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
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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 marketing or developing a number of products based on our innovative AC5® self-assembling technology platform. We believe these products can be important advances in the field of stasis and barrier applications, which includes stopping bleeding ("hemostasis"), controlling leaking ("sealant") and managing wounds created during surgery, trauma or interventional care or from disease. We have generated no revenues to date and have devoted substantially all of our operational effort to the research, development and regulatory programs necessary to turn our core technology into commercial products. Our goal is to make care faster and safer for patients with products for use in external wounds, which we refer to as Dermal Sciences applications, and products for use inside the body, which we refer to as Biosurgery applications.
To date, the Company has principally raised capital through debt borrowings, the
issuance of convertible debt and the issuance of units consisting of its common
stock, par value
Core Technology
Our flagship products and product candidates are derived from our AC5
self-assembling peptide (SAP) technology platform and are sometimes referred to
as AC5 or the "AC5 Devices." These include AC5 Advanced Wound System and AC5
Topical Hemostat, which have received marketing authorization as medical devices
in
Products based on the AC5 platform contain a biocompatible peptide that is synthesized from proteogenic, naturally occurring L-amino acids. Unlike products that contain traditional peptide sequences, when applied to a wound, AC5-based products intercalate into the interstices of the connective tissue and self-assemble into a protective physical-mechanical nanoscale structure that can provide a barrier to leaking substances, such as blood, while also acting as a biodegradable scaffold that enables healing. Self-assembly is a central component of the mechanism of action of our technology. Individual AC5 peptide units readily build themselves, or self-assemble, into an ordered network of nanofibrils when in aqueous solution by the following process:
· Peptide strands line up with neighboring peptide strands, interacting via
hydrogen bonds (non-covalent bonds) to form a ribbon-like structure called
a beta sheet.
· This process continues such that hundreds of strands organize with charged
and polar side chains oriented on one face and non-polar side chains
oriented on the opposite face of the beta sheets.
· Interactions of the resulting structure with water molecules and ions
results in formation nanofibrils, which extend in length and can join
together to form larger nanofibers.
· This network of AC5 peptide nanofibers forms the physical-mechanical
barrier that is responsible for sealant, hemostatic and other properties,
regardless of the presence of antithrombotic agents, and which
subsequently becomes the scaffold that supports the repair and
regeneration of damaged tissue.
Based on the intended application, we believe that the underlying AC5 SAP technology can impart important features and benefits to our products that may include, for instance, stopping bleeding (hemostasis), mitigating contamination, modulating inflammation, donating moisture, and enabling an appropriate wound microenvironment conducive to healing. For instance, AC5 Advanced Wound System, which is indicated for the management of partial and full-thickness wounds, such as pressure sores, leg ulcers, diabetic ulcers, and surgical wounds, is shipped and stored at room temperature, is applied directly as a liquid, can conform to irregular wound geometry, and does not possess sticky or glue-like handling characteristics. We believe these properties enhance its utility in several settings and contribute to its user-friendly profile.
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We believe that our technology lends itself to a range of potential applications in which there is a wound inside or on the body, and in which there is need for a hemostatic agent or sealant. For instance, the results of certain preclinical and clinical investigations that either we have conducted or others have conducted on our behalf have shown quick and effective hemostasis with the use of AC5 SAP technology, and that time to hemostasis ("TTH") 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." Furthermore, the transparency and physical properties of certain AC5 Devices may enable a surgeon to operate through it in order to maintain a clearer field of vision and prophylactically stop or lessen bleeding as surgery starts, a concept that we call Crystal Clear Surgery™. An example of a product that contains related features and benefits is AC5 Topical Hemostat, which is indicated for use as a dressing and to control mild to moderate bleeding, each during the management of injured skin and the micro-environment of an acute surgical wound.
Operations
Much of our operational efforts to date, which we often perform in collaboration
with partners, have included selecting compositions and formulations for our
initial products; conducting preclinical studies, including safety and other
tests; conducting a human trial for safety and performance of AC5; developing
and conducting a human safety study to assess for irritation and sensitization
potential; securing marketing authorization for our first product in
Our long-term business plan includes the following goals:
· conducting biocompatibility, pre-clinical, and clinical studies on our
products and product candidates;
· obtaining additional marketing authorization for products in the United
States , Europe , and other jurisdictions as we may determine;
· continuing to develop third party relationships to manufacture,
distribute, market and otherwise commercialize our products;
· continuing to develop academic, scientific and institutional relationships
to collaborate on product research and development;
· expanding and maintaining protection of our intellectual property
portfolio; and
· developing additional product candidates in Dermal Sciences, Biosurgery,
and other areas.
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 manufacturing partners to scale up production of product
compliant with current good manufacturing practices ("cGMP"), which
activities will be ongoing and tied to our development and
commercialization needs;
· further clinical development of our product platform;
· assess our technology platform in order to identify and select product
candidates for potential advancement into development;
· seek regulatory input to guide activities related to expanded and new
product marketing authorizations;
· continue to expand and enhance our financial and operational reporting and
controls;
· pursue commercial partnerships; and
· 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.
In addition to capital required for operating expenses, depending upon additional input from EU and US regulatory authorities, as well as the potential for additional regulatory filings and approvals during the next 2 years, additional capital will be required.
We believe that the Company has cash on hand to meet its anticipated cash requirements into the second 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.
Merger with ABS and Related Activities
As noted earlier in this document, on
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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
On
On
On
During
On
On
The Company engaged
The Company also recently commenced commercial sales of its first product, AC5®Advanced Wound System.
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 endedDecember 31, 2020 Compared to Three months endedDecember 31, 2019 December 31, December 31, Increase 2020 2019 (Decrease) ($) ($) ($) Revenue - - - Operating Expenses General and administrative 919,458 975,833 (56,375 ) Research and development 343,590 643,734 (300,144 ) Operating loss (1,263,048 ) (1,619,567 ) (356,519 ) Other income (expense) 108,944 (40,187 ) (149,131 ) Net loss (1,154,104 ) (1,659,754 ) (505,650 ) 23 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
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.
Working Capital
At
December 31, September 30,
2020 2020
Total Current Assets $ 2,092,284 $ 2,142,975
Total Current Liabilities 742,446 646,241
Working Capital $ 1,349,838 $ 1,496,734 Total current assets as of
Total current liabilities as of
Cash Flow for the three months ended
December 31 December 31, 2020 2019
Cash Used in Operating Activities
- (2,455 )
Cash Provided by Financing Activities 1,050,000 2,167,162
Net (decrease) increase in cash
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Cash Used in Operating Activities
Cash used in operating activities decreased
Cash Used in Investing Activities
Cash used in investing activities decreased
Cash Provided by Financing Activities
Cash provided by financing activities decreased
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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
To date we have generated no operating revenues. We expect to generate revenue in the near future. That revenue will not be sufficient to fund our business operations and we will need to obtain additional 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 relating to our principal product candidate, seeking regulatory approval of that or any other product candidate we may choose to develop, commercializing any product candidate for which we are able to obtain regulatory approval or certification, 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 second 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
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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.
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) 2018-13, "Fair Value Measurement (Topic 820)
Disclosure Framework-Changes to the Disclosure Requirements for Fair Value
Measurement" was issued by the
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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