Ampio Pharmaceuticals, Inc.

We currently, and from time to time in the future may, outsource portions of our internal business functions to third-party providers including information technology, human resources, internal audit testing, legal services and certain calculations and other information that support our accounting and financial reporting, among other things. Third-party providers may not comply on a timely basis with all of our requirements or may not provide us with an acceptable level of service. In addition, our reliance on third-party providers could have significant negative consequences, including significant disruptions in our operations and significantly increased costs to undertake our operations. For example, any failure by the third-party providers that assist us with financial reporting to provide us with accurate information or implement and maintain effective controls may cause us to be unable to meet our reporting obligations as a publicly traded company and we could experience deficiencies in our operations that could have an adverse effect on the effectiveness of our internal control over financial reporting. As a result of our outsourcing activities, it may be more difficult for us to recruit and retain qualified employees for our business needs at any time and if we have a failure in our outsourced financial reporting activities, our independent registered public accounting firm may not be able to provide us with an unqualified report regarding the effectiveness of our internal control over financial reporting, which may cause investors to lose confidence in the reliability of our financial statements and could result in a decrease in the value of our common stock. Our failure to successfully outsource any material portion of our business functions could materially adversely affect our business, results of operations, and financial condition.

In particular, sales, marketing, and business arrangements in the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, misconduct, kickbacks, self-dealing and other abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion, sales commission, customer incentive programs, and other business arrangements. Such misconduct could also involve the improper use of information obtained in the course of clinical trials, which could result in regulatory sanctions and cause serious harm to our reputation. We have adopted a Code of Business Conduct and Ethics applicable to all of our employees, but it is not always possible to identify and deter employee misconduct, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to comply with these laws or regulations. If any such actions are instituted against us, and we are not successful in defending ourselves or asserting our rights, those actions could have a significant impact on our business, including the imposition of significant fines or other sanctions.

Research and development costs increased $5.8 million, or 84.8%, for the 2019 period compared to the 2018 period.  Clinical trials expense increased $5.4 million for the 2019 period compared to the 2018 period due to the commencement of the AP-013 Phase III clinical study (“AP-013 study”) in June 2019.  Salaries and benefits also increased $915,000 for the 2019 period compared with the 2018 period, primarily due to the favorable accrual adjustment resulting from the elimination of the 2018 annual incentive compensation accrual as a result of the repricing of employee stock options in October 2018, which resulted in an adjustment totaling $488,000 for the 2018 period.  This 2018 favorable adjustment was partially offset by a de minimis stock-based compensation expense from the repricing of employee stock options.  In addition, during the 2019 period, we added three new positions to assist with the direct management and oversight of the AP-013 study and certain of our employees received merit increases effective at the commencement of 2019.  These three new positions and merit increases were partially offset by the reduction of the CSO position, which occurred during the end of the 2018 period. The increases in the clinical trial expenses and salaries and benefits were partially offset by a decrease in laboratory, regulatory/FDA, and stock-based compensation expenses.  Laboratory expenses decreased for the 2019 period compared to the 2018 period as we finalized a quality control project related to the manufacturing of Ampion.  Regulatory/FDA expenses decreased for the 2019 period compared to the 2018 period as we finalized our discussions with the FDA regarding our prior clinical trials.  Stock-based compensation decreased for the 2019 period compared with the 2018 period as previously awarded high-priced options became fully vested during the 2019 period.

On December 14, 2019, we entered into a new three-year employment agreement with Mr. Macaluso, which became effective on January 10, 2020 (“Start Date”) immediately following the expiration of his prior employment agreement.  In connection with his continued service as the Company’s CEO and as a member of the Board, Mr. Macaluso will continue to receive an annual base salary of $300,000 with a term ending January 10, 2023.  At the Start Date, Mr. Macaluso received a one-time equity award of 200,000 stock options at an exercise price per share equal to the closing price of the Company’s common stock as reported on the New York Stock Exchange on the Start Date (50% of which will vest on the Start Date and 50% of which will vest on January 10, 2021).  Mr. Macaluso will also be able to allocate incentive compensation to others through (i) a special cash bonus pool of $50,000, which he shall be able to allocate in his sole discretion to employees of the Company, and (ii) recommendations to the Compensation Committee of issuance of up to 100,000 stock options. Each of the cash and stock option bonus pools shall be fully allocated before December 31, 2020. As consideration for the incentive compensation pools, on the Start Date, Mr. Macaluso forfeited previously granted options to purchase 100,000 shares of common stock, which were originally granted on August 12, 2010 with an exercise price of $1.70 and were fully vested.

Under each of our Executive Employment Agreements, the respective member of our executive team (each, an “Executive”), if their employment is terminated without Cause, will be entitled to a lump sum severance payment equal to six months of his or her base salary in effect at the date of termination, less applicable withholding and certain offsetting payments (including offsets for any and all compensation that he or she may receive from other employment subsequent to his or her employment with the Company pursuant to a duty to mitigate such severance payment). In addition, the vesting and exercisability of all then outstanding equity awards (excluding the performance-based awards) held by our Executive will accelerate in full. Any performance-based award held by such Executive shall become vested and exercisable only if the applicable performance-based criteria are satisfied at the end of the applicable period relating to such award, at which time such performance-based award shall become vested and exercisable on a pro-rated basis by multiplying such award by a fraction, the numerator of which is the number of full months such executive was employed by the Company during the applicable performance period, and the denominator of which is the total number of months in such performance period. Any performance-based award for which the performance criteria are not satisfied within the applicable performance period shall terminate at the end of such period. If our Executive terminates his or her employment for Good Reason, such Executive will be entitled to three months of his or her base salary less applicable taxes and withholdings. All severance payments, less applicable taxes and withholdings, are subject to Our Executive’s execution and delivery of a general release in a form acceptable to us, and is further conditioned upon complying with the confidentiality, non-solicitation, non-competition, intellectual property and post-termination cooperation obligations under his employment agreement. If the employment is terminated for Cause, no severance shall be payable by us.