ARCH THERAPEUTICS, INC. The following discussion and analysis should be read in conjunction with our
unaudited interim financial statements and notes included in this report and the
audited financial statements and notes thereto and Management's Discussion and
Analysis of Financial Condition and Results of Operations included in our Annual
Report on Form 10-K for the year ended
This report contains forward looking statements. We make forward-looking
statements, as defined by the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, and in some cases, you can identify these
statements by forward-looking words such as "if," "shall," "may," "might," "will
likely result," "should," "expect," "plan," "anticipate," "believe," "estimate,"
"project," "intend," "goal," "objective," "predict," "potential" or "continue,"
or the negative of these terms and other comparable terminology. Such
forward-looking statements contained in this report on Form 10-Q are based on
various underlying assumptions and expectations and are subject to risks,
uncertainties and other unknown factors, may include projections of our future
financial performance based on our growth strategies and anticipated trends in
our business and include risks and uncertainties relating to Arch's current cash
position and its need to raise additional capital in order to be able to
continue to fund its operations; the stockholder dilution that may result from
future capital raising efforts and the exercise or conversion, as applicable of
Arch's outstanding options and warrants; anti-dilution protection afforded
investors in prior financing transactions that may restrict or prohibit Arch's
ability to raise capital on terms favorable to the Company and its current
stockholders; Arch's limited operating history which may make it difficult to
evaluate Arch's business and future viability; Arch's ability to timely
commercialize and generate revenues or profits from our anticipated products;
Arch's ability to achieve the desired marketing authorizations in
As used in this report on Form 10-Q unless otherwise indicated, the "Company",
"we", "us", "our", and "Arch" refer to
Corporate Overview
For financial reporting purposes, the Merger represented a "reverse merger". ABS
was deemed to be the accounting acquirer in the transaction and the predecessor
of Arch. Consequently, the accumulated deficit and the historical operations
that are reflected in the Company's consolidated financial statements prior to
the Merger are those of ABS. All share information has been restated to reflect
the effects of the Merger. The Company's financial information has been
consolidated with that of ABS after consummation of the Merger on
ABS was incorporated under the laws of the
Business Overview
We are a biotechnology company in the development stage. We have generated no revenues to date and are devoting substantially all of our operational efforts to the development of our core technology. We are developing a novel approach to stop bleeding ("hemostasis"), control leaking ("sealant") and manage wounds during surgery, trauma and interventional care. Arch is developing products based on an innovative self-assembling barrier technology platform with the goal of making care faster and safer for patients. We believe our technology could support an innovative platform of potential products in the field of stasis and barrier applications. Our plan and business model are to develop products that apply that core technology for use with bodily fluids and tissues.
To date, the Company has principally raised capital through borrowings and the
issuance of convertible debt and units consisting of its common stock, par value
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Our initial products ("AC5"), including AC5® Advanced Wound System, AC5® Topical
Gel, AC5® Topical Hemostat, AC5® Surgical Hemostat, among others, rely on our
self-assembling peptide ("SAP") technology and are being designed for a range of
applications, including to achieve hemostasis during surgical, wound and
interventional care. We intend to develop other product candidates based on our
technology platform for use in a range of indications. AC5 contains synthetic
biocompatible peptides comprising L-amino acids, commonly referred to as
naturally occurring amino acids. When applied to a wound, AC5 intercalates into
the interstices of the connective tissue where it self-assembles into a
physical, mechanical nanoscale structure that provides a barrier to leaking
substances, such as blood. AC5 may be applied directly as a liquid, which may
make it user-friendly and able to conform to irregular wound geometry.
Additionally, AC5 does not possess sticky or glue-like handling characteristics,
which may enhance its utility in several settings, including minimally invasive
surgical procedures. Further, in certain settings, AC5 lends itself to a concept
that we call Crystal Clear Surgery™; the transparency and physical properties of
AC5 may enable a surgeon to operate through it in order to maintain a clearer
field of vision and prophylactically stop or lessen bleeding as it starts. AC5
and associated logos are trademarks and/or registered trademarks of
We believe that the results of early data from preclinical tests as well as
certain clinical investigations have shown quick and effective hemostasis with
the use of AC5® relative to that reported with other types of hemostatic agents,
and that time to hemostasis is comparable among test subjects regardless of
whether such test subject had or had not been treated with therapeutic doses of
anticoagulant or antiplatelet medications, commonly called "blood thinners".
Based on testing results, we believe that AC5® is biocompatible.
We have devoted much of our operational effort to date to the research and development of our core technology, including selecting our initial product composition, conducting safety and other related tests, conducting a human trial for safety and performance of AC5®, developing methods for manufacturing scale-up, reproducibility, and validation, and developing and protecting the intellectual property rights underlying our technology platform. Manufacturing method and formulation optimization and validation are important parts of peptide development. Manufacturing and formulation optimization for our product candidates has been and continues to be done with extensive collaboration among our team and partners. The processes are focused on optimizing traditional product parameters to target specifications covering performance, biocompatibility, physical appearance, stability, and handling characteristics, among others. We and our partners intend to continue to monitor manufacturing processes and formulation methods closely, as success or failure in setting and/or realizing appropriate specifications may directly impact our ability to conduct additional preclinical and clinical trials that may be necessary for our commercialization efforts.
Our long-term business plan includes the following goals:
• conducting biocompatibility, pre-clinical, and clinical studies on AC5®
and related products and product candidates;
• expanding and maintaining protection of our intellectual property portfolio;
• developing additional third party relationships to manufacture,
distribute, market and otherwise commercialize our products and product
candidates;
• obtaining additional regulatory certifications or clearances of AC5® and
related products in the EU, the U.S. , and other jurisdictions as we may
determine;
• continuing or developing academic, scientific and institutional
relationships to collaborate on product research and development; and
• developing additional product candidates in the hemostatic, sealant,
and/or other fields.
In furtherance of our long-term business goals, we expect to continue to focus on the following activities during the next twelve months:
• seek additional funding as required to support the milestones described
previously and our operations generally;
• work with our large scale manufacturing partners to scale up production of
product compliant with current good manufacturing practices ("cGMP"),
which activities will be ongoing as we seek to advance toward, enter into,
and, if successful, subsequently increase commercialization activities;
• further preclinical and clinical development of our product platform;
• pursue additional regulatory clearances for commercialization;
• continue to expand and enhance our financial and operational reporting and
controls;
• seek commercial partnerships;
• expand and enhance our intellectual property portfolio by filing new
patent applications, obtaining allowances on currently filed patent
applications, and/or adding to our trade secrets in self-assembly,
manufacturing, analytical methods and formulation, which activities will
be ongoing as we seek to expand our product candidate portfolio;
• obtain regulatory input into subsequent clinical trial designs;
• assess our self-assembling peptide platforms in order to identify and
select product candidates for advancement into development.
We believe that the Company has cash on hand to meet its anticipated cash requirements into the first quarter of fiscal 2021. Notwithstanding this, depending upon additional input from EU and US regulatory authorities, we may need to raise additional capital before then. In addition to the foregoing, our estimated capital requirements potentially could increase significantly if a number of risks relating to conducting these activities were to occur, including without limitation those set forth under the heading "RISK FACTORS" in this filing.
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Merger with ABS and Related Activities
As noted earlier in this document, on
Liquidity
We have generated no revenues to date. We devote a significant amount of our
efforts on fundraising as well as planning and conducting product research and
development and activities in connection with obtaining regulatory marketing
authorization. For the three months ended
Cash used in operating activities decreased
Recent Developments
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The Payroll Protection Program Loan has a two-year term and bears interest at a
rate of 1.00% per annum. Monthly principal and interest payments are deferred
for six months. Beginning seven months from the date of the PPP Note, the
Company is required to make monthly payments of principal and interest of
approximately
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The PPP Note contains customary events of default relating to, among other things, payment defaults, making materially false and misleading representations to the SBA or Lender, or breaching the terms of the PPP Loan documents. The occurrence of an event of default may result in the immediate repayment of all amounts outstanding, collection of all amounts owing from the Company, or filing suit and obtaining judgment.
Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion of loan granted under the PPP. Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds for payment of payroll costs and any payments of mortgage interest, rent, and utilities. However, no assurance is provided that forgiveness for any portion of the PPP Loan will be obtained.
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Results of Operations
The following discussion of our results of operations should be read together with the unaudited interim consolidated financial statements included in this report on Form 10-Q. The period to period comparisons of our interim results of operations that follow are not necessarily indicative of future results.
Three months ended
June 30, June 30, Increase
2020 2019 (Decrease)
($) ($) ($)
Revenue - - -
Operating Expenses
General and administrative 858,853 933,567 (74,714 )
Research and development 382,847 638,694 (255,847 )
Operating loss (1,241,700 ) (1,572,261 ) (330,561 )
Other income 337,333 283,099 54,234
Net loss (904,367 ) (1,289,162 ) 384,795
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Revenue
We did not generate revenue in either of the three months ended
General and Administrative Expense
General and administrative expenses during the three months ended
Research and Development Expense
Research and development expense during the three months ended
Other Income
Other income during the three months ended
Nine months ended
June 30, June 30, Increase
2020 2019 (Decrease)
($) ($) ($)
Revenue - - -
Operating Expenses
General and administrative 2,726,823 2,990,800 (263,977 )
Research and development 1,289,013 1,856,651 (567,638 )
Operating loss (4,015,836 ) (4,847,451 ) (831,615 )
Other income 719,831 1,128,014 (408,183 )
Net (loss) (3,296,005 ) (3,719,437 ) (423,432 )
Revenue
We did not generate revenue in either of the nine months ended
General and Administrative Expense
General and administrative expenses during the nine months ended
Research and Development Expense
Research and development expense during the nine months ended
Research and development expenses are generally expected to increase in the future as a result of our plans for additional product development, clinical and regulatory programs.
Other Income
Other income during the nine months ended
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Liquidity and Capital Resources
To date, we have not generated revenues from the sale of any products and have
principally raised capital through borrowings and the issuance of convertible
debt and units consisting of Common Stock and warrants to fund our operations.
At
Working Capital
At
June 30 ,September 30, 2020 2019
Total Current Assets
713,811
Working Capital $ 2,601,606 $ 2,175,870 Total current assets as of
Total current liabilities as of
Cash Flow for the nine months ended
June 30 ,June 30, 2020 2019
Cash Used in Operating Activities
(2,455 ) -
Cash Provided by Financing Activities 3,826,190 2,802,249 Net (decrease) in cash
$ (167,453 ) $ (1,485,588 )
Cash Used in Operating Activities
Cash used in operating activities decreased
Cash Used in Investing Activities
Cash used in investing activities increased
Cash Provided by Financing Activities
Cash provided by financing activities increased
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Cash Requirements
We anticipate that our operating and other expenses will increase significantly
as we continue to implement our business plan and pursue our operational goals.
As of
We are in the development stage and have generated no operating revenues to date. We do not presently have, nor do we expect in the near future to have, adequate revenue to fund our business from our operations, and will need to obtain all of our necessary funding from external sources for the foreseeable future. We do not have any commitments for future capital. Significant additional financing will be required to fund our planned operations in the near term and in future periods, including research and development activities, seeking marketing authorization from regulatory authorities for any product candidate we may choose to develop, commercializing any product candidate for which we are able to obtain marketing authorization, seeking to license or acquire new assets or businesses, and maintaining our intellectual property rights and pursuing rights to new technologies. We may not be able to obtain additional financing on commercially reasonable or acceptable terms when needed, or at all. We are bound by certain contractual terms and obligations that may limit or otherwise impact our ability to raise additional funding in the near-term including, but not limited to, provisions in the 2017 SPA and 2018 SPA restricting our ability to effect or enter into an agreement to effect any issuance by the Company or any of its subsidiaries of Common Stock or securities convertible, exercisable or exchangeable for Common Stock (or a combination of units thereof) involving a Variable Rate Transaction (as defined in the 2017 SPA and 2018 SPA) including, but not limited to, an equity line of credit or "At-the-Market" financing facility until the three lead investors in the 2017 Financing and the 2018 Financing collectively own less than 20% of the Series F Warrants and Series G Warrants purchased by them pursuant to the 2017 SPA and 2018 SPA. These restrictions and provisions could make it more challenging for us to raise capital through the incurrence of debt or through equity issuances. If we cannot raise the money that we need in order to continue to develop our business, we will be forced to delay, scale back or eliminate some or all of our proposed operations. If any of these were to occur, there is a substantial risk that our business would fail and our stockholders could lose all of their investments.
As previously noted, since inception we have funded our operations primarily through equity and debt financings and we expect to continue to seek to do so in the future. If we obtain additional financing by issuing equity securities, our existing stockholders' ownership will be diluted. Additionally, the terms of securities we may issue in future capital-raising transactions may be more favorable for our new investors, and in particular may include preferences, superior voting rights and the issuance of warrants or other derivative securities, which may have additional dilutive effects. If we obtain additional financing by incurring debt, we may become subject to significant limitations and restrictions on our operations pursuant to the terms of any loan or credit agreement governing the debt. Further, obtaining any loan, assuming a loan would be available when needed on acceptable terms, would increase our liabilities and future cash commitments. We may also seek funding from collaboration or licensing arrangements in the future, which may require that we relinquish potentially valuable rights to our product candidates or proprietary technologies or grant licenses on terms that are not favorable to us. Moreover, regardless of the manner in which we seek to raise capital, we may incur substantial costs in those pursuits, including investment banking fees, legal fees, accounting fees, printing and distribution expenses and other related costs. In addition, as described in greater detail under the Risk Factor entitled "The terms of the 2017 Financing and 2018 Financing could impose additional challenges on our ability to raise funding in the future," included in this Quarterly Report on Form 10-Q, the 2017 SPA and the 2018 SPA imposes certain restrictions on our ability to issue equity or debt securities.
Going Concern
From inception, we have not earned operating revenues from sales of products or
services and have recurring losses from operations. While the Company
anticipates that it will have cash on hand into the first quarter of fiscal
2021, the continuation of our business as a going concern is dependent upon
raising additional capital and eventually attaining and maintaining profitable
operations. As of
Critical Accounting Policies and Significant Judgments and Estimates
Pursuant to certain disclosure guidance issued by the
Basis of Presentation
The unaudited consolidated financial statements presented with this Form 10-Q
include the accounts of
The Company is in the development stage and is devoting substantially all of its efforts to developing technologies, raising capital, establishing customer and vendor relationships, and recruiting new employees.
Use of Estimates
Management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates.
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Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment when circumstances indicate the carrying value of an asset may not be recoverable in accordance with ASC 360, Property, Plant and Equipment. For assets that are to be held and used, impairment is recognized when the estimated undiscounted cash flows associated with the asset or group of assets is less than their carrying value. If impairment exists, an adjustment is made to write the asset down to its fair value, and a loss is recorded as the difference between the carrying value and fair value. Fair values are determined based on quoted market values, discounted cash flows or internal and external appraisals, as applicable. Assets to be disposed of are carried at the lower of carrying value or estimated net realizable value.
Research and Development
We expense internal and external research and development costs, including costs of funded research and development arrangements, in the period incurred
Accounting for Stock-Based Compensation
The Company accounts for employee and nonemployee stock-based compensation in
accordance with the guidance of
The determination of the fair value of share-based payment awards utilizing the
Black-Scholes model is affected by the fair value of the common stock and a
number of other assumptions, including expected volatility, expected life,
risk-free interest rate and expected dividends. Prior to
Fair Value Measurements
We measure both financial and nonfinancial assets and liabilities in accordance with FASB ASC Topic 820, Fair Value Measurements and Disclosures, including those that are recognized or disclosed in the financial statements at fair value on a recurring basis. The standard created a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels as follows: Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and Level 3 inputs are unobservable inputs that reflect our own views about the assumptions market participants would use in pricing the asset or liability.
Income Taxes
In accordance with FASB ASC 740, Income Taxes, we recognize deferred tax assets and liabilities for the expected future tax consequences or events that have been included in our consolidated financial statements and/or tax returns. Deferred tax assets and liabilities are based upon the differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities and for loss and credit carryforwards using enacted tax rates expected to be in effect in the years in which the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized.
We provide reserves for potential payments of tax to various tax authorities related to uncertain tax positions when management determines that it is probable that a loss will be incurred related to these matters and the amount of the loss is reasonably determinable.
Derivative Liabilities
The Company accounts for its warrants and other derivative financial instruments as either equity or liabilities based upon the characteristics and provisions of each instrument, in accordance with FASB ASC Topic 815, Derivatives and Hedging. Warrants classified as equity are recorded at fair value as of the date of issuance on the Company's consolidated balance sheets and no further adjustments to their valuation are made. Warrants classified as derivative liabilities and other derivative financial instruments that require separate accounting as liabilities are recorded on the Company's consolidated balance sheets at their fair value on the date of issuance and will be revalued on each subsequent balance sheet date until such instruments are exercised or expire, with any changes in the fair value between reporting periods recorded as other income or expense. Management estimates the fair value of these liabilities using option pricing models and assumptions that are based on the individual characteristics of the warrants or instruments on the valuation date, as well as assumptions for future financings, expected volatility, expected life, yield, and risk-free interest rate.
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Inventories
Inventories are stated at the lower of cost or net realizable value. The cost of inventories comprises expenditures incurred in acquiring the inventories, the cost of conversion and other costs incurred in bringing them to their existing location and condition. The cost of raw materials, work-in-progress and finished goods and other products are determined on a First in First out (FiFo) basis. When determining net realizable value, appropriate consideration is given to obsolescence, excessive levels, deterioration, and other factors in evaluating net realizable value.
Recent Accounting Guidance
Accounting Standards Update (ASU) 2018-07, "Compensation-Stock Compensation
(Topic 718) Improvements to Nonemployee Share-Based Payment Accounting" was
issued by the
ASU 2016-02, "Leases (Topic 842)" was issued by the FASB in
Off-Balance Sheet Arrangements
We have no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to stockholders.
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