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AMPE > SEC Filings for AMPE > Form 10-Q on 8-Nov-2013All Recent SEC Filings

Show all filings for AMPIO PHARMACEUTICALS, INC.

Form 10-Q for AMPIO PHARMACEUTICALS, INC.


8-Nov-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 consolidated 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 primarily developing compounds that decrease inflammation by (i) inhibiting specific pro-inflammatory compounds by affecting specific pathways at the protein expression and at the transcription level; (ii) activating specific phosphatase or depleting available phosphate needed for the inflammation process; and
(iii) decreasing vascular permeability. We are also focused on monetizing our sexual dysfunction portfolio and diagnostic platform.

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, BioScience's 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.

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


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registration was declared effective on October 28, 2011 by the Securities and Exchange Commission. At September 30, 2013 Ampio had $28.4 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 funded through a private placement which had a final closing on May 31, 2013 with $4,652,500 in gross proceeds. Net proceeds were $3,980,290 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 80.9% of Luoxis.

In September 2013, we completed a registered direct placement offering for the sale of 4,600,319 shares of common stock at a price of $5.50 per share. Our net proceeds from this offering, after deducting our estimated offering expenses, was $25.0 million. We anticipate that we will use the net proceeds from this offering for working capital and for general corporate purposes, including continuation and completion of our Ampion and Optina clinical trials, potential submission of a BLA relating to Ampion and a NDA relating to Optina, acquisition of manufacturing equipment and related outfitting in connection with the leasing of a new manufacturing facility and the potential hiring of additional personnel to manufacture Ampion.

Product Update

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

Ampion for Osteoarthritis of the Knee

On August 14, 2013 and September 30, 2013, we announced results of the SPRING study of Ampion for the treatment of osteoarthritis of the knee. The SPRING study was a U.S. multicenter randomized (1:1:1:1), double-blind, vehicle controlled trial designed to evaluate the safety and efficacy of Ampion in osteoarthritis of the knee patients. 329 patients were randomized to receive one of two doses (4 mL or 10 mL) of Ampion or corresponding saline control via intra-articular injection. The primary study objective was to evaluate the relative efficacy of Ampion 4 mL versus Ampion 10 mL. The primary endpoint was mean change in pain as measured on the WOMAC, a standardized scoring metric for pain, from baseline for Ampion compared to the same volume of saline. Secondary endpoints included evaluating safety and quality of life, as well as stiffness and function. Ampion dose cohorts experienced statistically significant reductions in pain compared to control. There were no significant differences between the efficacy of the two Ampion doses. Selection of the optimal dose for the Phase III pivotal trial will be decided in consultation with the FDA. A brief summary of the combined Ampion topline results is as follows:

• Patients receiving Ampion achieved significantly greater reduction in pain (WOMAC A) from baseline to 12 weeks compared to saline vehicle control (p = 0.0038) and over the whole period of 12 weeks (p = 0.01)

• Clinical efficacy defined as pain reduction was evident as early as four weeks after the injection (p = 0.025) and continued to show improvement through 12 weeks (p = 0.0038)

• Patients receiving Ampion experienced, on average, a 42.3% reduction in pain from baseline

• Kellgren-Lawrence IV patients receiving Ampion achieved significantly greater reduction in pain (WOMAC A) from baseline to 12 weeks compared to saline vehicle control (p = 0.017)

• Patients receiving Ampion achieved significantly greater improvement in function (WOMAC C) from baseline to 12 weeks compared to saline vehicle control (p = 0.044)

• Patients receiving Ampion also demonstrated significantly greater improvement in overall quality of life measures (Patient Global Assessment) from baseline to 12 weeks compared to saline vehicle control
(p = 0.012)

• Ampion was well tolerated with minimal adverse events (AEs) reported in the study. AEs were well balanced between Ampion and control groups. There were no drug-related serious adverse events (SAEs)


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Subsequently, we released 20 week data from the 4 mL cohort of the SPRING trial including patients' rated Kellgren-Lawrence grade 3 or grade 4 as determined at the time of initial screening. We excluded patients' rated Kellgren-Lawrence grade 2 for this particular sub-population analyses in order to highlight results in patients with moderate to severe osteoarthritis of the knee. The SPRING trial extension to week 20 was not defined a priori, and therefore the 4 mL patient cohort included 97 patients in the extension study, 66% of which were Kellgren-Lawrence grade 3 or 4.

• 50% of patients receiving Ampion were considered responders at week 20 compared to 25% in the vehicle control group (p = 0.04). Patients were considered responders if they achieved 40% or greater improvement in pain (WOMAC A) and function (WOMAC C).

• Patients receiving Ampion achieved significantly greater reduction in pain (WOMAC A) from baseline to 20 weeks compared to saline vehicle control (p = 0.02) and over the whole period of 20 weeks (p = 0.005)

• Patients receiving Ampion achieved significantly greater improvement in function (WOMAC C) from baseline to 20 weeks compared to saline vehicle control (p = 0.05) and over the whole period of 20 weeks (p = 0.04)

On October 29, 2013, we presented and discussed the Ampion clinical data with the FDA in a Type B pre-BLA (Biologics License Application) meeting that was informative and constructive. The formal response from the FDA in regards to what activities will be required to complete the BLA process is typically received within 30 days of the pre-BLA meeting and we await their guidance.

On October 10, 2013, we entered into a Human Serum Albumin Ingredient Purchase and Sale Agreement (the Agreement) with a major, global manufacturer, which will provide a long term dedicated supply of human serum albumin (the "Product"). Under the Agreement, the Company has agreed to purchase a pre-determined quantity of the Product sufficient for Ampio to serve the osteoarthritis patient population currently undergoing treatment. The agreement sets minimum and maximum annual quantities that may be purchased but it enables Ampio to increase such maximum with notice, so Ampio should not be limited in its ability to treat additional patient populations where the anti-inflammatory capabilities of Ampion may show clinical benefit. The term of the Agreement commenced on October 10, 2013 and continues through December 31, 2018. The total commitment by the Company over the period is $11,475,000. The term of the Agreement may be extended 5 additional years at the completion of the second year by written agreement of both parties. The Agreement provides for early termination by advance written notice or for uncured breach as well as representations, warranties and indemnity obligations customary for agreements of this type.

Optina for Diabetic Macula Edema

On October 7, 2013, we received positive results from the interim analysis of Optina trial for diabetic macular edema. After review of the interim data from the ongoing study, it was determined that there was a treatment dosage that was demonstrating a potentially beneficial anatomic effect. Given that there were no significant safety concerns identified in the study to date, a recommendation to continue the trial was made. This allowed the immediate initiation of an open label extension study using the optimum dose of Optina for all patients who have completed the trial and wish to continue treatment for an additional 12 weeks.

ORP, Point-of-Care Diagnostic Device

On October 1, 2013 Luoxis Diagnostics announced results from a recently completed clinical study of patients with isolated traumatic brain injury ("iTBI"). This study demonstrated statistically significant correlations between Oxidation Reduction Potential ("ORP") and the severity of injury among iTBI patients. ORP is measured using the company's proprietary RedoxSYS™ diagnostic system, a point-of-care diagnostic system enabling rapid analysis of multiple markers of oxidative stress. Increases in plasma static Oxidation Reduction Potential (spot measurement, sORP) levels were consistently shown to closely correlate with increases in iTBI severity as measured by the Abbreviated Injury Score (p=0.02). The Company also announced the issuance of its third US patent (US patent number 8,512,548) for the RedoxSYS diagnostic system.

Known Trends or Future Events

We have not generated any significant revenues and have therefore incurred significant net losses totaling $56.2 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 $29.0 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 and commercialization of 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.


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Significant Accounting Policies and Estimates

Our consolidated financial statements have been prepared in accordance with accounting policies generally accepted in the United States of America. The preparation of the consolidated 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. 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 nine months of 2013, there were no significant changes to our significant accounting policies and estimates.

Results of Operations - September 30, 2013 Compared to September 30, 2012

Results of operations for the three months ended September 30, 2013 (the "2013 quarter") and the three months ended September 30, 2012 (the "2012 quarter") reflected losses of approximately $6,194,000 and $2,584,000, respectively. These losses include non-cash income and charges related to derivative income/expense, stock-based compensation, common stock issued for services and depreciation and amortization in the amount of $1,142,000 in the 2013 quarter and $97,300 in the 2012 quarter.

Results of operations for the nine months ended September 30, 2013 (the "2013 period") and the nine months ended September 30, 2012 (the "2012 period") reflected losses of approximately $16,995,000 and $7,916,000, respectively. These losses include non-cash charges related to derivative expense/income, stock-based compensation, common stock issued for services and depreciation and amortization in the amount of $2,925,000 in the 2013 period and $777,000 in the 2012 period.

Revenue

We are a development stage enterprise and have not generated material revenue in our operating history. The $37,500 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 is being recognized over 10 years.

Expenses

Research and Development

Research and development costs are summarized as follows:



                                       Three Months Ended September 30,            Nine Months Ended September 30,
                                         2013                    2012                  2013                  2012
Labor                              $         359,000       $         387,000     $       1,023,000       $  1,120,000
Patent costs                                 384,000                 416,000             1,358,000          1,092,000
Stock-based compensation                     605,000                 135,000             1,186,000            311,000
Clinical trials and sponsored
research                                   3,400,000               1,159,000             8,970,000          2,357,000
Consultants                                   55,000                  38,000               302,000            280,000

                                   $       4,803,000       $       2,135,000     $      12,839,000       $  5,160,000

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 $2,668,000, or 125%, for the 2013 quarter compared to the 2012 quarter and $7,679,000, or 149%, for the 2013 period compared to the 2012 period. The increases are principally the result of clinical trials for Ampion and Optina, and the Luoxis development of its ORP platform. Stock-based compensation increased due to the incremental stock options awarded in both Ampio and Luoxis and the continuing vesting of awards granted in previous years.


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General and Administrative

General and administrative costs are summarized as follows:



                                         Three Months Ended September 30,             Nine Months Ended September 30,
                                            2013                   2012                 2013                   2012
Labor                                $          290,000       $       172,000     $        775,000       $      1,083,000
Stock-based compensation                        246,000               156,000            1,124,000                552,000
Professional fees                                98,000                50,000              382,000                283,000
Occupancy, travel and other                     466,000               245,000            1,261,000                838,000
Directors fees                                   52,000                55,000              142,000                185,000

                                     $        1,152,000       $       678,000     $      3,684,000       $      2,941,000

General and administrative costs increased $474,000, or 70%, for the 2013 quarter compared to the 2012 quarter. The increases are primarily due to increased professional staffing in Luoxis, stock option awards granted by Luoxis and continuing vesting of Ampio awards granted in previous years, and occupancy, travel and other. These other expenses also include insurance and investor relations.

For the 2013 period, general and administrative costs increased $743,000, or 25%, compared to the 2012 period primarily as a result of increases in stock-based compensation and occupancy, travel and other which were off-set by a reduction in labor due to a first quarter 2012 one-time payout to our former CEO pursuant to the terms of the employment agreement.

Derivative (expense) income

We recorded $251,610 of non-cash derivative expense in the 2013 quarter compared to $208,934 of non-cash derivative income in the 2012 quarter and $517,477 of non-cash derivative expense in the 2013 period compared to $132,687 of 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 $14.1 million in cash which was less than the net loss of $16.7 million primarily as a result of the non-cash stock based compensation and derivative expense.

In the 2012 period, the use of cash was $7.1 million and was approximately the same as the $7.9 million net loss principally as a result of non-cash stock-based compensation being off-set by changes in prepaid expense and accounts payable.

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 a Luoxis ORP manufacturing device.

Net Cash from Financing Activities

Net cash provided by financing activities in the 2013 period of $29.1 million reflects proceeds from the registered direct placement of $25.0 million, Luoxis' private financings of $4.0 million and $0.1 million from the exercise of stock options and warrants.

In the 2012 period, net cash provided by financing activities was $16 million. During the period, Ampio completed an underwritten public offering, with net proceeds of $15.4 million, exercise of stock options and warrants of $630,000 and repayment of $37,000 related to stockholder advances made in 2010.


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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 September 30, 2013, we had cash and cash equivalents totaling $32.1 million and $1.2 million in accounts payable, of which $2.6 million of the cash and cash equivalents and $0.2 million in payables related to Luoxis. Based upon our current expectations, we believe our capital resources at September 30, 2013 will be sufficient to fund our currently planned operations into the first quarter of 2015. 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 to expand our clinical development activities for Ampion and Optina. This could be necessary either assuming positive results of our ongoing . . .

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