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 March 31, 2021

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
Securities registered pursuant to Section 12(b) of the Act:
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 Act

Large accelerated filer ¨	Accelerated filer ¨
Non-accelerated filer x	Smaller reporting company x
Emerging 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 May 5, 2021, 236,719,770 shares of the registrant's common stock were outstanding.

ARCH THERAPEUTICS, INC.

Quarterly Report on Form 10-Q

For the Three Months ended March 31, 2021
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2021 (unaudited) and September 30, 2020	3
Consolidated Statements of Operations for the Three and Six Months ended March 31, 2021 and March 31, 2020 (unaudited)	4
Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the Three and Six Months ended March 31, 2021 and March 31, 2020 (unaudited)	5
Consolidated Statements of Cash Flows for the Six Months ended March 31, 2021 and March 31, 2020 (unaudited)	6
Notes to Consolidated Financial Statements (unaudited)	7

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	34
Item 4.	Controls and Procedures	34
PART II - OTHER INFORMATION	34
Item 1.	Legal Proceedings	34
Item 1A. Risk Factors	34
Item 6.	Exhibits	58
	- 2 -

Arch Therapeutics, Inc. and Subsidiaries

Consolidated Balance Sheets

As of March 31, 2021 (Unaudited) and September 30, 2020

ASSETS			March 31,		September 30,
		2021			2020
Current assets:
Cash	$	5,560,816		$	959,309
Inventory			828,220		967,993
Prepaid expenses and other current assets			453,376		215,673
Total current assets			6,842,412			2,142,975
Long-term assets:
Property and equipment, net			6,838		4,552
Other assets			3,500		3,500
Total long-term assets			10,338			8,052
Total assets	$	6,852,750		$	2,151,027
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable	$	558,833	$	342,050
Accrued expenses and other liabilities			171,542		248,968
Current portion of derivative liability			1,000,000			-
Current portion of PPP Loan			116,772		37,442
Total current liabilities			1,847,147			628,460
Long-term liabilities:
Long-term portion of PPP loan			59,528			138,858
Series 1 convertible notes			550,000		550,000
Series 2 convertible notes			1,050,000			-
Accrued interest			86,918			17,781
Derivative liability			1,207,475			2,316,419
Total long-term liabilities			2,953,921			3,023,058
Total liabilities			4,801,068			3,651,518
Commitments and contingencies
Stockholders' equity (deficit):
Common stock, $0.001 par value, 800,000,000 shares authorized as of March 31, 2021 and September 30, 2020,	236,719,770
and 193,044,766 shares issued and outstanding as of March 31, 2021 and September 30, 2020			236,720		193,045
Additional paid-in capital			48,316,799			41,862,901
Accumulated deficit			(46,501,837)		(43,556,437)
Total stockholders' equity (deficit)			2,051,682			(1,500,491	)
Total liabilities and stockholders' equity (deficit)	$	6,852,750		$	2,151,027

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

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Arch Therapeutics, Inc. and Subsidiaries

Consolidated Statements of Operations (Unaudited)

For the Three and Six Months Ended March 31, 2021 and 2020

		Three Months		Three Months			Six Months		Six Months
		Ended March 31,		Ended March 31,
				Ended March 31,	Ended March 31,
		2021			2020
							2021			2020
Revenue	$	10,000		$	-			$	10,000		$	-
Operating expenses:
Cost of revenues		10,102			-			10,102			-
General and administrative expenses		1,339,833			892,136			2,230,024			1,867,969
Research and development expenses		410,611		262,433			754,202		906,167
Total costs and expenses		1,760,546			1,154,569				2,994,328			2,774,136
Loss from operations		(1,750,546)		(1,154,569)			(2,984,328)		(2,774,136)
Other income (expense):
Interest expense		(40,750)		-			(70,016)		-
Decrease to fair value of derivative		-		422,685			108,944		382,498
Total other income (expense)		(40,750	)		422,685				38,928			382,498
Net loss	$	(1,791,296)	$	(731,884)	$	(2,945,400)	$	(2,391,638)
Loss per share - basic and diluted
Net loss per common share - basic and diluted	$	(0.01)	$	-	$	(0.01)	$	(0.01)
Weighted common shares - basic and diluted		213,337,625			186,897,947				203,135,751			185,492,795

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

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Arch Therapeutics, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders' Equity (Deficit) (Unaudited)

For the Three and Six Months Ended March 31, 2021 and 2020

								Additional						Total
		Common Stock		Paid-in			Accumulated		Stockholders'
Three Months Ended March 31, 2020	Shares		Amount			Capital			Deficit		Equity (Deficit)
Balance at December 31, 2019		186,897,947		$	186,898		$	40,237,079			$	(40,524,814)		$	(100,837)
Net loss	-		-		-			(731,884)		(731,884)
Stock-based compensation expense	-		-		297,203			-		297,203
Balance at March 31, 2020	186,897,947		$	186,898		$	40,534,282			$	(41,256,698	)	$	(535,518	)
								Additional						Total
		Common Stock		Paid-in			Accumulated		Stockholders'
Three Months Ended March 31, 2021	Shares		Amount			Capital			Deficit		Equity (Deficit)
Balance at December 31, 2020		193,044,766		$	193,045	$	41,948,512		$	(44,710,541)	$	(2,568,984)
Net loss	-		-		-			(1,791,296)		(1,791,296)
Issuance of common stock and warrants, net of financing
costs	43,125,004			43,125			6,176,108				-		6,219,233
Issuance of restricted stock	550,000		550			(550)						-
Stock-based compensation expense	-		-		192,729			-		192,729
Balance at March 31, 2021	236,719,770		$	236,720		$	48,316,799			$	(46,501,837	)	$	2,051,682

Six Months Ended March 31, 2020

Balance at September 30, 2019

Net loss

Issuance of common stock and warrants, net of financing costs

Issuance of restricted stock

Stock-based compensation expense

Balance at March 31, 2020

						Additional					Total
Common Stock		Paid-in		Accumulated		Stockholders'
Shares		Amount			Capital		Deficit		Equity (Deficit)
172,612,233		$	172,612		$	37,885,151		$	(38,865,060)		$	(807,297)
-		-		-		(2,391,638)		(2,391,638)
14,285,714			14,286			2,152,876			-		2,167,162
-		-		496,255		-		496,255
									)			)
186,897,947		$	186,898		$	40,534,282		$	(41,256,698	$	(535,518

								Additional					Total
		Common Stock		Paid-in		Accumulated	Stockholders'
Six Months Ended March 31, 2021	Shares		Amount			Capital		Deficit	Equity (Deficit)
Balance at September 30, 2020		193,044,766		$	193,045		$	41,862,901		$	(43,556,437)			(1,500,491)
Net loss	-		-		-		(2,945,400)		(2,945,400)
Issuance of common stock and warrants, net of financing
costs	43,125,004			43,125			6,176,108			-		6,219,233
Issuance of restricted stock	550,000		550			(550)					-
Stock-based compensation expense	-		-		278,340		-		278,340
Balance at March 31, 2021	236,719,770		$	236,720		$	48,316,799		$	(46,501,837	)	$	2,051,682

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

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Arch Therapeutics, Inc. and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

For the Six Months Ended March 31, 2021 and 2020

						Six Months
	Six Months Ended	Ended March 31,
		March 31, 2021		2020
Cash flows from operating activities:
Net loss	$	(2,945,400)	$	(2,391,638)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation		989				3,701
Stock-based compensation		278,340			496,255
Decrease to fair value of derivative		(108,944)		(382,498)
Inventory obsolescence charge		181,988			49,692
Changes in operating assets and liabilities:
(Increase) decrease in:
Inventory		(42,215)		(657,000)
Prepaid expenses and other current assets		(237,703)		222,014
Increase (decrease) in:
Accounts payable		216,783			190,752
Accrued interest		69,137				-
Accrued expenses and other liabilities		(77,426)		(87,385)
Net cash used in operating activities		(2,664,451	)		(2,556,107	)
Cash flows from investing activities:
Purchases of property and equipment		(3,275)		(2,455)
Net cash used in investing activities		(3,275	)		(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		6,219,233				2,167,162
Net cash provided by financing activities		7,269,233				2,167,162
Net increase (decrease) in cash		4,601,507				(391,400)
Cash, beginning of year		959,309			2,180,329
Cash, end of period	$	5,560,816			$	1,788,929
Non-cash financing activities:
Issuance of restricted stock for services	$	103,750		$	-

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

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ARCH THERAPEUTICS, INC.

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.

We have only recently commenced commercial sales of our first product, AC5® Advanced Wound System, 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. 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.

- 7 -

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 six months ended March 31, 2021.

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.

We are a biotechnology company marketing or developing a number of products and are devoting substantially all of its efforts to developing technologies, raising capital, establishing customer and vendor relationships, and recruiting and retaining 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.

Recently Issued 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 Financial Accounting Standards Board (FASB) in August 2018. The purpose of this amendment in this Update is to modify the disclosure requirements on fair value measurements in Topic 820. The amendments in this Update are effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019. The Company adopted ASU 2018-13 during our first quarter of fiscal year 2021, and the impact was considered immaterial on our consolidated financial statements.

ASU 2020-06, "Debt with Conversion and other Options (subtopic 470-02) and Derivatives and Hedging-Contracts in Entity's Own Equity (Subtopic 815-40)" was issued by the FASB in August 2020. The purpose of this amendment is to address issues identified as a result of the complexity associated with applying generally accepted accounting principles (GAAP) for certain financial instruments with characteristics of liability and equity. The amendments in this Update are effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2023. Early adoption is permitted. The Company does not believe that this guidance will have a material impact on its consolidated results of operations, financial position or disclosures

Cash

The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. The Company had no cash equivalents as of March 31, 2021 and September 30, 2020.

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, goods-in-process and finished goods 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.

Concentration of Credit Risk