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AMPE > SEC Filings for AMPE > Form 10-K on 14-Feb-2014All Recent SEC Filings

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Form 10-K for AMPIO PHARMACEUTICALS, INC.


14-Feb-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the related notes appearing elsewhere in this report. Some of the information contained in this discussion and analysis, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. You should read the "Risk Factors" section of this Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

Ampio Pharmaceuticals, Inc. is a development stage biopharmaceutical company focused primarily on the development of therapies to treat prevalent inflammatory conditions for which there are limited treatment options. Ampio's two lead product candidates in development are Ampion for osteoarthritis of the knee and Optina for diabetic macular edema. We are also focused on developing and monetizing our ORP diagnostic device and sexual dysfunction portfolio.

Dose Ranging SPRING Pivotal Trial Results.

On August 14, 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, from baseline for Ampion compared to the same volume of saline. Secondary endpoints included evaluating safety and disease severity, as well as stiffness and function. Both Ampion dose cohorts experienced statistically significant reductions in pain compared to control, and there were no significant differences between the efficacy of the two Ampion doses. 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 -0.25 (95% CI: -0.41 to -0.08, p = 0.004).

Patients receiving Ampion experienced, on average, a greater than 40% reduction in pain from baseline.

Patients receiving Ampion achieved significantly greater reduction in pain, WOMAC A, across 12 weeks compared to saline vehicle control (p = 0.01)

Patients receiving Ampion also 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 Patient Global Assessment ("PGA") of disease severity from baseline to 12 weeks compared to saline vehicle control (p = 0.012).

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).

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

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").

On February 4, 2014, we announced that an article reporting the results of the SPRING study was published in PLOSE ONE, an international, open-access, online publication. The article entitled: "A Randomized Clinical Trial to Evaluate Two Doses of an Intra-Articular Injection of LMWF-5A in Adults with Pain Due to Osteoarthritis of the Knee" details the efficacy and safety outcomes of the use of Ampion in the SPRING study.

We decided to follow 97 patients who were administered either 4 mL Ampion or saline vehicle control for an additional 8 weeks past the original 12 week primary endpoint. At week twenty, 50% of patients in the Kellgren-Lawrence grades of 3 and 4 (severe osteoarthritis) had improvement of 40% or more in the WOMAC A pain scale compared to 25% in the vehicle control group (p=0.04). Patients were also classified as "responders" if they achieved 40% or greater improvement in pain, WOMAC A, and function, WOMAC C, at and over 20 weeks after a single intra-articular injection into the knee. In these same grade 3 & 4 patients, there was a


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statistically significant improvement in pain, WOMAC A, compared to the vehicle control both at week 20 (p=0.02) and over the whole period of 20 weeks (p=0.005). Also in these same grade 3 & 4 patients, there was a statistically significant improvement in function, WOMAC C, compared to vehicle control both at week 20 (p=0.05) and over the whole period of 20 weeks (p=0.04).

Ongoing US Clinical Trials

On January 13, 2014, we announced the first patient injection in the Phase III final pivotal clinical trial of Ampion for the treatment of osteoarthritis of the knee. The Phase III STEP study has been designed to enroll 500 patients and the primary endpoint is reduction in pain for patients treated with Ampion compared to vehicle control at 12 weeks. STEP is a randomized, placebo-controlled, double-blind study in which patients with osteoarthritis knee pain will be randomized to receive either a 4 mL single injection of Ampion or saline control. The clinical effects of treatment on osteoarthritic pain will be evaluated during clinic visits at 6, 12, and 20 weeks using WOMAC Osteoarthritis Index and the PGA of disease severity. Safety will be assessed by recording adverse events, concomitant medications, physical examination, vital signs and clinical laboratory tests. Topline results are anticipated in the third quarter of 2014.

We commenced enrollment in a 450 patient Phase IIb trial in February 2013 of Optina for the treatment of DME. The U.S. multicenter dose ranging trial is designed to evaluate the safety and efficacy of oral Optina compared with placebo over 12 weeks in adult patients with DME. The active treatment duration of 12 weeks is the maximum time allowed to withdraw treatment in the ophthalmology community. We have enrolled over 300 patients and expect enrollment to be completed in the first quarter of 2014. Patients are randomized (1:1:1) to receive one of two oral doses of Optina (0.5 mg per BMI and 1.0 mg per BMI per day) or placebo. The primary endpoint is improvement in best-corrected visual acuity in treated patients compared to a placebo. Secondary endpoints are (i) measurements of changes in central macular thickness in treated patients compared to a placebo and (ii) safety and tolerability of the two Optina doses. Additionally, patients from the active treatment arms of the trial will be followed for four weeks without treatment following the 12 week treatment period in order to study any regression of effect. All patients will also be given the option to enter into an open label extension of the trial. The open label study will evaluate patients' improvement in BCVA over 12 weeks by administering the optimal dose of Optina. The optimal dose was determined by an interim analysis occurring at week 4 involving approximately 150 patients.

Recent Financing Activities

On September 30, 2011 Ampio filed a "shelf" registration statement on Form S-3 with the Securities and Exchange Commission ("SEC") to register Ampio common stock and warrants in an aggregate amount of up to $80 million for offering from time to time in the future. The shelf registration was declared effective on October 28, 2011 by the SEC. Of the $80 million in Ampio common stock registered under the shelf, $28.4 remains under such registration statement after the sales referenced below.

On December 26, 2013, Ampio filed an additional shelf registration statement on Form S-3 with the SEC to register Ampio common stock and warrants in an aggregate amount of up to $100 million for offering from time to time in the future. The registration statement also registers for possible resale up to 1,500,000 shares of common stock to be sold by directors and management (as selling shareholders) in future public offerings. The shelf registration was declared effective on January 22, 2014 by the Securities and Exchange Commission.

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 $4,652,000 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.

On September 25, 2013, Ampio entered into a Securities Purchase Agreement with a limited number of purchasers, mainly institutional investors, with respect to a registered direct offering of 4,600,319 shares of the Company's common stock, par value $0.0001 per share, at a price of $5.50 per share. Net proceeds from the offering, after deducting offering expenses, were $25 million. No placement agent was used for the offering. The proceeds from the offering will be used 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.

Known Trends or Future Events; Outlook

We have not generated any significant revenues and have therefore incurred significant net losses totaling approximately $64 million since our inception in December 2008. The assets we purchased from BioSciences in April 2009 generated minimal revenues prior to their acquisition. We expect to generate operating losses for the foreseeable future, but intend to try to limit the extent of these losses by entering into co-development or collaboration agreements with one or more strategic partners. Although we have raised capital in the past and with net proceeds of $29 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.


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Our primary focus is advancing the clinical development of our core assets:
Ampion and Optina. We have previously announced the initiation of a Phase III final pivotal trial of Ampion in osteoarthritis of the knee and a Phase IIb clinical trial of Optina in diabetic macular edema. These trials will be blinded and conducted by third party clinical research organizations. On December 16, 2013, we announced a ten-year lease of a multi-purpose facility containing 19,346 square feet. This facility will include an FDA compliant clean room to manufacture Ampion and will be our new headquarters. The facility is expected to be operational by the summer of 2014.

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 consolidated 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 consolidated financial statements.

Patents

Costs of establishing patents consisting of legal fees paid to third parties and related costs are currently expensed as incurred. We will continue this practice unless we can demonstrate that such costs add economic value to our business, in which case we will capitalize such costs as part of intangible assets. The primary consideration in making this determination is whether or not we can demonstrate that such costs have, in fact, increased the economic value of our intellectual property. Legal and related costs which do not meet the above criteria will be expensed as incurred. The $500,000 fair value of the Zertane patents acquired in connection with the March 2011 acquisition of BioSciences is being amortized over the remaining U.S. patent lives of approximately 11 years beginning April 2011.

In-Process Research and Development

In-process research and development ("IPRD") relates to the Zertane product and clinical trial data acquired in connection with the March 2011 business combination of BioSciences. The $7,500,000 recorded was based on an independent third party appraisal of the fair value of the assets acquired. IPRD is considered an indefinite-lived intangible asset and its fair value will be assessed for impairment annually and written down if impaired. Once the Zertane product obtains regulatory approval and commercial production begins, IPRD will be amortized over its estimated useful life. If the commercialization of Zertane becomes impracticable or we abandon this drug, we will expense the $7.5 million IPRD asset.

Research and Development

Research and development costs are expensed as incurred. These costs consist primarily of expenses for personnel engaged in the design and development of product candidates; the scientific research necessary to produce commercially viable applications of our proprietary drugs or compounds; early stage clinical testing of product candidates or compounds; expenditures for design and engineering of the ORP product; and development equipment and supplies, facilities costs and other related overhead.

Stock-Based Compensation

We account for stock-based payments by recognizing compensation expense based upon the estimated fair value of the awards on the date of grant. We determine the estimated grant fair value of options using the Black-Scholes option pricing model and recognize compensation costs ratably over the vesting period using the straight-line method. Common stock issued in exchange for services is recorded at the fair value of the common stock at the date at which we become obligated to issue the shares. The value of the shares is expensed over the requisite service period.

Derivatives

We account for hybrid financial instruments (debentures with embedded derivative features - conversion options, down-round protection and a mandatory conversion provision) and related warrants by recording the fair value of each hybrid instrument in its entirety and recording the fair value of the warrant derivative liability. The fair value of the hybrid financial instruments and warrants


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was calculated using a binomial-lattice-based valuation model. We recorded a derivative expense at the inception of each instrument reflecting the difference between the fair value and cash received. Changes in the fair value in subsequent periods were recorded as unrealized gain or loss on fair value of derivative instruments for the hybrid financial instruments and to derivative income or expense for the warrants. The warrants associated with these financial instruments expired on December 31, 2013 and the warrant derivative liability was eliminated.

Income Taxes

We use the liability method of accounting for income taxes. Under this method, we recognize deferred assets and liabilities based on the differences between the tax basis of assets and liabilities and their reported amounts in the financial statements that will result in taxable or deductible amounts in future years. We establish a valuation allowance for all deferred tax assets for which there is uncertainty regarding realization.

Results of Operations-Year Ended December 31, 2013, 2012 and 2011 See Notes to Consolidated Financial Statements.

Results of operations for the years ended December 31, 2013, 2012 and 2011 reflected losses of $24.0 million, $ 11.6 million and $18.4 million, respectively. These losses include non-cash charges related to depreciation and amortization expense, derivative expense, stock-based compensation, stock issued for services and losses on the fair value of debt instruments in the amount of $4.2 million in 2013, $1.5 million in 2012 and $9.2 million in 2011.

Revenue

We are a development stage enterprise and have not generated material revenue in our operating history. The $50,000 license revenue recognized in 2013 and 2012 represents the amortization of the upfront payment received from our license agreement. The initial payment of $500,000 from the license agreement with a Korean pharmaceutical company was deferred and being recognized over 10 years.

Expenses

Research and Development

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. These costs relate solely to research and
development without an allocation of general and administrative expenses and are
summarized as follows:



                                                     Year Ended December 31,
                                               2013            2012            2011
  Labor                                    $  1,862,000     $ 1,424,000     $ 1,364,000
  Patent costs                                1,738,000       1,449,000         962,000
  Stock-based compensation                    1,997,000         396,000         316,000
  Clinical trials and sponsored research     12,078,000       3,756,000       1,694,000
  Techology license                                  -               -        2,000,000
  Consultants and other                         614,000         469,000         312,000

                                           $ 18,289,000     $ 7,494,000     $ 6,648,000

Comparison of Years Ended December 31, 2013 and 2012

Research and development expenses increased $10,795,000, or 144%, in 2013 over 2012. This was due primarily to costs associated with the production of study drugs, clinical trials of Ampion and Optina and the Luoxis development of its ORP platform. Labor and stock-based compensation increased due to bonuses paid/accrued and stock options granted in both Ampio and Luoxis as well as the continuing vesting of stock option awards granted in previous years. We continue to maintain and increase our patent portfolio.

Comparison of Years Ended December 31, 2012 and 2011

Research and development expenses increased approximately 13% in 2012 over 2011. This was due primarily to costs associated with FDA pre-IND filings for our three major drug candidates, the IND submissions for Ampion and Optina, and clinical trials of Ampion and Optina. We also incurred costs related to the production of the study drugs for the Ampion and Optina trials. We continue to maintain and strengthen our patent portfolio while labor and stock compensation costs were relatively flat.


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General and Administrative

General and administrative expenses consist of personnel costs for employees in
executive, business development and operational functions; professional fees
include legal, auditing and accounting; occupancy, travel and other includes
rent, governmental and regulatory compliance, insurance, investor/public
relations and professional subscriptions. These costs are summarized as follows:



                                                Year Ended December 31,
                                         2013            2012            2011
        Labor                         $ 1,538,000     $ 1,308,000     $   888,000
        Stock-based compensation        1,539,000       1,227,000       1,671,000
        Professional fees                 735,000         399,000         656,000
        Occupancy, travel and other     1,767,000       1,191,000         932,000
        Directors fees                    206,000         252,000         357,000

                                      $ 5,785,000     $ 4,377,000     $ 4,504,000

Comparison of Years Ended December 31, 2013 and 2012

General and administrative costs increased $1,408,000, or 32%, in 2013 over 2012. The increase in labor costs and stock-based compensation primarily relates to the addition of our chief operating officer in December 2012, increased professional staffing in Luoxis, bonuses paid/accrued and stock options granted in both Ampio and Luoxis as well as the continuing vesting of stock option awards granted in previous years. The labor costs in 2012 includes an employment agreement payout to our former CEO. The increase in professional fees is associated with the formation of the subsidiaries for Luoxis and Vyrix and the fees associated with legal defense costs. Occupancy, travel and other increased primarily due to insurance premiums, regulatory and compliance fees and travel expenses.

Comparison of Years Ended December 31, 2012 and 2011

There was an overall decrease of approximately 3% in general and administrative costs in 2012 from 2011. Labor costs increased in 2012 as the result of the employment agreement payout to our former CEO upon the granting of an indefinite compassionate leave of absence in January 2012. Stock-based compensation decreased in 2012 due to longer vesting periods being incorporated into new awards, resulting in straight line amortization of the fair value over a longer period. Professional fees consist primarily of legal, audit and accounting costs, public company compliance costs, and consulting related to capital formation. Professional fees decreased in 2012 as compared to 2011 since we had only routine filing and reporting requirements in 2012. In 2011 we had additional professional fees related to the filing of a Form S-4 with the SEC and the acquisition of BioSciences. Travel and investor/public relations costs increased in 2012 as we pursued business development and financing opportunities. Directors' fees decreased because only regularly scheduled meetings were held during 2012, compared to 2011 when additional meetings were required. No general and administrative costs are currently being allocated to the research and development activities.

Derivative Expense

We recorded approximately ($517,000), $206,000 and ($1.6) million in non-cash derivative income (expense) in 2013, 2012 and 2011, respectively, in connection with our hybrid financial instruments consisting of debentures and related warrants. The expense relates to the fair value at inception and 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. The debentures were redeemed in 2011 and the December 31, 2013 expiring warrants were all exercised prior to that date.

Unrealized loss on fair value of debt instruments

We recorded $5.6 million in non-cash unrealized loss on fair value of debt instruments in the first quarter of 2011. The expense reflects the change in fair value of our debentures prior to their conversion to common stock in February 2011 and stemmed primarily from the increase in our common stock price between December 31, 2010 and February 28, 2011, when the debentures were converted.

Foreign income tax expense

The $82,500 of foreign income tax expense in 2011 is the amount of Korean income taxes withheld in connection with the $500,000 payment received for the signing of the license agreement with the Korean pharmaceutical company.


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Net Cash Used in Operating Activities

During 2013, our operating activities used approximately $19.1 million in cash. The use of cash was $5.4 million lower than the net loss due primarily to non-cash charges for stock-based compensation, depreciation and amortization, derivative expense and non-cash deferred revenue. Net cash provided in operating activities also included a $522,000 increase in accrued bonuses/salaries and $699,400 increase in accounts payable.

During 2012 our operating activities used approximately $9.7 million in cash. The use of cash was $1.9 million lower than the net loss due to non-cash charges for stock-based compensation, depreciation and amortization and also non-cash deferred revenue and derivative income. Net cash used in operating activities also included a $121,770 increase in prepaid expenses and cash provided by a $570,500 increase in accounts payable.

During 2011 our operating activities used approximately $9.1 million in cash. The use of cash was significantly lower than the $18.4 million net loss, primarily as a result of non-cash charges for depreciation and amortization, stock-based compensation, and derivative and unrealized loss on fair value of debt instruments of $9.2 million. Net cash used in operating activities included the receipt of revenue to be recognized over a ten year period, but was offset by the payment of deferred salaries.

Net Cash Used in Investing Activities

During 2013, cash was used to acquire ORP patents on behalf of Luoxis - See Note
3 - Formation of Subsidiaries. Fixed assets reflect purchases of machinery related to the in process manufacturing facility/clean room, a new server, a lab scope and a Luoxis ORP manufacturing device.

Net Cash from Financing Activities

Net cash provided by financing activities in 2013 was $29.4 million which reflects net proceeds from the registered direct placement of $25.0 million, Luoxis' private financings of $4.0 million and $0.4 million from the exercise of stock options and warrants.

Net cash provided by financing activities in 2012 was $16 million. During the year, Ampio completed an underwritten public offering, with net proceeds of $15.4 million, options exercised of $618,000 and warrants exercised of $12,322. . . .

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