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AMPE > SEC Filings for AMPE > Form 10-Q on 3-May-2013All Recent SEC Filings

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Form 10-Q for AMPIO PHARMACEUTICALS, INC.


3-May-2013

Quarterly Report


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

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion should be read in conjunction with Ampio Pharmaceuticals, Inc.'s historical financial statements filed with this report. The following discussion and analysis contain forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those projected in the forward-looking statements. For additional information regarding these risks and uncertainties, please see Part II, Item 1A of this Form 10-Q, "Risk Factors," and the risk factors included in Ampio's Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 6, 2013.

Overview

Ampio maintains an Internet website at www.ampiopharma.com. Information on or linked to the Company website is not incorporated by reference into this Quarterly Report on Form 10Q. Filings with the SEC can also be obtained at the SEC's website, www.sec.gov.

We are a development stage biopharmaceutical company focused on the rapid development of therapies to treat prevalent inflammatory conditions for which there are limited treatment options. We are primarily focused on providing medicines to improve the health and quality of life of patients with minimal side effects. We are developing compounds that decrease inflammation by
(i) inhibition of specific pro-inflammatory compounds by affecting specific pathways at the protein expression and at the transcription level or
(ii) activation of a specific phosphatase or depletion of the available phosphate needed for the inflammation process and (iii) decreasing vascular permeability - an upstream event in the inflammation cascade. We are also focused on monetizing our sexual dysfunction portfolio and a diagnostic device.

Acquisition

On March 23, 2011, we acquired all of the outstanding stock of DMI BioSciences, Inc. ("BioSciences") for 8,667,905 shares of our common stock (the "merger stock"). We acquired BioSciences in order to obtain all rights to Zertane, BioSciences' male sexual dysfunction drug for premature ejaculation ("PE"). The business combination occurred following the satisfaction or waiver of all conditions to closing. As called for in the merger agreement, Ampio issued 405,066 shares of merger stock to holders of BioSciences in-the-money stock options and warrants, 500,000 shares of merger stock to holders of two BioSciences promissory notes in extinguishment of the notes, and placed 250,000 shares of merger stock in an indemnification escrow until December 31, 2011. The remaining 7,512,839 shares of merger stock were issued to the holders of BioSciences common stock on a pro rata basis. As required by the merger agreement, at the closing BioSciences donated back to Ampio's capital 3,500,000 shares of Ampio common stock formerly owned by BioSciences. Ampio separately issued 212,693 options in replacement of 250,850 Biosciences options that were "out-of-the-money" as of the date of execution of the merger agreement. On June 17, 2011, an additional 223,024 options were issued in exchange for 98,416 previously issued shares of Ampio stock pursuant to an agreement with three former BioSciences option holders. During 2011, we filed a claim on the indemnification escrow and were awarded 95,700 shares of Ampio stock to reflect the full value of the 223,024 options issued in exchange for the shares relinquished. On December 31, 2011 the remaining 154,300 indemnification escrow shares were allocated to the appropriate shareholders. All shares donated back, relinquished and escrow shares awarded to Ampio have been cancelled.

Financing History/Overview

On February 28, 2011, we issued an aggregate of 1,281,852 shares of our common stock in retirement of the Senior Convertible Debentures issued to 21 holders of such debentures. The convertible debentures were previously issued in five tranches. The first tranche consisted of $430,000 in principal amount issued in August 2010 to two directors and an affiliate of one of those directors. The next three tranches consisted of $1.38 million in principal amount issued in October, November and December 2010 to 19 unaffiliated holders (seven of whom were already our shareholders), and the remaining tranche in January 2011 was an increase of $382,000 in principal amount of debentures purchased by five holders who originally purchased debentures in November 2010. The principal amount of the debentures and accrued interest were converted into our common stock at $1.75 per share. Debentures held by two directors and an affiliate of one director were converted on the same terms as debentures held by unaffiliated parties. The debenture holders were collectively issued warrants to purchase 256,389 shares of our common stock as additional consideration for the purchase of the debentures. Those warrants are exercisable at $1.75 per share.

On March 31, April 8 and April 18, 2011, we closed private placements of our common stock (the "2011 Private Placement"). A total of 5,092,880 shares of common stock were issued resulting in gross proceeds of $12,732,200, of which we received net proceeds of $10,916,538, after placement agent commissions, non-accountable expenses and other offering costs. The placement agent also received 509,288 warrants valued at $888,664 in connection with the closing. We applied a portion of the private placement proceeds in March and April 2011 to pay accrued expenses, to pay accrued salaries owed to certain of our officers, to reduce accounts payable, and to repay a $100,000 promissory note to Michael Macaluso, our chief executive officer and chairman of the board.


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In September 2011, we filed a "shelf" registration statement on Form S-3 with the Securities and Exchange Commission to register our common stock and warrants in an aggregate amount of up to $80 million for offering from time to time in the future. The registration statement also registers for possible resale up to one million shares of common stock to be sold by directors and management (as selling shareholders) in future public offerings. On October 13, 2011 we filed an amendment to identify potential selling shareholders and the number of shares they would be eligible to sell in the event of a future public offering. The shelf registration was declared effective on October 28, 2011 by the Securities and Exchange Commission. At March 31, 2013 Ampio had $53.7 million available for future public offerings along with 714,900 shares remaining for future sale by named selling shareholders.

In December 2011, we completed a registered direct offering of our common stock A total of 2,220,255 shares were issued at a price of $4.25 per share resulting in gross proceeds of $9,436,084, of which we received net proceeds of $8,454,001, after placement agent commissions, non-accountable expenses and other offering costs. No warrants were issued.

In July 2012, we completed an underwritten public offering for the sale of 5,203,860 shares of common stock at a price of $3.25 per share. Gross proceeds to Ampio were $16,912,545 with net proceeds of $15,353,150 after underwriter fees and cash offering expenses. We also issued warrants to purchase 138,462 shares of common stock to the underwriters. These warrants have an exercise price of $4.0625 and can be exercised from the period July 12, 2013 through July 12, 2017. Certain shareholders also became selling shareholders and received gross proceeds of $926,575 from the offering of 285,100 shares as provided in the registration statement.

The net proceeds of the above offerings have been or will be used for general corporate purposes and working capital, including the continued progress of research and development of our product candidates, the completion of clinical trials and regulatory approvals, and preparing, filing, prosecuting, maintaining, defending, and enforcing patent claims and other intellectual property rights.

In January 2013, we formed a subsidiary, Luoxis Diagnostics, Inc. (Luoxis) to focus on the development and commercialization of our Oxidation Reduction Potential (ORP) technology platform. Luoxis was initially funded through a private placement which had a closing on March 15, 2013 with $3,465,000 in gross proceeds. Net proceeds were $2,934,040 after placement agent and legal fees. Prior to the private placement, Ampio incurred all of the costs associated with the development of the ORP platform. As a result of the private placement, Ampio now owns 85.02% of Luoxis Diagnostics.

Product Update

We continue to execute our business plan and have moved forward on our three main drug candidates and our device development.

Ampion for Osteoarthritis of the Knee

In December 2012, we submitted an IND to the FDA for the Phase 3 pivotal trial based upon the guidance received at the pre-IND meeting with the FDA in May 2012. Our prior IND submission and FDA guidance suggested we would complete two Phase 3 studies (AP-003 and AP-004) with respect to Ampion™, each enrolling approximately 800 patients. In February 2013, we received new formal guidance from the FDA indicating that the Company should conduct a dose ranging study "as a Phase 2 dose-escalation study or as a run-in study for one of the Phase 3 studies." Accordingly, we submitted an updated trial protocol to the FDA and they approved it in late March. Known as the SPRING trial, Ampion is being evaluated for its effect on reducing pain as a single intra-articular injection into the knee in 4 milliliter (mL) and 10 milliliter (mL) volumes as compared to placebo at twelve weeks. The study enrolled in excess of the targeted 320 patient goal. The study was designed as a run-in to a Phase 3 pivotal trial which we will initiate once the optimal volume is determined and the proposed pivotal trial is properly powered to achieve its scientific objectives. Twelve week primary endpoint data are expected in the third quarter of 2013. We also modified our contract with our own Ampion clinical research organization (Ampion CRO) to reflect the revised IND. The contract total is approximately $2.5 million and is expected to be paid over the course of the next eight months, subject to the achievement by the Ampion CRO of specified milestones.

Optina for Diabetic Macula Edema

The FDA granted OptinaTM 505(b)(2) status in July, 2012, and we commenced enrollment in the clinical trial in February 2013. Drugs designated under this pathway can be approved on a single trial. The multicenter trial is designed to evaluate the safety and efficacy of oral OptinaTM compared with placebo given over a period of 12 weeks in adult patients with DME. Patients will be randomized to receive one of two doses of Optina™ (0.5mg per BMI and 1.0mg per BMI per day) or placebo. After patients have completed 4 weeks of initial treatment, an interim analysis will occur to determine the best dose of OptinaTM. Following the 12 week active treatment period, there will be a further 4 week washout period to determine regression of treatment effect. The primary


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endpoint is improvement in visual acuity (VA), defined by responder status, compared to placebo. Secondary endpoints are (i) measurements of changes in VA and central macular thickness (CMT) in treated patients compared to placebo, and
(ii) safety and tolerability of the two Optina™ doses. Following treatment and washout, patients will be assessed for vision regression and a 12 week open label extension study will be offered to evaluate the duration of effect of the optimal dose. A total of 450 patients are expected to enroll. On February 27, 2013, we announced oral dosing of the first patient in the Optina Trial. The Optina clinical research organization (Optina CRO) contract total is approximately $5.9 million and is expected to be paid over the course of the next nine months, subject to the achievement by the Optina CRO of specified milestones.

Zertane for Male Sexual Dysfunction

We reached agreement with the Australian Therapeutic Goods Administration (TGA) on a plan for preparation of manufacturing and common technical documents to obtain regulatory approval for Zertane in Australia. The preliminary submission is expected to be made in the second quarter of 2013 and we hope to obtain approval in Australia in late first quarter or second quarter of 2014.

On March 11, 2013, we announced the FDA's acceptance of our Patient Outcome for Premature Ejaculation (POPE) questionnaire, a modification of the questionnaire that was used in the two successful Zertane Phase 3 clinical trials completed in Europe. The acceptance by the FDA of the POPE questionnaire allows us, or a partner, to file an IND with the FDA for a pivotal trial of Zertane.

ORP, Point-of-Care Diagnostic Device

In January 2013, we formed a subsidiary, Luoxis, to focus on the development and commercialization of our Oxidation Reduction Potential (ORP) technology platform. All technology and patents related to the ORP technology platform have been assigned to Luoxis. The initial funding of operations was through a private placement completed on March 15, 2013 for net proceeds of $2,934,040 representing a 14.98% non-controlling interest.

NCE001: Methylphenidate

An independent third party has completed lead optimization. We are currently confirming those results, and then we plan to pursue preclinical toxicology studies.

Known Trends or Future Events

We have not generated any significant revenues and have therefore incurred significant net losses totaling $43.7 million since our inception in December 2008. The assets we purchased from BioSciences in April 2009 generated minimal revenues prior to their acquisition. Although we have raised capital in the past and raised net proceeds of $2.9 million, $15.4 million and $19.4 million through the sale of common stock in 2013, 2012 and 2011, respectively, we cannot assure you that we will be able to secure such additional financing, if needed, or that it will be adequate to execute our business strategy. Even if we obtain additional financing, it may be costly and may require us to agree to covenants or other provisions that will favor new investors over existing shareholders.

We expect to incur losses from operations for the foreseeable future. We expect to incur substantial research and development expenses, including expenses related to clinical trials for Ampion and Optina. We also intend to limit the extent of these losses by entering into co-development, collaboration agreements or a sale with one or more strategic partners for our sexual dysfunction portfolio and the monetization of ORP either through a sale or an initial public offering of Luoxis. At this time, due to the risks inherent in the clinical trials and the stage of development of our product candidates, we are unable to estimate with any certainty the additional costs we will incur for the continued development of our product candidates for commercialization as clinical development timelines, probability of success, and development costs vary widely.

Significant Accounting Policies and Estimates

Our financial statements have been prepared in accordance with accounting policies generally accepted in the United States of America. The preparation of the financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to recoverability of long-lived assets, fair value of our derivative instruments, allowances and contingencies. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.


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Actual results may differ from these estimates under different assumptions or conditions. The methods, estimates, and judgments used by us in applying these most critical accounting policies have a significant impact on the results we report in our financial statements.

Our significant accounting policies and estimates are included in our 2012 Annual Report reported on form 10-K, filed with the SEC on March 6, 2013. During the first three months of 2013, there were no significant changes to our significant accounting policies and estimates.

Results of Operations - March 31, 2013 Compared to March 31, 2012

Results of operations for the three months ended March 31, 2013 (the "2013 period") and the three months ended March 31, 2012 (the "2012 period") reflected losses of approximately $4,208,000 and $2,836,000, respectively. These losses include non-cash income and charges related to derivative income/expense, stock based compensation, losses and income on the fair value of debt instruments and depreciation and amortization in the amount of $831,000 in the 2013 period and $99,000 in the 2012 period.

Revenue

We are a development stage enterprise and have not generated material revenue in our operating history. The $12,500 license revenue recognized in the 2013 period and 2012 period represents the amortization of the upfront payment received on our license agreement. The initial payment of $500,000 from the license agreement of Zertane with a Korean pharmaceutical company was deferred and will be recognized over 10 years.

Expenses

Research and Development

Research and development costs are summarized as follows:



                                                 Three Months Ended March 31,
                                                    2013                2012
      Labor                                    $       318,000       $   397,000
      Patent Costs                                     462,000           353,000
      Stock-based compensation                         155,000            57,000
      Clinical trials and sponsored research         1,684,000           468,000
      Consultants                                      168,000           198,000

                                               $     2,787,000       $ 1,473,000

Research and development costs consist of labor, research and development of patents and intellectual property, stock-based compensation as well as drug development and clinical trials. Costs of research and development increased $1,314,000 for the 2013 period compared to the 2012 period principally as a result of the initiation of our clinical trials for Ampion and Optina which include the costs related to the study drugs and the clinical research organization. Labor costs decreased as a result of a better optimization of resources. Patent costs increased as we continue to maintain and strengthen our patent portfolio on our primary product candidates.

General and Administrative

General and administrative costs are summarized as follows:



                                           Three Months Ended March 31,
                                              2013                2012
           Labor                         $       216,000       $   759,000
           Stock-based compensation              532,000           183,000
           Professional fees                     170,000           131,000
           Occupancy, travel and other           353,000           396,000
           Directors fees                         41,000            67,000

                                         $     1,312,000       $ 1,536,000

General and administrative costs decreased $224,000 primarily as a result of decreased labor costs off-set by increased stock-based compensation. The labor costs in the 2012 period include an employment agreement payout to our former CEO who was


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granted an indefinite compassionate leave of absence. The increase in stock-based compensation reflects vesting of awards granted in previous years and the first quarter of 2013.

Derivative income (expense)

We recorded $126,478 of non-cash derivative expense in the 2013 period compared to $156,979 in non-cash derivative income in the 2012 period in connection with our hybrid financial instruments consisting of debentures and related warrants. These amounts relate to the subsequent changes in fair value of the debentures issued in 2011 and 2010 stemming from the embedded derivative features
(conversion options, down-round protection and mandatory conversion provisions)
and the changes in fair value of warrants issued in conjunction with the debentures.

Net Cash Used in Operating Activities

During the 2013 period, our operating activities used approximately $3.6 million in cash which was less than the net loss of $4.2 million primarily as a result of the non-cash stock based compensation.

In the 2012 period, the use of cash was $3.1 million and was greater than the $2.8 million net loss principally as a result of a reduction in accounts payable, stock based compensation and the non-cash derivative income.

Net Cash Used in Investing Activities

During the 2013 period, cash was used to acquire ORP patents on behalf of Luoxis
- See Note 2-Formation of Subsidiary. Fixed assets reflect purchases of a new server system, a lab scope, and an ORP manufacturing device.

Net Cash from Financing Activities

Net cash provided by financing activities of $3.0 million reflects proceeds from the Luoxis private financing of $2.9 million and $0.1 million from the exercise of stock options.

Liquidity and Capital Resources

As a development stage biopharmaceutical company, we have not generated significant revenue as our primary activities are focused on research and development, advancing our primary product candidates, and raising capital. As of March 31, 2013, we had cash and cash equivalents totaling $16.5 million available to fund our operations and $1.2 million in payables. Based upon our current expectations, we believe our capital resources at March 31, 2013 will be sufficient to fund our currently planned operations for the next 12 months. This estimate is based on a number of assumptions that may prove to be wrong, and we could exhaust our available cash and cash equivalents earlier than presently anticipated. We may be required or choose to seek additional capital within the next 12 months to expand our clinical development activities for Ampion and Optina based on the positive results of our ongoing clinical trials to fund costs of planning for a commercial launch of Ampion or Optina, if we face challenges or delays in connection with our clinical trials, or to maintain minimum cash balances that we deem reasonable and prudent. In addition, we intend to evaluate the capital markets from time to time to determine whether to raise additional capital in the form of equity, convertible debt or otherwise, depending on market conditions relative to our need for funds at such time, and we may seek to raise additional capital within the next 12 months should we conclude that such capital is available on terms that we consider to be in the best interests of us and our stockholders.

We have prepared a budget for 2013 which reflects cash requirements for fixed, on-going expenses such as payroll, legal and accounting, patents and overhead at an average cash burn rate of between $550,000 and $600,000 per month. Additional funds in the amount of approximately $9.0 million are planned for regulatory approvals and completion of clinical trials. To the extent we decide to further expand our clinical trials, it will be necessary to raise additional capital and/or enter into licensing or collaboration agreements. At this time, we expect to satisfy our future cash needs through private or public sales of our securities or debt financings. We cannot be certain that financing will be available to us on acceptable terms, or at all. In recent years, volatility in the financial markets has adversely affected the market capitalizations of many pharmaceutical companies and generally made equity and debt financing more difficult to obtain. This volatility, coupled with other factors, may limit our access to additional financing.

If we cannot raise adequate additional capital in the future when we require it, we will be required to delay, reduce the scope of, or eliminate one or more of our research or development programs or our commercialization efforts. We also may be required to relinquish greater or all rights to product candidates at an earlier stage of development or on less favorable terms than we would otherwise choose. This may lead to impairment or other charges, which could materially affect our balance sheet and operating results.


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Off Balance Sheet Arrangements

We do not have off-balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons, also known as "variable interest entities."

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