("FDA"); promulgation and implementation of regulations by foreign governmental instrumentalities with functions similar to those of the FDA; costs of research and development and clinical trials, including without limitation, costs of clinical supplies, packaging and inserts, patient recruitment, trial monitoring, trial evaluation and publication; and possible difficulties in enrolling a sufficient number of qualified patients for certain clinical trials. The Company is also dependent upon a broad range of general economic and financial risks, such as possible increases in the costs of employing and/or retaining qualified personnel and consultants and possible inflation which might affect the Company's ability to remain within its budget forecasts. The principal uncertainties to which the Company is presently subject are its inability to ensure that the results of trials performed by the Company will be sufficiently favorable to ensure eventual regulatory approval for commercial sales, its inability to accurately budget at this time the possible costs associated with hiring and retaining of additional personnel, uncertainties regarding the terms and timing of one or more commercial partner agreements and its ability to continue as a going concern.

The risks cited here are not exhaustive. Other sections of this report may include additional factors which could adversely impact the Company's business and future operations. Moreover, the Company is engaged in a very competitive and rapidly changing industry.

New risk factors emerge from time to time and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on the Company's business, or the extent to which any factor or combination of factors may cause actual results to differ materially from those projected in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual future events.

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