Arch Therapeutics : Quarterly report pursuant to Section 13 or 15(d)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2020

Commission File Number: 000-54986

ARCH THERAPEUTICS, INC.

(Exact name of registrant as specified in its charter)

Nevada	46-0524102
(State or other jurisdiction of incorporation or	(I.R.S. Employer Identification No.)
organization)
235 Walnut Street, Suite 6
Framingham, MA	01702
(Address of principal executive offices)	(Zip Code)

[phone]

Registrant's telephone number, including area code

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
N|A	N|A	N|A

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange ActLarge accelerated filer ¨

Accelerated filer ¨

Non-accelerated filer x

Smaller reporting company xEmerging growth company ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes¨ No x

As of February 11, 2021, 193,594,766 shares of the registrant's common stock were outstanding.

ARCH THERAPEUTICS, INC.

Quarterly Report on Form 10-Q

For the Three Months ended December 31, 2020

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets as of December 31, 2020 (unaudited) and September 30, 2020 3

Consolidated Statements of Operations for the Three Months ended December 31, 2020 and December 31, 2019 (unaudited) 4

Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the Three Months ended December 31, 2020 and December 31, 2019 (unaudited) 5

Consolidated Statements of Cash Flows for the Three Months ended December 31, 2020 and December 31, 2019 (unaudited) 6

Notes to Consolidated Financial Statements (unaudited) 7

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 20

Item 3. Quantitative and Qualitative Disclosures About Market Risk 28

Item 4. Controls and Procedures 28

PART II - OTHER INFORMATION 28

Item 1. Legal Proceedings 28

Item 1A. Risk Factors 28

Item 6. Exhibits 46

Arch Therapeutics, Inc.and Subsidiaries

Consolidated Balance Sheets

As of December 31, 2020 (Unaudited) and September 30, 2020

ASSETS Current assets:December 31, 2020

Cash Inventory

Prepaid expenses and other current assets

Total current assets

$

Long-term assets:

Property and equipment, net Other assets

Total long-term assets

Total assets

$

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current liabilities:

Accounts payable

Accrued expenses and other liabilities Current portion of PPP Loan

Total current liabilities

$

742,446646,241

Long-term liabilities:

Long-tem portion of PPP loan Series 1 convertible notes Series 2 convertible notes

879,413$ 959,309

1,015,740967,993

197,131215,673

2,092,284

September 30, 2020

4,1804,552

3,5003,500

7,6808,052

2,099,964$

2,151,027

391,151$ 342,050

294,022266,749

57,27337,442

119,027138,858

550,000550,000

1,050,000

-

• Derivative liability 2,207,4752,316,419

Total long-term liabilities

Total liabilities

Commitments and contingencies

Stockholders' deficit:

Common stock, $0.001 par value, 800,000,000 shares authorized as of December 31, 2020 and September 30, 2020, 193,094,766 and 193,044,766 shares issued and outstanding as of December 31, 2020 and September 30, 2020, respectively Additional paid-in capital

Accumulated deficit

Total stockholders'deficit

193,04541,948,512

(44,710,541)(43,556,437)

Total liabilities and stockholders' deficit

The accompanying notes are an integral part of these consolidated financial statements.

3

3,926,5023,005,2774,668,9483,651,518

-

-193,04541,862,901

(2,568,984)(1,500,491)

$

2,099,964$

2,151,027

Arch Therapeutics, Inc.and Subsidiaries

Consolidated Statements of Operations (Unaudited)

For the Three Months Ended December 31, 2020 and 2019

Three Months	Three Months
Ended	Ended
December	December
31, 2020	31, 2019

Revenues

$

Operating expenses:

General and administrative expenses Research and development expenses

Total operating expenses

343,590643,734

Operating loss

Other income/(expense)

Decrease (increase) to fair value of derivative

Total other income (expense)

108,944(40,187)

Net loss

$

Earnings per share - basic and diluted

Net loss per common share - basic and diluted Weighted common shares - basic and diluted

The accompanying notes are an integral part of these consolidated financial statements.

4

-$

-919,458975,833

1,263,048

(1,263,048)

1,619,567

(1,619,567)

108,944(40,187)

(1,154,104)$

(1,659,754)

$

(0.01)$ 193,044,766

(0.01) 184,102,916

Arch Therapeutics, Inc.and Subsidiaries

Consolidated Statements of Changes in Stockholders' (Deficit) (Unaudited) For the Three Months Ended December 31. 2020 and 2019

Common StockSharesBalance at September 30, 2019

Net loss

Issuance of common stock and warrants, net of financing costs

Stock based compensation expense

-

Balance at December 31, 2019

186,897,947$

Balance at September 30, 2020

193,044,766$

Net loss

Stock based compensation expense

--

Balance at December 31, 2020

172,612,233$

-

14,285,714

193,044,766$

The accompanying notes are an integral part of these consolidated financial statements.

5

AdditionalAmount

Paid-in Capital

172,612$

37,885,151$

-

-

14,286

2,152,876

-

199,052

186,898$

40,237,079$

193,045$

• 41,862,901$ (43,556,437)(1,500,491)

  --

• -(1,154,104)(1,154,104)

85,611

193,045$

Accumulated

Deficit

(38,865,060)$

(1,659,754)

--

(40,524,814)$

-Total Stockholders'

(Deficit)

(807,297)

(1,659,754)

2,167,162

199,052

85,611

41,948,512$

(44,710,541)$

Arch Therapeutics, Inc.and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

For the Three Months Ended December 31. 2020 and 2019

Three Months

Ended December 31, 2020

Cash flows from operating activities:

Net loss

Adjustments to reconcile net loss to cash used in operating activities:

$

(1,154,104)$

Three Months

Ended December 31, 2019

(1,659,754)

Depreciation

372

1,936

Stock-based compensation	85,611	199,052
(Decrease) increase to fair value of derivative	(108,944)	40,187
Changes in operating assets and liabilities:
(Increase) decrease in:
Inventory	(47,747)	146,292
Prepaid expenses and other current assets	18,542	33,194
Increase (decrease) in:
Accounts payable	49,101	(132,007)
Accrued expenses and other liabilities	27,273	49,452
Net cash used in operating activities	(1,129,896)	(1,321,648)
Cash flows from investing activities:
Purchases of property and equipment	-	(2,455)
Net cash used in investing activities	-	(2,455)
Cash flows from financing activities:
Proceeds received from Series 2 convertible notes	1,050,000	-
Proceeds from issued common stock and warrants, net of financing costs	-	2,167,162
Net cash provided by financing activities	1,050,000	2,167,162
Net (decrease) increase in cash	(79,896)	843,059
Cash, beginning of year	959,309	2,180,329
Cash, end of period	3,023,388
The accompanying notes are an integral part of these consolidated financial statements.
6
ARCH THERAPEUTICS, INC.

$

879,413$

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS

Organization and Description of Business

Arch Therapeutics, Inc., (together with its subsidiary, the "Company" or "Arch") was incorporated under the laws of the State of Nevada on September 16, 2009, under the name "Almah, Inc.". Effective June 26, 2013, the Company completed a merger (the "Merger") with Arch Biosurgery, Inc. (formerly known as Arch Therapeutics, Inc.), a Massachusetts corporation ("ABS"), and Arch Acquisition Corporation ("Merger Sub"), the Company's wholly owned subsidiary formed for the purpose of the transaction, pursuant to which Merger Sub merged with and into ABS and ABS thereby became the wholly owned subsidiary of the Company. As a result of the acquisition of ABS, the Company abandoned its prior business plan and changed its operations to the business of a biotechnology company. Our principal offices are located in Framingham, Massachusetts.

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 June 26, 2013, and the historical financial statements of the Company before the Merger have been replaced with the historical financial statements of ABS before the Merger in this report.

ABS was incorporated under the laws of the Commonwealth of Massachusetts on March 6, 2006 as Clear Nano Solutions, Inc. On April 7, 2008, ABS changed its name from Clear Nano Solutions, Inc. to Arch Therapeutics, Inc. Effective upon the closing of the Merger, ABS changed its name from Arch Therapeutics, Inc. to Arch Biosurgery, Inc.

The Company has generated no operating revenues to date and is devoting substantially all of its efforts toward product research and development. To date, the Company has principally raised capital through debt borrowings, the issuance of convertible debt, and the issuance of units consisting of common stock and warrants.

The Company expects to incur substantial expenses for the foreseeable future relating to research, development and commercialization of its potential products. However, there can be no assurance that the Company will be successful in securing additional resources when needed, on terms acceptable to the Company, if at all. Therefore, there exists substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments related to the recoverability of assets that might be necessary despite this uncertainty.

2.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying unaudited interim consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP"). The interim consolidated financial statements included herein are unaudited; however, they contain all normal recurring accruals and adjustments that, in the opinion of management, are necessary to present fairly our results of operations and financial position for the interim periods.

Although we believe that the disclosures in these unaudited interim consolidated financial statements are adequate to make the information presented not misleading, certain information normally included in the footnotes prepared in accordance with US GAAP has been omitted as permitted by the rules and regulations of the Securities and Exchange Commission ("SEC"). These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2020, filed with the SEC on December 11, 2020.

For a complete summary of our significant accounting policies, please refer to Note 2 included in Item 8 of our Form 10-K for the fiscal year ended September 30, 2020. There have been no material changes to our significant accounting policies during the three months ended December 31, 2020.

Basis of Presentation

The consolidated financial statements include the accounts of Arch Therapeutics, Inc. and its wholly owned subsidiary, Arch Biosurgery, Inc., a biotechnology company. All intercompany accounts and transactions have been eliminated in consolidation.