The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
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, 2016, filed with the SEC on December 5, 2016.
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, 2016. There have been no material changes
to our significant accounting policies during the nine months ended June 30, 2017.
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.
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
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) 2016-15, “Statement of Cash
Flows (Topic 230) Classification of Certain Cash Receipts and Payments” was issued by the Financial Accounting Standards
Board (FASB) in August 2016. The purpose of this amendment is to address eight specific cash flow issues with the objective of
reducing the existing diversity in practice. 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, 2017. 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.
ASU 2016-09, “Compensation—Stock Compensation (Topic
718) Improvements to Employee Share-Based Payment Accounting” was issued by the FASB in March 2016. The purpose of this amendment
is to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification
of awards as either equity or liabilities, and classification on the statement of cash flows. 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, 2016. 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.
ASU 2016-02, “Leases (Topic 842)” was issued by the
FASB in February 2016. The purpose of this amendment requires the recognition of lease assets and lease liabilities by lessees
for those leases previously classified as operating leases. 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, 2018. 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.
ASU 2014-15, “Presentation of Financial Statements-Going Concern
(Subtopic 205-40) – Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern” was
issued by the FASB in August 2014. The primary purpose of the ASU is to provide guidance in GAAP about management’s responsibility
to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related
footnote disclosures. The amendments should reduce diversity in the timing and content of footnote disclosure. ASU 2014-15 is effective
for the annual period ending after December 15, 2016, and for the annual periods and interim periods thereafter. Early adoption
is permitted. The Company is currently assessing the impact of this guidance, but does not believe that it will have a material
impact on its consolidated results of operations, financial position or disclosures.
ASU 2014-12, “Compensation-Stock Compensation (Topic 718)
– Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after
the Requisite Service Period” was issued by the FASB in June 2014. ASU 2014-12 requires that compensation cost should be
recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation
cost attributable to the period(s) for which the requisite service has already been rendered. ASU 2014-12 is effective for public
business entities for annual periods and interim periods within the annual periods beginning after December 15, 2015. Early adoption
is permitted.
The Company adopted ASU 2014-12 during our first quarter of fiscal year 2017, which
had no impact on our consolidated financial statements, and will apply the new guidance in future periods.
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 June 30, 2017 and September
30, 2016.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration
of credit risk consist primarily of cash. The Company maintains its cash in bank deposits accounts, which, at times, may exceed
federally insured limits. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to
any significant credit risk on cash.
Deferred Offering Costs
Deferred Offering Costs consist of fees and expenses incurred in
connection with the public offering and sale of the Company’s common stock, including legal, accounting, printing and other
related expenses. These costs are netted against the proceeds received as a reduction to additional paid-in capital.
Property and Equipment
Property and equipment are recorded at cost and depreciated using
the straight-line method over the estimated useful life of the related asset. Upon sale or retirement, the cost and accumulated
depreciation are eliminated from their respective accounts, and the resulting gain or loss is included in income or loss for the
period. Repair and maintenance expenditures are charged to expense as incurred.
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. For the nine month periods June 30, 2017 and 2016
there has not been any impairment of long-lived assets.
Convertible Debt
The Company records a discount to convertible notes for the intrinsic
value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common
stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Debt discounts under
these arrangements are amortized to noncash interest expense using the effective interest rate method over the term of the related
debt to their date of maturity. If a security or instrument becomes convertible only upon the occurrence of a future event outside
the control of the Company, or, is convertible from inception, but contains conversion terms that change upon the occurrence of
a future event, then any contingent beneficial conversion feature is measured and recognized when the triggering event occurs and
contingency has been resolved.
Income Taxes
In accordance with ASC 740,
Income Taxes
, the Company
recognizes deferred tax assets and liabilities for the expected future tax consequences or events that have been included in the
Company’s 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.
The Company provides 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. The Company has no reserves
related to uncertain tax positions as of June 30, 2017 and September 30, 2016.
Research and Development
The Company expenses 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 stock-based compensation in accordance
with the guidance of FASB ASC Topic 718,
Compensation-Stock Compensation
(“FASB ASC Topic 718”), which requires
all share-based payments to employees, including grants of employee stock options, to be recognized in the consolidated financial
statements based on their fair values. The Company accounts for non-employee stock-based compensation in accordance with the guidance
of FASB ASC Topic 505,
Equity
(“FASB ASC Topic 505”), which requires that companies recognize compensation expense
based on the estimated fair value of options granted to non-employees over their vesting period, which is generally the period
during which services are rendered by such non-employees. FASB ASC Topic 505 requires the Company to re-measure the fair value
of stock options issued to non- employee at each reporting period during the vesting period or until services are complete.
In accordance with FASB ASC Topic 718, the Company has elected to
use the Black-Scholes option pricing model to determine the fair value of options granted and recognizes the compensation cost
of share-based awards on a straight-line basis over the vesting period of the award.
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. The Company does not have a sufficient history
of market prices of the common stock, and as such volatility is estimated in accordance with ASC 718-10-S99 Staff Accounting Bulletin
(“SAB”) No. 107,
Share-Based Payment
(“SAB No. 107”), using historical volatilities of similar public
entities. The life term for awards uses simplified method for all “plain vanilla” options, as defined in ASC 718-10-S99
and the contractual term for all other employee and non-employee awards. The risk-free interest rate assumption is based on observed
interest rates appropriate for the terms of our awards. The dividend yield assumption is based on history and the expectation of
paying no dividends. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. Stock-based compensation expense, when recognized in the consolidated financial statements,
is based on awards that are ultimately expected to vest.
Fair Value Measurements
The Company measures both financial and nonfinancial assets
and liabilities in accordance with FASB ASC Topic 820,
Fair Value Measurements and Disclosures
, except those that are recognized
or disclosed in the consolidated 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 the Company’s own views about the assumptions market participants would use in pricing
the asset or liability.
At June 30, 2017 and September 30, 2016, the carrying amounts of
cash, accounts payable, accrued expenses and other liabilities, and convertible notes approximate fair value because of their short-term
nature. The fair value of note payable, which is influenced by interest rates and the Company’s liquidity, approximates carrying
value.
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.
Subsequent Events
The Company evaluated all events or transactions that occurred commencing
from July 1, 2017 and ending on July 26, 2017 the date which these consolidated financial statements were issued. The Company
disclosed material subsequent events in Note 12.
Going Concern Basis of Accounting
As reflected in the consolidated financial statements, the Company
has an accumulated deficit, has suffered significant net losses and negative cash flows from operations, has not generated operating
revenues, and has limited working capital. The continuation of our business as a going concern is dependent upon raising additional
capital and eventually attaining and maintaining profitable operations. In particular, as of June 30, 2017, the Company will be
required to raise additional capital, obtain alternative means of financial support, or both, in order to continue to fund operations,
and therefore there is substantial doubt about our ability to continue as a going concern. The Company expects to incur substantial
expenses into the foreseeable future for the research, development and commercialization of its potential products. In addition,
the Company will require additional financing in order to seek to license or acquire new assets, research and develop any potential
patents and the related compounds, and obtain any further intellectual property that the Company may seek to acquire. Historically,
the Company has principally funded operations through debt borrowings, the issuance of convertible debt, and the issuance of units
consisting of common stock and warrants.
The accompanying consolidated financial statements
have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and
the settlement of liabilities and commitments in the normal course of business. The consolidated financial statements do not include
any adjustments that might result from this uncertainty.
|
3.
|
PROPERTY AND EQUIPMENT
|
At June 30, 2017 and September 30, 2016, property
and equipment consisted of:
|
|
Estimated
Useful Life
|
|
June 30,
2017
|
|
|
September 30,
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Computer equipment
|
|
3 years
|
|
$
|
4,293
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Furniture and fixtures
|
|
5 years
|
|
|
2,925
|
|
|
|
2,925
|
|
|
|
|
|
|
|
|
|
|
|
|
Lab equipment
|
|
5 years
|
|
|
1,000
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,218
|
|
|
|
3,925
|
|
|
|
|
|
|
|
|
|
|
|
|
Less - accumulated depreciation
|
|
|
|
|
4,760
|
|
|
|
3,925
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
|
$
|
3,458
|
|
|
$
|
-
|
|
Depreciation expense recorded for the three months ended June 30,
2017 and 2016 was $357 and $0, respectively.
For the nine months ended June 30, 2017 and 2016 depreciation expense
recorded was $835 and $0, respectively.
|
4.
|
STOCK-BASED COMPENSATION
|
On June 18, 2013, the Company established the 2013 Stock Incentive
Plan (the “2013 Plan”). Under the 2013 Plan, during the fiscal year ended September 30, 2016, a maximum number of 16,114,256
shares of the Company’s authorized and available common stock could be issued in the form of options, stock appreciation
rights, sales or bonuses of restricted stock, restricted stock units or dividend equivalent rights, and an award may consist of
one such security or benefit, or two or more of them in any combination or alternative. The 2013 Plan provides that on the first
business day of each fiscal year commencing with fiscal year 2014, the number of shares of our common stock reserved for issuance
under the 2013 Plan for all awards except for incentive stock option awards will be subject to increase by an amount equal to the
lesser of (A) 3,000,000 Shares, (B) four (4) percent of the number of shares outstanding on the last day of the immediately preceding
fiscal year of the Company, or (C) such lesser number of shares as determined by the Company’s Board of Directors (the “Board”).
The exercise price of each option shall be the fair value as determined in good faith by the Board at the time each option is granted.
On October 1, 2016, the aggregate number of authorized shares under the Plan was further increased by 3,000,000 shares to a total
of 19,114,256 shares.
As of June 30, 2017, a total of 13,524,212 options had been issued
to employees and directors and 5,282,500 options had been issued to consultants. The exercise price of each option has either been
equal to the closing price of a share of our common stock on the date of grant or has been determined to be in compliance with
Internal Revenue Section 409A.
Share-based awards
During the three and nine months ended June 30, 2017, the
Company granted options to employees and directors to purchase 0 and 2,310,000, respectively, shares of common stock under
the 2013 Plan. In addition, during the three and nine months ended June 30, 2017, the Company granted options to consultants
to purchase 0 and 205,000, respectively shares of common stock under the 2013 Plan. The options have terms ranging from 1 to
10 years, are subject to vesting terms over periods ranging up to 3 years and have exercise prices ranging from $0.60 to
$0.65.
The Company recognizes compensation expense for stock option awards
on a straight-line basis over the applicable service period of the award. The service period is generally the vesting period, with
the exception of options granted subject to a consulting agreement, whereby the option vesting period and the service period are
defined pursuant to the terms of the consulting agreement. Share-based compensation expense for awards granted during the three
and nine months ended June 30, 2017 was based on the fair market value at period end or grant date fair value estimated using the
Black-Scholes Option Pricing Model. The following assumptions were used to calculate the fair value of share based compensation
for the three and nine months ended June 30, 2017; expected volatility, 72.26% - 119.44%, risk-free interest rate, 1.01% - 2.40%,
expected forfeiture rate, 0.00%, expected dividend yield, 0.00%, expected term, 1 to 10 years.
Expected price volatility is the measure by which the Company’s
stock price is expected to fluctuate during the expected term of an option. The Company exited shell company status on June 26,
2013. In situations where a newly public entity has limited historical data on the price of its publicly traded shares and no other
traded financial instruments, authoritative guidance is provided on estimating this assumption by basing its expected volatility
on the historical, expected, or implied volatility of similar entities whose share option prices are publicly available. In making
the determination as to similarity, the guidance recommends the consideration of industry, stage of life cycle, size and financial
leverage of such other entities. The Company’s expected volatility is derived from the historical daily change in the market
price of its common stock since it exited shell company status, as well as the historical daily change in the market price for
the peer group as determined by the Company.
For so called “plain vanilla” options granted to employees,
the expected term of the options is based upon the simplified method as defined in ASC 718-10-S99 which averages an award’s
weighted-average vesting period and the contractual term for share options. The Company will continue to use the simplified method
until it has the historical data necessary to provide a reasonable estimate of expected life in accordance with ASC Topic 718.
The Company’s estimation of the expected term for stock options not subject to the simplified method is based upon the contractual
term of the option award. For the purposes of estimating the fair value of stock option awards, the risk-free interest rate used
in the Black-Scholes calculation is based on the prevailing U.S. Treasury yield. The Company has never paid any dividends on its
common stock and does not anticipate paying dividends on its common stock in the foreseeable future.
Stock-based compensation expense recognized in the Company’s
consolidated statements of operations is based on awards ultimately expected to vest, reduced for estimated forfeitures. Authoritative
guidance requires forfeitures to be estimated at the time of grant, and revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. Prior to the year ended September 30, 2015, the Company did not experience any forfeitures
of stock options. During the year ended September 30, 2016 and the three and nine months ended June 30, 2017, the Company experienced
an insignificant number of forfeitures of stock options. Since the Company has a limited history of stock option forfeitures it
continues to estimate the forfeiture rate of its outstanding stock options as zero, but will continually evaluate its historical
data as a basis for determining expected forfeitures
Common Stock Options
Stock compensation activity under the 2013 Plan for the nine months
ended June 30, 2017 follows:
|
|
Option
Shares
Outstanding
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term (years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at September 30, 2016
|
|
|
12,379,210
|
|
|
$
|
0.33
|
|
|
|
6.4
|
|
|
$
|
4,341,816
|
|
Awarded
|
|
|
2,515,000
|
|
|
$
|
0.65
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
(240,000
|
)
|
|
$
|
0.35
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited/Cancelled
|
|
|
(150,000
|
)
|
|
$
|
0.40
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at June 30, 2017
|
|
|
14,504,210
|
|
|
$
|
0.38
|
|
|
|
4.96
|
|
|
$
|
3,290,979
|
|
Vested
|
|
|
11,230,022
|
|
|
$
|
0.35
|
|
|
|
5.37
|
|
|
$
|
2,869,896
|
|
Vested and expected to vest at June 30, 2017
|
|
|
14,504,210
|
|
|
$
|
0.38
|
|
|
|
4.96
|
|
|
$
|
3,290,979
|
|
As of June 30, 2017, 1,465,861 shares are available for future
grants under the 2013 Plan. Share-based compensation expense recorded in the Company’s Consolidated Statements of
Operations for the three months ended June 30, 2017 and 2016 resulting from stock options awarded to the Company’s
employees, directors and consultants was approximately $326,000 and $349,000, respectively. Of this amount during the three
months ended June 30, 2017 and 2016, $82,000 and $60,000, respectively, was recorded to research and development expenses,
and $244,000 and $289,000, respectively was recorded in general and administrative expenses in the Company’s
Consolidated Statements of Operations. Share-based compensation expense recorded in the Company’s Consolidated
Statements of Operations for the nine months ended June 30, 2017 and 2016 resulting from stock options awarded to the
Company’s employees, directors and consultants was approximately $1,058,000 and $708,000, respectively. Of this amount
during the nine months ended June 30, 2017 and 2016, $289,000 and $228,000, respectively, was recorded to research and
development expenses, and $769,000 and $480,000, respectively was recorded in general and administrative expenses in the
Company’s Consolidated Statements of Operations.
During the nine months ended June 30, 2017, 240,000
stock options awarded under the 2013 Stock Incentive Plan were exercised on a cashless basis for an aggregate issuance of
106,666 shares of the Company’s Common Stock.
As of June 30, 2017, there is approximately $963,000 of unrecognized
compensation expense related to unvested stock-based compensation arrangements granted under the 2013 Plan. That cost is expected
to be recognized over a weighted average period of 1.84 years.
Restricted Stock
On February 3, 2017, the Company awarded 1,750,000 shares of Restricted
Stock to members of the Board of Directors and management. The shares subject to this grant are awarded under the 2013 Plan and
100% shall fully vest on the second anniversary of the date of grant. In addition, in the event of a Change of Control (as such
term is defined in the 2013 Plan), 100% of the grants will immediately vest.
On August 9, 2016, we entered into a consulting agreement with Acorn
Management Partners, LLC (“Acorn”). In consideration of the services to be provided under and in accordance with the
terms of the consulting agreement, we issued (i) 225,000 shares of Common Stock under our 2013 Stock Incentive Plan at an agreed
upon value of $0.72 per share, which was the closing price of our common stock on August 9, 2016; and (ii) an option under our
2013 Stock Incentive Plan to purchase up to 375,000 shares of Common Stock at an exercise price of price of $0.72 per share, in
each case to John R. Exley, Acorn’s Chief Executive Officer and the party designated by Acorn to receive its shares and option.
The shares and option are subject to time-based vesting restrictions. Of the 225,000 shares of Common Stock granted to Mr. Exley,
75,000 vest 90 days from the date of the award, 75,000 vest 120 days from the date of the award and the remaining 75,000 shares
are scheduled to vest 150 days from the date of the award. Of the stock options to purchase up to 375,000 shares of Common Stock
awarded to Mr. Exley, 125,000 vest 90 days from the date of the award, 125,000 vest 120 days from the date of the award and the
remaining 125,000 shares are scheduled to vest 150 days from the date of the award. The issuance and sale of the shares of Common
Stock and option to Acorn has not been registered under the Securities Act, and such securities may not be offered or sold in the
United States absent registration under or exemption from the Securities Act and any applicable state securities laws. The securities
were issued and sold in reliance upon an exemption from registration afforded by Section 4(a)(2) of the Securities Act based on
the following facts: Acorn has represented that it is an accredited investor as defined in Regulation D promulgated under the Securities
Act, that it is acquiring the securities for investment only and not with a view towards, or for resale in connection with, a distribution
thereof in violation of applicable securities laws; that it understood that the securities would be issued as restricted securities
and as a result, it must bear the economic risk of its investment in the securities for an indefinite period of time.
Restricted stock activity under the 2013 Plan for the nine months
ended June 30, 2017 follows:
|
|
Restricted
Stock
Activity
|
|
Non Vested at October 1, 2016
|
|
|
225,000
|
|
Awarded
|
|
|
1,750,000
|
|
Vested
|
|
|
(225,000
|
)
|
Forfeited
|
|
|
-
|
|
Non Vested at June 30, 2017
|
|
|
1,750,000
|
|
The weighted average restricted stock
award date fair value information for the nine months ended June 30, 2017 follows:
|
|
Weighted
Average
Restricted
Stock Award
|
|
Non Vested at October 1, 2016
|
|
$
|
0.72
|
|
Awarded
|
|
|
0.65
|
|
Vested
|
|
|
0.72
|
|
Forfeited
|
|
|
-
|
|
Non Vested at June 30, 2017
|
|
$
|
0.65
|
|
Non-employee restricted shares subject to vesting are revalued at
each vesting date and at the end of the reporting period, with all changes in fair value recorded as stock-based compensation expense.
For the three and nine months ended June 30, 2017, compensation expense recorded for the restricted stock awards was approximately
$142,000 and $391,000.
|
5.
|
Restricted Stock Awarded
Outside the 2013 Stock Incentive Plan
|
On May 3, 2016, the Company awarded 2,000,000 shares of Restricted
Stock to members of the Board of Directors and management in a private placement in reliance upon an exemption from registration
afforded by Section 4(a)(2) of the Securities Act. The shares subject to this grant are outside the 2013 Plan and 100% shall fully
vest on the second anniversary of the date of grant. In addition, in the event of a Change of Control (as such term is defined
in the 2013 Plan), 100% of the grants will immediately vest.
On August 6, 2015, we entered into separate consulting agreements
with two investor relations firms, Excelsior Global Advisors LLC (“
Excelsior
”) and Acorn. In consideration of
the services to be provided under and in accordance with the terms of each consulting agreement, we issued 300,000 shares of Common
Stock subject to time-based vesting restrictions to each of Excelsior and John R. Exley, Acorn’s Chief Executive Officer
and the party designated by Acorn to receive its shares, at an agreed upon value of $0.35 per share, which was the closing price
of our common stock on August 6, 2015. 150,000 of shares of common stock granted to each of Excelsior and Mr. Exley vested immediately
upon issuance, and the remaining 150,000 shares are scheduled to vest in 75,000, 50,000 and 25,000 share increments on September
4, 2015, October 2, 2015, and November 4, 2015, respectively. The issuance and sale of the shares of common stock to Excelsior
and Acorn has not been registered under the Securities Act, and such securities may not be offered or sold in the United States
absent registration under or exemption from the Securities Act and any applicable state securities laws. The securities were issued
and sold in reliance upon an exemption from registration afforded by Section 4(a)(2) of the Securities Act based on the following
facts: each of Excelsior and Acorn has represented that it is an accredited investor as defined in Regulation D promulgated under
the Securities Act, that it is acquiring the securities for investment only and not with a view towards, or for resale in connection
with, a distribution thereof in violation of applicable securities laws; that it understood that the securities would be issued
as restricted securities and as a result, it must bear the economic risk of its investment in the securities for an indefinite
period of time.
Restricted Stock activity for the nine months ended June 30, 2017
and 2016 is as follows:
|
|
2017
|
|
|
2016
|
|
Non Vested at October 1
|
|
|
2,000,000
|
|
|
|
150,000
|
|
Awarded
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
-
|
|
|
|
(150,000
|
)
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
Non Vested at June 30, 2017
|
|
|
2,000,000
|
|
|
|
-
|
|
The weighted average restricted stock award
date fair value information for the nine months ended June 30, 2017 and 2016 follows:
|
|
2017
|
|
|
2016
|
|
Non Vested at October 1, 2016
|
|
$
|
0.39
|
|
|
$
|
0.35
|
|
Awarded
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
-
|
|
|
|
0.35
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
Non Vested at June 30, 2017
|
|
$
|
0.39
|
|
|
$
|
-
|
|
For the three months ended June 30, 2017 and 2016, compensation
expense recorded for the restricted stock awards was approximately $97,000 and $98,000, respectively. For the nine months ended
June 30, 2017 and 2016, compensation expense recorded for the restricted stock awards was approximately $292,000 and $114,500,
respectively.
Beginning March 11, 2015 and through March 13, 2015, the Company
entered into a series of substantially similar subscription agreements (each a “Subscription Agreement”) with each
of Anson Investments Master Fund, Ltd., Equitec Specialists, LLC and Capital Ventures International (collectively, the “Note
Investors”) pursuant to which the Company issued unsecured 8% Convertible Notes (the “Notes”, and such transaction,
the “Notes Offering”) to the Note Investors in the aggregate principal amount of $750,000. On the closing of the Notes
Offering on March 13, 2015 (the “Closing Date”), each Note Investor was issued a Note in the principal amount of $250,000.
The Company did not engage any underwriter or placement agent in connection with the Notes Offering.
The Notes were originally due and payable on March 13, 2016
(the “Stated Maturity Date”) and they were not prepayable or redeemable by the Company prior to the stated
maturity date. The Notes bore interest on the unpaid principal balance at a rate equal to eight percent (8.0%) (computed on the
basis of the actual number of days elapsed in a 360-day year) per annum until either (a) converted into shares of the
Company’s common stock, $0.001 par value per share (“Common Stock”) or (b) the outstanding principal and
accrued interest on the Notes is paid in full by the Company. Interest on the Notes became due and payable upon their
conversion or the Stated Maturity Date and could become due and payable upon the occurrence of an event of default under the
Notes. The Notes contained customary events of default, which include, among other things, (i) the Company’s failure to
pay other indebtedness of $100,000 or more within the specified cure period for such breach; (iii) the acceleration of
the stated maturity of such indebtedness; (iii) the insolvency of the Company; and (iv) the receipt of final,
non-appealable judgments in the aggregate amount of $100,000 or more.
On September 8, 2015, we, along with the then current holders of
the Convertible Notes, entered into a series of substantially similar subordination agreements with the Massachusetts Life Sciences
Center (“
MLSC
” and such agreements, the “
Subordination Agreements
”), pursuant to which the
holders of the Convertible Notes agreed to subordinate their right to payment under the Convertible Notes to MLSC’s right
to receive payments under the MLSC Loan Agreement. Under the terms of the Subordination Agreements, the indebtedness accrued under
the Convertible Notes could not be repaid unless and until all indebtedness and fees owed to MLSC under the MLSC Loan Agreement
were repaid in full, but the right to convert the Convertible Notes into shares of Common Stock was expressly allowed.
At any time prior to the Stated Maturity Date, the holders of the
Notes had the right to convert some or all of such Notes into the number of shares of Common Stock determined by dividing (a) the
aggregate sum of the (i) principal amount of the Note to be converted, and (ii) amount of any accrued but unpaid interest with
respect to such portion of the Note to be converted; and (b) the conversion price then in effect (the shares of Common Stock issuable
upon such conversion, the “Conversion Shares”). The initial conversion price was $0.20 per share, and it could be (A)
reduced to any amount and for any period of time deemed appropriate by the Board of Directors of the Company, or (B) reduced or
increased proportionately as a result of stock splits, stock dividends, recapitalizations, reorganizations, and similar transactions.
A holder did not have the right to convert any portion of a Note, if after giving effect to such conversion, the holder, together
with its affiliates collectively, would beneficially own more than 4.99% or 9.99% (at the holder’s discretion) of the shares
of Common Stock outstanding immediately after giving effect to such conversion.
The issuance and sale of the Notes and Conversion Shares (collectively,
the “Securities”) was not, registered under the Securities Act of 1933, as amended (the “Securities Act”),
and the Securities may not be offered or sold in the United States absent registration under or exemption from the Securities Act
and any applicable state securities laws. The Securities were issued and sold in reliance upon an exemption from registration afforded
by Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D promulgated under the Securities Act.
During the three months ended June 30, 2016, $100,000 of Notes and
$8,622 of accrued interest were converted into 543,111 shares of the Company’s Common Stock. During the nine months ended
June 30, 2016, $605,000 of Notes and $39,900 of accrued interest were converted into 3,224,494 shares of the Company’s Common
Stock. As of June 30, 2017 and September 30, 2016, principal amounts outstanding under the Notes amounted to $0.
Derivative Liabilities
The Company accounted for the conversion feature embedded within
the Notes in accordance with ASC 815-10,
Derivatives and Hedging
. The options to convert into Common Stock are not indexed
to the Company’s stock and are not classified within stockholders’ equity, the options to convert are recorded as liabilities
at fair value. They are marked to fair value each reporting period through the consolidated statement of operations.
On the Closing Date, the derivative
liability was recorded at fair value of $354,988 with the remaining proceeds of $395,012 allocated to the Notes. The allocation
of funds to the derivative liability resulted in a discount on the Notes, which was accreted to interest expense over the life
of the loan. For the three and nine months ended June 30, 2016, $29,101 and $131,252, respectively of the loan discount has been
accreted to interest expense. As of September 30, 2016 the accreted balance of the outstanding Notes was $0.
As a result of the conversion of notes we recorded other income
of $0 and $142,964 for the three and nine months ended June 30, 2016, respectively and due to the change in the estimated fair
value of the derivative liability we recorded other income of $0 and $192,128 for the three and nine months ended June 30, 2016,
respectively.
Fair Value Measurements Using Significant Unobservable
Inputs
(Level 3)
|
|
|
|
|
|
Convertible
Debt
Derivative Liability
|
|
Beginning balance at September 30, 2015
|
|
$
|
335,092
|
|
|
|
|
|
|
Conversion of notes
|
|
|
(142,964
|
)
|
|
|
|
|
|
Adjustments to estimated fair value
|
|
|
(192,128
|
)
|
|
|
|
|
|
Ending balance at June 30, 2016
|
|
$
|
-
|
|
The derivative liability was valued as of September 30, 2015,
October 29, 2015 (weighted average conversion date) and December 31, 2015 using Monte Carlo Simulations with the following assumptions:
|
|
September 30,
|
|
|
October 29,
|
|
|
December 31,
|
|
|
|
2015
|
|
|
2015
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Stated interest rate
|
|
|
8.0
|
%
|
|
|
8.0
|
%
|
|
|
8.0
|
%
|
Exercise price per share
|
|
$
|
0.20
|
|
|
$
|
0.20
|
|
|
$
|
0.20
|
|
Expected volatility
|
|
|
80.0
|
%
|
|
|
85.0
|
%
|
|
|
110.0
|
%
|
Risk-free interest rate
|
|
|
0.07
|
%
|
|
|
0.14
|
%
|
|
|
0.16
|
%
|
Credit adjusted discount rate
|
|
|
22.0
|
%
|
|
|
22.0
|
%
|
|
|
25.0
|
%
|
Remaining expected term of underlying securities (years)
|
|
|
0.46
|
|
|
|
0.38
|
|
|
|
0.21
|
|
On September 30, 2013, the Company entered into the Life Sciences
Accelerator Funding Agreement (the “
MLSC Loan Agreement
”) with the Massachusetts Life Sciences Center (“
MLSC
”),
pursuant to which MLSC provided an unsecured subordinated loan in the amount of $1,000,000 (the “
MLSC Loan
”).
The loan originally bore interest at a rate of 10% per annum, and was originally scheduled to become fully due and payable on the
earlier of (i) September 30, 2018, (ii) the occurrence of an event of default under the MLSC Loan Agreement, or (iii) the completion
of a sale of substantially all of our assets, a change-of-control transaction (a “
Qualified Sale
”) or one or
more financing transactions in which we receive from third parties other than our then existing shareholders net proceeds of $5,000,000
or more in a 12-month period (a “
Qualified Financing
”). The MLSC Loan Agreement includes warrants to purchase
145,985 shares of the Company’s Common Stock at an exercise price of $0.27 per share. None of the warrants, which expire
on September 30, 2023, have been exercised as of June 30, 2017.
Of the $1,000,000, the Company allocated $944,707 to the loan
and $55,293 to the warrants. The allocation of funds to the warrants resulted in a discount on the loan, which is accreted to interest
expense over the life of the loan. For the three months ended June 30, 2017 and 2016, approximately $0 and $2,800, respectively
of the loan discount was accreted to interest expense. For the nine months ended June 30, 2017 and 2016, approximately $22,100
and $8,300, respectively of the loan discount was accreted to interest expense. As of June 30, 2017 and September 30, 2016 the
accreted balance of the MLSC Loan was $0 and $977,882, respectively.
On September 28, 2016, the Company
and MLSC entered into that certain Amendment Agreement to Arch Therapeutics, Inc. Accelerator Funding Agreement (the “
Amendment
”).
Under the terms of the Amendment, (i) interest on the MLSC Loan decreased from 10% per annum to 7% per annum beginning October
3, 2016; and (ii) the MLSC Loan became due and payable on the earlier of October 3, 2017 (the “
Maturity Date
”),
the occurrence of a Corporate Event (which was defined as the occurrence of either a Qualified Sale or Qualified Financing), or
the occurrence of a Default (as defined in the promissory note issued in connection with the MLSC Loan Agreement). In addition,
under the terms of the Amendment, (a) beginning October 3, 2016, the Company began amortizing the principal and accrued interest
under the MLSC Loan by making the first of 13 monthly payments of approximately $106,022, with the last payment scheduled to occur
on the Maturity Date; and (b) the term “
Qualified Financing
” was defined to mean one or more financing transactions
in which we receive, in a single transaction or series of transactions, cumulative net proceeds of not less than five million dollars
($5,000,000) at any time after October 3, 2016. As a result of the Amendment, the Company expected to reduce interest expenses
that would otherwise be incurred under the MLSC Loan Agreement by approximately $232,000 due to the effect of the amortization
payments and the lower 7% per annum interest rate. On February 24, 2017, the Company completed a registered direct offering with
gross proceeds of approximately $6.1 million, which under the Amendment, qualified as a Corporate Event. On March 3, 2017 approximately
$830,000 of the offering proceeds were used to satisfy our outstanding indebtedness to the MLSC under the MLSC Loan Agreement.
As a result of the Amendment and the acceleration of the Company’s obligation to repay the MLSC Loan as a result of the offering,
the Company reduced interest expenses that would otherwise be incurred under the MLSC Loan Agreement by approximately $250,000.
|
8.
|
2014 PRIVATE PLACEMENT
FINANCING
|
On January 30, 2014, the Company entered into a Securities Purchase
Agreement (the “
Securities Purchase Agreement
”) with nine separate accredited investors (“
2014 Investors
”)
providing for the issuance and sale by the Company to the 2014 Investors, in a private placement, of an aggregate of 11,400,000
shares of Common Stock (collectively, the “
2014 Shares
”) at a purchase price of $0.25 per share and three series
of warrants, the Series A warrants, the Series B warrants and the Series C warrants, to purchase up to an aggregate of 34,200,000
shares of the Company’s Common Stock (collectively, the “
2014 Warrants
,” and the shares issuable upon
exercise of the 2014 Warrants, collectively, the “
2014 Warrant Shares
”), for aggregate gross proceeds to the
Company of approximately $2,850,000 (the “
2014 Private Placement Financing
”).
Upon the closing of the 2014 Private Placement Financing on
February 4, 2014 (the “
Closing Date
”), the Company entered into a registration rights agreement (the “
2014
Registration Rights Agreement
”) with the 2014 Investors, pursuant to which the Company became obligated, subject to certain
conditions, to file with the SEC on or before March 21, 2014 one or more registration statements to register for resale under the
Securities Act of 1933, as amended (the “
Securities Act
”), (i) the 2014 Shares and the 2014 Warrant Shares,
plus (ii) an additional number of shares of Common Stock equal to 33% of the total number of 2014 Shares and 2014 Warrant Shares,
to account for adjustments, if any, to the number of 2014 Warrant Shares issuable pursuant to the terms of the 2014 Warrants (the
securities set forth in this clause (ii), the “
Additional Shares
”). Under the terms of the 2014 Registration
Rights Agreement, the Company was permitted to reduce the number of shares covered by a registration statement if such reduction
is required by the SEC as a condition for permitting such registration statement to become effective and treated as a resale registration
statement (the “
Cutback Provisions
”). In response to comments received from the SEC and in accordance with the
terms of the 2014 Registration Rights Agreement, the Company reduced the number of shares included in its draft resale registration
statement (the “
2014 S-1
”) by the number of Additional Shares. The Company’s failure to satisfy certain
other obligations and deadlines set forth in the 2014 Registration Rights Agreement may subject the Company to payment of monetary
penalties as discussed below. The resale registration statement was declared effective on July 2, 2014. As described below, in
the event that we fail to comply with certain requirements in the 2014 Registration Rights Agreement, we may be required to pay
liquidated damages to the investors.
The 2014 Registration Rights Agreement also obligated the Company
to register the resale of all securities covered by the 2014 Registration Rights Agreement on a short-form registration statement
on Form S-3 as soon as the Company becomes eligible to use Form S-3. On October 31, 2016, the Company filed a resale registration
statement on Form S-3 (the “
2014 S-3
”) to register the remaining securities covered by the 2014 Registration
Rights Agreement, and the 2014 S-3 was declared effective on November 23, 2016. Pursuant to Rule 429 promulgated under the Securities
Act, the 2014 S-3 contained a combined prospectus that covered the securities that remained unsold under the 2014 S-1 and also
registered those same securities under the 2014 S-3. Under Rule 429, the 2014 S-3 also constituted a post-effective amendment to
the 2014 S-1, which became effective on the date that the 2014 S-3 was declared effective.
The 2014 Warrants were exercisable immediately upon issuance.
The Series A warrants had an initial exercise price of $0.30 per share and expire five years from the date of their issuance. The
Series B warrants had an initial exercise price of $0.35 per share and expired on the earlier of 12 months after their issuance
date or six months after the first date on which the resale of all Registrable Securities (as defined in the 2014 Registration
Rights Agreement) is covered by one or more effective registration statements, which occurred on July 2, 2014 (the “
2014
Registration Statement Effective Date
”). The Series B warrants expired on January 2, 2015. The Series C warrants had
an initial exercise price of $0.40 per share and an initial expiration on the earlier of 18 months after their issuance date or
nine months after the 2014 Registration Statement Effective Date. As described below, the term of the Series C Warrants was extended
to 5:00 p.m., New York time, on July 2, 2016 and, prior to such expiration date, all 11,400,000 shares underlying the Series C
Warrants were exercised. The number of shares of the Company’s Common Stock into which each of the 2014 Warrants is exercisable
and the exercise price therefore were subject to adjustment as set forth in the 2014 Warrants, including, without limitation, adjustment
to both the exercise price of the 2014 Warrants in the event of certain subsequent issuances and sales of shares of the Company’s
Common Stock (or securities convertible or exercisable into shares of Common Stock) at a price per share lower than the then-effective
exercise price of the 2014 Warrants, in which case the per share exercise price of the 2014 Warrants would be adjusted to equal
such lower price per share and the number of shares issuable upon exercise of the 2014 Warrants would be adjusted accordingly so
that the aggregate exercise price upon full exercise of the 2014 Warrants immediately before and immediately after such per share
exercise price adjustment were equal (the “
Anti-Dilution Provisions
”). The 2014 Warrants are also subject to
customary adjustments in the event of stock dividends and splits, subsequent rights offerings and pro rata distributions to the
Company’s common stockholders, and provide that they shall not be exercisable in the event and to the extent that the exercise
thereof would result in the holder of the Warrant or any of its affiliates beneficially would then own more than 4.9% of the Company’s
Common Stock. The Company may be required to make certain payments to the 2014 Investors under certain circumstances in the future
pursuant to the terms of the Securities Purchase Agreement and the 2014 Registration Rights Agreement. These potential future payments
include: (a) potential partial damages for failure to register the Common Stock issued or issuable upon exercise of 2014 Warrants
(in a cash amount equal to 1% of the price paid to the Company by each investor in the 2014 Private Placement Financing on the
date of and on each 30-day anniversary of such failure until the cure thereof; (b) amounts payable if the Company and its transfer
agent fail to timely remove certain restrictive legends from certificates representing shares of Common Stock issued in the 2014
Private Placement Financing or issuable upon exercise of the 2014 Warrants; (c) expense reimbursement for the lead investor in
the 2014 Private Placement Financing; and (d) payments in respect of claims for which the Company provides indemnification. There
is no cap to the potential consideration.
On December 1, 2014, the Company entered into an agreement with
Cranshire Capital Master Fund, Ltd. (“
Cranshire
”), which was the lead investor in the 2014 Private Placement
Financing, to amend certain provisions of the 2014 Warrants (the “
December 2014 Amendment
”). Under the terms
of the December 2014 Amendment, the 2014 Warrants were amended to (i) reduce the exercise price of the Series B Warrants from $0.35
to $0.20; (ii) reduce the exercise price of the Series C Warrants from $0.40 to $0.20; and (iii) clarify that each series of 2014
Warrants may be amended without having to amend all three series of 2014 Warrants. The number of shares of the Company’s
Common Stock, which may be purchased from the Company upon exercise of each 2014 Warrant, remained unchanged. In conjunction with
the December 2014 Amendment, the Company recognized a loss on the modification of 2014 Warrants in the amount of $1,300,170, which
was determined using Monte Carlo Simulation valuation model.
As of December 2, 2014, Series B Warrants had been exercised
for an aggregate issuance of 4,000,000 shares of the Company’s Common Stock resulting in gross proceeds to the Company of
$800,000. In conjunction with the exercise of the Series B Warrants, their corresponding fair value at the exercise dates of $224,000
were extinguished from the derivative liabilities balance.
On March 13, 2015, the Company issued unsecured 8% Convertible
Notes in the aggregate principal amount of $750,000 - See footnote 6. The Company’s issuance of the Notes triggered the Anti-Dilution
Provisions of the Series A Warrants and, as a result, the exercise price of the Series A Warrants was reduced to $0.20 per share
and the aggregate number of shares issuable under the Series A Warrants increased by 5,700,000 shares from 11,400,000 shares to
17,100,000 shares. In addition, on March 13, 2015 and May 30, 2015, respectively the expiration date of the Series C Warrants was
extended to June 2, 2015 and July 2, 2015, respectively. In conjunction with the March 13, 2015 amendment, the Company recognized
a loss on the modification of warrants in the amount of $624,016, which was determined using Monte Carlo Simulation.
Prior to June 22, 2015, Series C Warrants had been exercised
for an aggregate issuance of 2,255,000 shares of the Company’s common stock resulting in gross proceeds to the Company of
$451,000. In conjunction with the exercise of the Series C Warrants, their corresponding fair value at the exercise dates of $75,321
were extinguished from the derivative liabilities balance and recognized as a gain in the Company’s statements of operations.
On June 22, 2015 the Company entered into an amendment to the
Series A Warrants and Series C Warrants to purchase Common Stock (the “June 2015 Amendment”), with Cranshire, to (i)
delete the Anti-Dilution Provisions in the Series A Warrants and Series C Warrants; and (ii) extend the expiration date of the
Series C Warrants from to 5:00 p.m., New York time, on July 2, 2015 to 5:00 p.m., New York time, on July 2, 2016. In consideration
of Cranshire’s entrance into the June 2015 Amendment (and for no additional consideration), the Company agreed to issue to
the holders of the 2014 Warrants up to 570,000 shares of Company’s Common Stock subject to the delivery by each such holder
of an investor certificate to the Company (such shares of Common Stock, the “Inducement Shares”). All 570,000 Inducement
Shares have been issued. In conjunction with the modifications to the Series A and Series C Warrants in the June 2015 Amendment,
the Company recognized a gain on modification of warrants, net of Inducement Shares, in the amount of $927,373 which was determined
using the Black Scholes model. As of June 22, 2015, the Company determined that its Series A and C Warrants were eligible for equity
classification due to the elimination of the full ratchet anti-dilution provision. As a result, as of June 22, 2015, the then-current
value of the derivative liabilities of $3,263,753 was reclassified as equity within the Company’s consolidated financial
statements.
During the nine months ended June 30, 2017, Series A Warrants
had been exercised on a cash basis for an aggregate issuance of 1,100,000 shares of the Company’s common stock, resulting
in gross proceeds to the Company of $220,000.
|
9.
|
2015 PRIVATE PLACEMENT
FINANCING
|
Beginning June 22, 2015 and through June 30, 2015, the Company
entered into a series of substantially similar subscription agreements (each a “
Subscription Agreement
”) with
20 accredited investors (collectively, the “
2015 Investors
”) providing for the issuance and sale by the Company
to the 2015 Investors, in a private placement, of an aggregate of 14,390,754 Units (“
Unit
”) at a purchase price
of $0.22 per Unit (the “
2015 Private Placement Financing
”). Each Unit consisted of a share of Common Stock (the
“
2015 Shares
”) and a Series D Warrant to purchase a share of Common Stock at an exercise price of $0.25 per
share at any time prior to the fifth anniversary of the issuance date of the Series D Warrant (the “
Series D Warrants
,”
and the shares issuable upon exercise of the Series D Warrants, collectively, the “2015 Warrant Shares”). The Company
did not engage any underwriter or placement agent in connection with the 2015 Private Placement Financing, and the aggregate gross
proceeds raised by the Company in the 2015 Private Placement Financing totaled approximately $3,200,000.
The Company’s obligation to issue and sell the 2015 Shares
and the Series D Warrants and the corresponding obligation of the 2015 Investors to purchase such 2015 Shares and Series D Warrants
were subject to a number of conditions precedent including, but not limited to, the amendment of the Company’s Series A Warrants
and Series C Warrants to delete certain of the anti-dilution provisions contained therein, as described in Note 8, 2014 Private
Placement Financing, and other customary closing conditions. The conditions precedent were satisfied June 30, 2015 (the “
Initial
Closing Date
”), and the Company conducted an initial closing (the “
Initial Closing
”) pursuant to which
it sold and 19 of the 2015 Investors (the “
Initial Investors
”) purchased 13,936,367 Units at an aggregate purchase
price of $3,066,000. On July 2, 2015, the Company conducted a second closing (the “
Second Closing
” and together
with the Initial Closing, the “
Closings
”) pursuant to which it sold and one of the 2015 Investors purchased
454,387 Units at an aggregate purchase price of $100,000.
On the Initial Closing Date, the Company entered into a registration
rights agreement with the Initial Investors (the “
2015 Registration Rights Agreement
”), pursuant to which the
Company was obligated, subject to certain conditions, to file with the Securities and Exchange Commission within 90 days after
the closing of the 2015 Private Placement Financing one or more registration statements (any such registration statement, a “
Resale
Registration Statement
”) to register the 2015 Shares and the 2015 Warrant Shares for resale under the Securities Act.
The remaining 2015 Investor became a party to the 2015 Registration Rights Agreement upon the consummation of the Second Closing.
The Company’s failure to satisfy certain filing and effectiveness deadlines with respect to a Resale Registration Statement
and certain other requirements set forth in the 2015 Registration Rights Agreement may subject the Company to payment of monetary
penalties. On October 27, 2015, we received from the SEC a Notice of Effectiveness of our Registration Statement related to the
2015 Private Placement Financing (the “
2015 S-1
”) which satisfied some of our obligation to register these securities
with the SEC.
The 2015 Registration Rights Agreement also obligated the Company
to register the resale of all securities covered by the 2015 Registration Rights Agreement on a short-form registration statement
on Form S-3 as soon as the Company becomes eligible to use Form S-3. On October 31, 2016, the Company filed a resale registration
statement on Form S-3 (the “
2015 S-3
”) to register the remaining securities covered by the 2015 Registration
Rights Agreement, and the 2015 S-3 was declared effective on November 23, 2016. Pursuant to Rule 429 promulgated under the Securities
Act, the 2015 S-3 contained a combined prospectus that covered the securities that remained unsold under the 2015 S-1 and also
registered those same securities under the 2015 S-3. Under Rule 429, the 2015 S-3 also constituted a post-effective amendment to
the 2015 S-1, which became effective on the date that the 2015 S-3 was declared effective.
Following each Closing, each 2015 Investor was also issued Series
D Warrants to purchase shares of the Company’s Common Stock up to 100% of the 2015 Shares purchased by such 2015 Investor
under such 2015 Investor’s Subscription Agreement. The Series D Warrants have an exercise price of $0.25 per share, are exercisable
immediately after their issuance and have a term of exercise equal to five years after their issuance date. The number of shares
of the Company’s Common Stock into which each of the Series D Warrants is exercisable and the exercise price therefore are
subject to adjustment, as set forth in the Series D Warrants, including adjustments for stock subdivisions or combinations (by
any stock split, stock dividend, recapitalization, reorganization, scheme, arrangement or otherwise). In addition, at any time
during the term of the Series D Warrants, the Company may reduce the then-current exercise price to any amount and for any period
of time deemed appropriate by the Board of the Company.
During the nine months ended June 30,2017, Series D Warrants
had been exercised on a cash basis for an aggregate issuance of 613,637 shares of the Company’s Common stock resulting in
gross proceeds to the Company of $153,409.
Common Stock
At the June 30, 2015 Initial Closing Date of the 2015 Private
Placement Financing, the Company issued 13,936,367 shares of Common Stock. On July 2, 2015, the Company conducted the Second Closing
pursuant to which it sold and one of the 2015 Investors purchased 454,387 shares of Common Stock.
Equity Value of Warrants
The Company accounted for the Series D Warrants relating to
the aforementioned 2015 Private Placement Financing in accordance with ASC 815-40,
Derivatives and Hedging
. Because the
Series D Warrants are indexed to the Company’s stock, they are classified within stockholders’ equity in the accompanying
consolidated financial statements.
|
10.
|
2016 PRIVATE PLACEMENT
FINANCING
|
Beginning May 24, 2016 and through May 26, 2016, we entered
into a series of substantially similar subscription agreements (each a “
2016 Subscription Agreement
”) with 18
accredited investors (collectively, the “
2016 Investors
”) providing for the issuance and sale by the Company
to the 2016 Investors, in a private placement, of an aggregate of 9,418,334 Units at a purchase price of $0.36 per Unit (the “
2016
Private Placement Financing
”). Each Unit consisted of a share of Common Stock, and a Series E Warrant to purchase 0.75
shares of Common Stock at an exercise price of $0.4380 per share at any time prior to the fifth anniversary of the issuance date
of the Series E Warrant (the “
Series E Warrants
,” and the shares issuable upon exercise of the Series E Warrants,
collectively, the “
Series E Warrant Shares
”). The exercise price of the Series E Warrants was set to equal the
closing price of our Common Stock on the date of their issuance (May 26, 2016), which was $0.4380, and therefore the Series E Warrants
were not issued at a discount to the market price of our Common Stock as of such date.
The number of shares of Common Stock into which each of the
Series E Warrants is exercisable and the exercise price therefor are subject to adjustment as set forth in the Series E Warrants,
including adjustments for stock subdivisions or combinations (by any stock split, stock dividend, recapitalization, reorganization,
scheme, arrangement or otherwise). In addition, (i) at any time during the term of the Series E Warrants, we may reduce the then-current
exercise price to any amount and for any period of time deemed appropriate by our Board of Directors (the “
Board
“);
and (ii) certain of the Series E Warrants provide that they shall not be exercisable in the event and to the extent that the exercise
thereof would result in the holder of the Series E Warrant, together with its affiliates and any other persons whose beneficial
ownership of Common Stock would be aggregated with the holder’s, would be deemed to beneficially own more than 4.99% of the
Common Stock;
provided, however
, the holder, upon notice to us, may increase or decrease the ownership limitation,
provided
that
any increase is limited to a maximum of 9.99% of the Company’s Common Stock, and any increase in the ownership limitation
will not become effective until the 61
st
day after delivery of such notice.
We engaged Maxim Group LLC (“Maxim”) as our exclusive
institutional investor placement agent in connection with the 2016 Private Placement Financing, and in consideration for the services
provided by it, Maxim was entitled to receive cash fees equal to 8.2% of the gross proceeds received by us from certain institutional
investors participating in the 2016 Private Placement Financing (the “
Maxim Investors
”), as well as reimbursement
for all reasonable expenses incurred by it in connection with its engagement. We received gross proceeds of approximately $3,390,600
in the aggregate, of which approximately $2,084,000 was attributable to the Maxim Investors, resulting in a fee of approximately
$170,888.
On May 26, 2016, we entered into a registration rights agreement
with the 2016 Investors (the “
2016 Registration Rights Agreement
”), pursuant to which we became obligated, subject
to certain conditions, to file with the Securities and Exchange Commission (the “
SEC
”) within 45 days after
the closing of the 2016 Private Placement Financing one or more registration statements (the “
2016 S-1
”) to
register the shares of Common Stock issued in the Closings and the Series E Warrant Shares for resale under the Securities Act
of 1933, as amended (the “
Securities Act
”). As a result, we registered for resale under the 2016 S-1 an aggregate
of 16,482,082 shares of Common Stock, representing the 9,418,334 shares issued at the closing of the 2016 Private Placement Financing
and the 7,063,748 shares underlying the Series E Warrants. On July 13, 2016, we received from the SEC a Notice of Effectiveness
of the 2016 S-1, which satisfied some of our obligation to register these securities with the SEC.
The 2016 Registration Rights Agreement also obligated the Company
to register the resale of all securities covered by the 2016 Registration Rights Agreement on a short-form registration statement
on Form S-3 as soon as the Company becomes eligible to use Form S-3. On October 31, 2016, the Company filed a resale registration
statement on Form S-3 (the “
2016 S-3
”) to register the remaining securities covered by the 2016 Registration
Rights Agreement, and the 2016 S-3 was declared effective on November 23, 2016. Pursuant to Rule 429 promulgated under the Securities
Act, the 2016 S-3 contained a combined prospectus that covered the securities that remained unsold under the 2016 S-1 and also
registered those same securities under the 2016 S-3. Under Rule 429, the 2016 S-3 also constituted a post-effective amendment to
the 2016 S-1, which became effective on the date that the 2016 S-3 was declared effective.
Following the Closing, each 2016 Investor was also issued Series
E Warrants to purchase shares of the Company’s Common Stock up to 75% of the 2016 Shares purchased by such 2016 Investor
under such 2016 Investor’s Subscription Agreement. The Series E Warrants have an exercise price of $0.438 per share, are
exercisable immediately after their issuance and have a term of exercise equal to five years after their issuance date. The number
of shares of the Company’s Common Stock into which each of the Series E Warrants is exercisable and the exercise price therefore
are subject to adjustment, as set forth in the Series E Warrants, including adjustments for stock subdivisions or combinations
(by any stock split, stock dividend, recapitalization, reorganization, scheme, arrangement or otherwise). In addition, at anytime
during the term of the Series E Warrants, the Company may reduce the then-current exercise price to any amount and for any period
of time deemed appropriate by the Board of the Company.
During the nine months ended June
30, 2017, Series E Warrants had been exercised on a cash basis for an aggregate issuance of 375,000 shares of the Company’s
Common stock resulting in gross proceeds to the Company of $164,250.
Common Stock
At May 26, 2016, the Closing Date of the 2016 Private Placement
Financing, the Company issued 9,418,334 shares of Common Stock.
Equity Value of Warrants
The Company accounted for the Series E Warrants relating to
the aforementioned 2016 Private Placement Financing in accordance with ASC 815-40,
Derivatives and Hedging
. Because the
Series E Warrants are indexed to the Company’s stock, they are classified within stockholders’ equity in the accompanying
consolidated financial statements.
|
11.
|
2017 REGISTERED DIRECT
OFFERING
|
On September 30, 2016, the Company filed a registration statement
with the SEC utilizing a “shelf” registration process, which was subsequently declared effective by the SEC on October
20, 2016 (such registration statement, the “
Shelf Registration Statement
”). Under the Shelf Registration Statement,
the Company may offer and sell any combination of its Common Stock, warrants, debt securities, subscription rights, and/or units
comprised of the foregoing to raise up to $50,000,000 in gross proceeds.
On February 20, 2017,
the Company entered into Securities Purchase Agreement (the “
2017
SPA
”)
with 6 accredited investors (collectively, the “
2017
Investors
”)
providing for the issuance and sale by the Company to the 2017 Investors of an aggregate of 10,166,664 units at a purchase price
of $0.60 per Unit in a registered offering (the “
2017 Financing
”).
The securities comprising the units sold in the 2017 Financing were issued under the Shelf Registration Statement, and consisted
of a share of Common Stock, and 0.55 of a Series F Warrant to purchase one share of Common Stock at an exercise price of $0.75
per share at any time prior to the fifth anniversary of the issuance date of the Series F Warrant subject to certain restrictions
on exercise (the “
2017
Warrants
,” and the shares issuable
upon exercise of the 2017 Warrants, collectively, the “
2017
Warrant Shares
”).
The gross proceeds to Arch from the 2017 Financing, which closed on February 24, 2017, were approximately $6.1 million before
deducting financing costs of approximately $112,000.
The number of shares of the Company’s Common Stock into
which each of the Series F Warrants is exercisable and the exercise price therefore are subject to adjustment, as set forth in
the Series F Warrants, including adjustments for stock subdivisions or combinations (by any stock split, stock dividend, recapitalization,
reorganization, scheme, arrangement or otherwise). In addition, at anytime during the term of the Series F Warrants, the Company
may reduce the then-current exercise price to any amount and for any period of time deemed appropriate by the Board of the Company.
In addition, if the Company undergoes a change of control or is involved in a similar transaction, the holder may cause the Company
or any successor entity to purchase its Series F Warrant for an amount of cash equal to $0.18 for each share of Common Stock underlying
the Series F Warrant.
As of June 30, 2017, no Series F Warrants have been
exercised.
As noted above in Note 7, on September
28, 2016, the Company and MLSC entered into the Amendment. Pursuant to this Amendment, the term “
Qualified Financing
”
was defined to mean one or more financing transactions in which the Company received, in a single transaction or series of transactions,
cumulative net proceeds of not less than five million dollars ($5,000,000) at any time after October 3, 2016. On March 3, 2017
approximately $830,000 of the offering proceeds were used to satisfy the Company’s outstanding indebtedness to MLSC under
the MLSC Loan Agreement.
Common Stock
At February 24, 2017, the Closing Date of the 2017 Financing,
the Company issued 10,166,664 shares of Common Stock.
Derivative Liabilities
The Company accounted for the Series F Warrants relating to
the aforementioned 2017 Financing in accordance with ASC 815-10,
Derivatives and Hedging
. Since the Company may be required
to purchase its Series F Warrant for an amount of cash equal to $0.18 for each share of Common Stock the underlying Series F Warrant
are not classified within stockholders’ equity, they are recorded as liabilities at fair value. They are marked to market
each reporting period through the consolidated statement of operations.
On the Closing Date, the derivative liabilities
were recorded at fair value of $2,996,110. Given that the fair value of the derivative liabilities were less than the
total proceeds of the 2017 Financing of $6,099,998, the remaining proceeds of $3,103,888 were allocated to the Common Stock
and additional paid in capital. During the three and nine months ended June 30, 2017, $65,326 and $426,832 was recorded to
Decrease to fair value of derivative, respectively.
Fair Value Measurements Using Significant Unobservable
Inputs
(Level 3)
|
|
|
|
|
|
Warrant Derivative
Liability
|
|
Beginning balance at October 1, 2016
|
|
$
|
-
|
|
|
|
|
|
|
Issuances
|
|
|
2,996,110
|
|
|
|
|
|
|
Adjustments to estimated fair value
|
|
|
(426,832
|
)
|
|
|
|
|
|
Ending balance at June 30, 2017
|
|
$
|
2,569,278
|
|
The derivative liabilities were valued as of February 24, 2017
and June 30, 2017 using the Black Scholes Model with the following assumptions:
|
|
February 24,
2017
|
|
|
June 30,
2017
|
|
Closing price per share of common stock
|
|
$
|
0.68
|
|
|
$
|
0.60
|
|
Exercise price per share
|
|
$
|
0.75
|
|
|
$
|
0.75
|
|
Expected volatility
|
|
|
111.84
|
%
|
|
|
109.77
|
%
|
Risk-free interest rate
|
|
|
1.80
|
%
|
|
|
1.89
|
%
|
Dividend yield
|
|
|
—
|
|
|
|
—
|
|
Remaining expected term of underlying securities (years)
|
|
|
5.00
|
|
|
|
4.63
|
|
The Company evaluated subsequent
events from July 1, 2017 through July 26, 2017, and concluded that no subsequent events have occurred that would require
recognition or disclosure in the consolidated financial statements.