Notes to Financial Statements
(unaudited)
Note 1Basis of Presentation
These financial statements represent the financial statements of Ampio Pharmaceuticals, Inc. (Ampio or the
Company). Ampio is a 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.
Ampios activities have been primarily related to research and development and raising capital and have not generated revenue to date.
On January 4, 2016, Ampio completed the spin-off of Aytu BioScience, Inc. (Aytu) by distributing a majority of its
shares of common stock of Aytu to the Ampio shareholders on a pro rata basis. This transaction changed Ampios ownership from 81.5% to 8.6% of Aytus outstanding shares on that date. Ampio believes it continues to have significant
influence over Aytu subsequent to the spin-off due to the fact that Ampios Chief Executive Officer was Aytus only Board member until mid-January 2016 when he became one of three Aytu Board of Directors members. Therefore, Ampio has
accounted for its remaining investment in Aytu based on the equity method of accounting. As of March 31, 2016 Ampios ownership in Aytus outstanding shares was 5.5% (
see Note 7 Discontinued Operations
). Ampio made
reclassification adjustments to its December 31, 2015 balance sheet and our results of operations for the three months ended March 31, 2015 to reflect the effect of the Aytu business as discontinued operations.
Recent Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU)
No. 2016-09,
Compensation Stock Compensation (Topic 718): Improvements to Employee Share Based Payment Accounting
. The standard includes multiple provisions intended to simplify various aspects of the accounting for share based
payments. The amendments are expected to significantly impact net income, earnings per share, and the statement of cash flows. Implementation and administration may present challenges to companies with significant share based payment activities. The
amendments are effective for public entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted in any interim or annual period, with any adjustments reflected as of
the beginning of the fiscal year of adoption. The Company is currently evaluating the impact of this standard on its financial statements.
In March 2016, the FASB issued ASU No. 2016-07,
Investments - Equity Method and Joint Ventures (Topic 323): Simplifying the Transition
to the Equity Method of Accounting
. The amendments affect all entities that have an investment that becomes qualified for the equity method of accounting as a result of an increase in the level of ownership interest or degree of influence. The
amendments eliminate the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations,
and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of acquiring
the additional interest in the investee to the current basis of the investors previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon
qualifying for the equity method of accounting, no retroactive adjustment of the investment is required. The amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15,
2016. The amendments should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. Earlier application is permitted. The Company is
currently evaluating the impact of this standard on its financial statements.
In February 2016, the FASB issued ASU 2016-02,
Leases
(Topic 842)
. The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be
classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods
within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial
statements, with certain practical expedients available. The Company is currently evaluating the impact of this standard on its financial statements.
In January 2016, the FASB issued ASU 2016-01,
Financial Instruments Overall (Subtopic 825-10): Recognition Measurement of Financial
Assets and Financial Liabilities
, which requires that all equity investments to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under equity method of accounting or those
that result in consolidation of the investee). The amendments in this update also require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the
instrument-specific credit risk when
8
the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. In addition, the amendments in this update eliminate the
requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities and the requirement to disclose the method(s) and significant assumptions used to estimate the fair value
that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet for public business entities. The amendment is effective for financial statements issued for fiscal years beginning after December 15,
2017. Early adoption is not permitted. The Company is currently evaluating the impact of this standard on its financial statements.
In August 2014, the FASB issued ASU 2014-15,
Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of
Uncertainties about an Entitys Ability to Continue as a Going Concern
. The standard is intended to define managements responsibility to evaluate whether there is substantial doubt about an organizations ability to continue as a
going concern and to provide related footnote disclosures. The amendments in this ASU are effective for reporting periods ending after December 15, 2016, with early adoption permitted. The Company is currently evaluating the impact of this
standard on its financial statements.
In May 2014, the FASB issued ASU 2014-09 regarding ASC
Topic 606, Revenue from Contracts with
Customers
. The standard provides principles for recognizing revenue for the transfer of promised goods or services to customers with the consideration to which the entity expects to be entitled in exchange for those goods or services. In August
2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date, which deferred the effective date of the new revenue standard for periods beginning after December 15, 2017, with early adoption
permitted. Entities have the option of using either a full retrospective or a modified retrospective approach to adopt this new guidance. The Company is currently evaluating the impact of this standard on its financial statements.
Note 2Fixed Assets
Fixed assets are recorded at cost and, once placed in service, are depreciated on the straight-line method over the
estimated useful lives. Fixed assets consist of the following:
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Estimated
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As of March 31,
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As of December 31,
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Useful Lives in years
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2016
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|
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2015
|
|
Manufacturing Facility/Clean Room
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|
8
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|
$
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2,734,000
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|
|
$
|
2,734,000
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|
Leasehold improvements
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|
10
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|
6,075,000
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6,075,000
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|
Office furniture and equipment
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3 - 10
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557,000
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557,000
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Lab equipment
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5 -10
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1,019,000
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1,019,000
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Less accumulated depreciation and accretion
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(1,503,000
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)
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(1,198,000
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)
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Fixed assets, net
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$
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8,882,000
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$
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9,187,000
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Note 3Commitments and Contingencies
Commitments and contingencies are described below and summarized by the following table:
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Remaining
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Total
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2016
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2017
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2018
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2019
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2020
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Thereafter
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Ampion supply agreement
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$
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5,100,000
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|
$
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$
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2,550,000
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$
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2,550,000
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$
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$
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$
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|
Clinical research and trial obligations
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1,738,000
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1,705,000
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33,000
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Facility lease
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2,851,000
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|
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224,000
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306,000
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316,000
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326,000
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335,000
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1,344,000
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Sponsored research agreement with related party
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975,000
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244,000
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325,000
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325,000
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81,000
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$
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10,664,000
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$
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2,173,000
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$
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3,214,000
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$
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3,191,000
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|
$
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407,000
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|
$
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335,000
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|
$
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1,344,000
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Ampion Supply Agreement
In October 2013, Ampio entered into an agreement to purchase human serum albumin, the starting raw material for the Companys Ampion
product. Under this agreement, the Company still has a remaining commitment of $5,100,000. Per an amendment to the original agreement, Ampio is not committed to purchase any human serum albumin during 2016 and has extended the agreement to 2018.
9
Clinical Research and Trial Obligations
In connection with current and recent clinical trials, as of March 31, 2016, Ampio has a remaining commitment of $1,738,000 on contracts
related to the active Ampion clinical trial.
Facility Lease
On December 13, 2013, Ampio entered into a 125-month non-cancellable operating lease for new office space and the manufacturing facility
effective May 1, 2014. The new lease has initial base rent of $23,000 per month, with the total base rent over the term of the lease of approximately $3.3 million and includes rent abatements and leasehold incentives. The Company recognizes
rental expense of the facility on a straight-line basis over the term of the lease. Differences between the straight-line net expenses on rent payments are classified as liabilities between current deferred rent and long-term deferred rent.
Rent expense for the respective periods is as follows:
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Three Months Ended March 31,
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2016
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2015
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Rent expense
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$
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73,000
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$
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64,000
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Sponsored Research Agreement with Related Party
Ampio entered into a Sponsored Research Agreement with Trauma Research LLC (TRLLC), a related party, in September 2009. Under the
terms of the Sponsored Research Agreement, Ampio is to provide personnel and pay for leased equipment. The Sponsored Research Agreement may be terminated without cause by either party on 180 days notice. As further noted in Note 6Related
Party Transactions, in March 2014, the Sponsored Research Agreement was extended through March 2019, including a no termination period through March 2017. In a subsequent addendum, the parties also agreed to increase the equivalent value
of the personnel provided by Ampio from $264,000 to $325,000 per year.
Note 4Common Stock
Capital Stock
At March 31, 2016 and December 31, 2015, Ampio had 52,016,432 and 51,998,306 common shares outstanding, respectively. As of these
same dates, Ampio had no preferred shares outstanding. Ampio has 100.0 million shares of common stock authorized with a par value of $0.0001 per share and 10.0 million shares of preferred stock authorized with a par value of $0.0001 per
share.
Shelf Registration
In December 2013, Ampio filed a shelf registration statement on Form S-3 with the Securities and Exchange Commission (the SEC)
to register Ampio common stock and warrants in an aggregate amount of up to $100.0 million for offering from time to time in the future, as well as 1.5 million shares of common stock available for sale by selling shareholders. The shelf
registration was declared effective in January 2014 by the SEC. As a result of prior equity raises, approximately $86.3 million remains available under the Form S-3 as of March 31, 2016.
Controlled Equity Offering
In February 2016, Ampio entered into a Controlled Equity Offering
SM
Sales Agreement (the
Agreement) with a placement agent to implement an at-the-market equity program under which Ampio, from time, to time may offer and sell shares of its common stock having an aggregate offering price of up to $25.0 million
through the placement agent. The Company has no obligation to sell any of the shares and may at any time suspend sales under the Agreement or terminate the Agreement in accordance with the terms. The Company has provided the placement agent with
customary indemnification rights. The placement agent will be entitled to a fixed commission of 3.0% of the gross proceeds from shares sold. No sales were made under the Agreement during the quarter ended March 31, 2016.
Common Stock Issued for Services
Ampio issued 18,126 and 7,998 shares valued at $60,000 and $30,000, respectively, for non-employee directors as part of their director fees for
fiscal years 2016 and 2015, respectively.
10
Note 5Equity Instruments
Options
In 2010, Ampio shareholders approved the adoption of a stock and option award plan (the 2010 Plan), under which shares were
reserved for future issuance under restricted stock awards, options, and other equity awards. The 2010 Plan permits grants of equity awards to employees, directors and consultants. The shareholders have approved a total of 11.7 million shares
reserved for issuance under the 2010 plan. Ampio has computed the fair value of all options granted using the Black-Scholes option pricing model. In order to calculate the fair value of the options, certain assumptions are made regarding components
of the model, including the estimated fair value of the underlying common stock, risk-free interest rate, volatility, expected dividend yield and expected option life. Changes to the assumptions could cause significant adjustments to valuation.
Ampio calculates its volatility assumption using the actual changes in the market value of its stock. Ampio has estimated a forfeiture rate of 5.3% based upon historical experience; this is an estimate of options granted that are expected to be
forfeited or cancelled before becoming fully vested. Ampio estimates the expected term based on the average of the vesting term and the contractual term of the options. The risk-free interest rate is based on the U.S. Treasury yield in effect at the
time of the grant for treasury securities of similar maturity. During the three months ended March 31, 2016, Ampio granted 5,000 options at a price of $6.53 to a former employee to replace 5,000 options that were forfeited due to the spin-off
of Aytu. The $6.53 price represented the fair market value on the original date of the grant. In January 2016, Aytu accelerated the vesting of 335,000 Aytu options to employees of Ampio. The Company recognized expense in the amount of $312,000
related to this modification during the quarter ended March 31, 2016. Ampio has computed the fair value of all options granted during the three months ended March 31, 2016 using the following assumptions:
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Expected volatility
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124
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%
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Risk free interest rate
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|
|
0.61
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%
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Expected term (years)
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1.0
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Dividend yield
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0.0
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%
|
Ampio stock option activity is as follows:
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Number of
Options
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Weighted
Average
Exercise Price
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Weighted Average
Remaining
Contractual Life
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|
Outstanding December 31, 2015
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7,315,832
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$
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3.71
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|
6.58
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Granted
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5,000
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$
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6.53
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Exercised
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$
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Forfeited
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$
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Expired or Cancelled
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(5,000
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)
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$
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6.53
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Outstanding March 31, 2016
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7,315,832
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$
|
3.71
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|
5.54
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Exercisable at March 31, 2016
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6,336,607
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$
|
3.71
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5.22
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Available for grant at March 31, 2016
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2,971,647
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11
Stock options outstanding and exercisable at March 31, 2016 are summarized in the table below:
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Range of Exercise Prices
|
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Number of
Options
Outstanding and
Exercisable
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Weighted
Average
Exercise Price
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Weighted Average
Remaining
Contractual Lives
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$1.03 - $4.00
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5,140,832
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$
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2.38
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|
|
5.28
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$4.01 - $7.00
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1,240,000
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$
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6.17
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|
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5.64
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$7.01 - $8.93
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935,000
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$
|
7.73
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|
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6.83
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7,315,832
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$
|
3.71
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|
5.54
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Stock-based compensation expense related to the fair value of stock options was included in the statements of
operations as research and development expenses and selling, general and administrative expenses as set forth in the table below. Ampio determined the fair value as of the date of grant using the Black-Scholes option pricing model and expenses the
fair value ratably over the vesting period. The following table summarizes stock-based compensation expense for the three months ended March 31, 2016 and 2015:
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Three Months Ended March 31,
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2016
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2015
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Research and development expenses
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Stock options
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$
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90,000
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$
|
608,000
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General and administrative expenses
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Common stock issued for services
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60,000
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30,000
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Stock options
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520,000
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|
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537,000
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$
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670,000
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|
$
|
1,175,000
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Unrecognized expense at March 31, 2016
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$
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836,613
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Weighted average remaining years to vest
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0.25
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Warrants
Ampio issued warrants in conjunction with its senior convertible debentures, 2011 private placements and an underwritten public offering. A
summary of all Ampio warrants is as follows:
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Number of
Warrants
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Weighted
Average
Exercise Price
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Weighted Average
Remaining
Contractual Life
|
|
Outstanding December 31, 2015
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499,076
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$
|
3.24
|
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|
|
1.19
|
|
Warrants exercised
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|
$
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|
|
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|
|
Outstanding March 31, 2016
|
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499,076
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$
|
3.24
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|
|
1.03
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12
In March 2016, the Company modified 45,300 of its outstanding warrants which extended the
expiration for an additional year from March 31, 2016 to March 31, 2017. The $37,000 expense related to this modification was recognized in the quarter ended March 31, 2016.
Note 6Related Party Transactions
Ampio entered into a sponsored research agreement with TRLLC, an entity controlled by Ampios director and Chief
Scientific Officer, Dr. Bar-Or, in September 2009, which has been amended six times with the last amendment occurring in January 2015. Under the amended terms of the research agreement, Ampio will provide personnel with an equivalent value
of $325,000 per year. With the fifth amendment, Ampio also paid $725,000 in 2014 which is being amortized over the contractual term of 60.5 months and is divided between current and long-term on the balance sheet. In return, TRLLC will assign any
intellectual property rights it develops on Ampios behalf under the research agreement and undertake additional activities to support Ampios commercial activities and business plan. This agreement is set to expire in March 2019 and
cannot be terminated prior to March 2017.
The Company has advances to one executive and three employees that were used to purchase stock
in the Company when it was formed during 2010. These advances are non-interest bearing and due on demand and are classified as a reduction to stockholders equity. As of March 31, 2016 and December 31, 2015, advances of $91,000 to
stockholders remained outstanding.
Note 7Discontinued Operations
On January, 4, 2016, the Company completed the spin-off of Aytu by distributing a majority of its shares of common stock of
Aytu to the Ampio shareholders on a pro rata basis. The Aytu business has been included in Ampios financial results as discontinued operations for all periods presented. Please refer to
Note 1 Basis of Presentation
for additional
information concerning discontinued operations.
For all periods presented, the operating results associated with the Aytu business have
been reclassified into loss from discontinued operations in the condensed statement of operations. Due to the holiday on January 1, 2016, and January 2
nd
and 3
rd
2016 falling on weekend days, the Company deemed the operating results associated with Aytu for January 1 3, 2016 immaterial for disclosure purposes. The following table provides a
summary of Aytu amounts included in discontinued operations:
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Three Months Ended March 31,
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|
|
2016
|
|
|
2015
|
|
Revenue
|
|
$
|
|
|
|
$
|
23,829
|
|
Total operating expenses
|
|
|
|
|
|
|
(1,829,966
|
)
|
Interest (expense)
|
|
|
|
|
|
|
(36,052
|
)
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
$
|
|
|
|
$
|
(1,842,189
|
)
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|
|
|
|
|
|
|
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13
Assets and liabilities of discontinued operations consisted of the following at December 31,
2015:
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|
|
|
|
December 31,
|
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|
|
2015
|
|
Cash and cash equivalents
|
|
$
|
10,959,546
|
|
Prepaid expenses and other
|
|
|
1,644,674
|
|
Prepaid research and development - related party
|
|
|
121,983
|
|
|
|
|
|
|
Current assets of discontinued operations
|
|
|
12,726,203
|
|
|
|
|
|
|
Fixed assets, net
|
|
|
143,826
|
|
In-process research and development
|
|
|
7,500,000
|
|
Developed technology, customer contracts and trade names, net
|
|
|
2,909,583
|
|
Goodwill
|
|
|
221,000
|
|
Patents, net
|
|
|
593,382
|
|
Long-term portion of prepaid research and development - related party
|
|
|
274,463
|
|
Deposits
|
|
|
2,888
|
|
|
|
|
|
|
Other assets of discontinued operations
|
|
|
11,645,142
|
|
|
|
|
|
|
Assets of discontinued operations
|
|
$
|
24,371,345
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
1,076,293
|
|
Primsol payable
|
|
|
1,111,057
|
|
Accrued compensation
|
|
|
492,584
|
|
Deferred revenue
|
|
|
85,714
|
|
|
|
|
|
|
Current liabilities of discontinued operations
|
|
|
2,765,648
|
|
|
|
|
|
|
Convertible promissory notes, net of unamortized discount of $253,448
|
|
|
4,921,552
|
|
Interest payable
|
|
|
161,988
|
|
Contingent consideration
|
|
|
687,685
|
|
Long-term deferred rent
|
|
|
11,694
|
|
Long-term deferred revenue
|
|
|
383,036
|
|
Warrant derivative liability
|
|
|
180,969
|
|
|
|
|
|
|
Liabilities of discontinued operations
|
|
|
6,346,924
|
|
|
|
|
|
|
Liabilities of discontinued operations
|
|
$
|
9,112,572
|
|
|
|
|
|
|
Note 8Litigation
As previously disclosed, on May 8, 2015 and May 14, 2015, purported stockholders of the Company brought two
putative class action lawsuits in the United States District Court in the Central District of California, Napoli v. Ampio Pharmaceuticals, Inc., et al., Case No. 2:15-cv-03474-TJH and Stein v. Ampio Pharmaceuticals, Inc., et al., Case
No. 2:15-cv-03640-TJH (the Securities Class Actions), alleging that Ampio and certain of its current and former officers violated federal securities laws by misrepresenting and/or omitting information regarding the STEP study. The
cases were consolidated, and on February 8, 2016, plaintiffs filed a consolidated amended complaint alleging claims under Sections 10(b) and 20(a) and Rule 10b-5 under the Securities Exchange Act of 1934, as amended (the Exchange
Act) and Sections 11 and 15 under the Securities Act of 1933 on behalf of a putative class of purchasers of common stock from January 13, 2014 through August 21, 2014, including purchasers in the Companys offering on
February 28, 2014. On April 8, 2016, Ampio and the other defendants moved to dismiss the consolidated amended complaint. The lawsuits seek unspecified damages, pre-judgment and post-judgment interest, and attorneys fees and costs.
On August 6, 2015 and September 25, 2015, purported stockholders of the Company brought derivative actions in the United States
District Court in the Central District of California, Oglina v. Macaluso et al., Case No. 2:15-cv-05970-TJH-PJW (Oglina action) and the Colorado state court in Denver, Loyd v. Giles et al., Case No. 2015CV33429 (Loyd
action), alleging primarily that the directors and officers of Ampio breached their fiduciary duties because of their alleged misstatements and/or omissions regarding the STEP study. Pursuant to the parties stipulation, the United States
District Court in the Central District of California has stayed the proceedings in the Oglina action at the present time in accordance with the terms of the parties stipulation. Pursuant to the parties stipulation, the Colorado state
court in Denver has stayed the Loyd action at the present time in accordance with the terms of the parties stipulation.
14
The Company believes these claims are without merit and intends to defend these lawsuits vigorously. The Company
currently believes the likelihood of a loss contingency related to these matters is remote and, therefore, no provision for a loss contingency is required.