For the transition period from ______________________to ______________________
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.
The registrant met the “smaller reporting company”,
and non accelerated filer requirements as of the end of its 2018 fiscal year pursuant to Rule 12b-2 of the Securities Exchange
Act of 1934, as amended, based upon the aggregate worldwide market value of the voting and non-voting common equity held by the
registrant’s non-affiliates as of March 31, 2018.
The aggregate market value of the registrant’s voting
and non-voting common equity held by non-affiliates as of the last business day of the registrant’s most recently completed
second fiscal quarter, computed by reference to the average of the bid and asked price of such common equity, was approximately
$42,000,000. For purposes of this calculation, it has been assumed that shares of common stock held by each director, each officer
and each person who owns 10% or more of the registrant’s outstanding common stock are held by affiliates.
As of December 17, 2018, 164,441,786 shares of the registrant’s
common stock were outstanding.
As used in this Annual Report on Form 10-K unless otherwise
indicated, the “Company”, “we”, “us”, “our”, and “Arch” refer to Arch
Therapeutics, Inc. and its consolidated subsidiary, Arch Biosurgery, Inc.
PART I
ITEM 1. BUSINESS
The following discussion should be read in conjunction with
our consolidated financial statements and the related notes and other financial information included in this Annual Report on Form
10-K.
Corporate Overview
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. to pursue the business of distributing automobile spare parts online. Effective June 26, 2013, the Company
completed a merger (“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.
Our Current Business
We are a biotechnology company in the development stage. We
have generated no revenues to date and are devoting substantially all of our operational efforts to the development of our core
technology. We are developing a novel approach to stop bleeding (“hemostasis”), control leaking (“sealant”)
and manage wounds during surgery, trauma and interventional care. Arch is developing products based on an innovative self-assembling
barrier technology platform with the goal of making care faster and safer for patients. We believe our technology could support
an innovative platform of potential products in the field of stasis and barrier applications. Our plan and business model is to
develop products that apply that core technology for use with bodily fluids and tissues.
To date, the Company has principally raised capital
through borrowings and the issuance of convertible debt and units consisting of its common stock, par value $0.001 per share
(“Common Stock”), and warrants. The Company expects to incur substantial expenses for the foreseeable future
relating to the research, development, clinical trials, and commercialization of its potential products. As of December
17, 2018, we believe that our current cash on hand will meet our anticipated cash requirements into the third
quarter of fiscal 2019. The Company will be required to raise additional capital in order to continue to fund operations.
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.
Our Core Technology
Our flagship development stage product candidates, known collectively
as the AC5™ Devices (which we sometimes refer to as “AC5™”, “AC5™ Topical Gel”, “AC5™
Surgical Hemostatic Device”, “AC5™ Surgical Hemostat”, “AC5™ Topical Hemostatic Device”,
or “AC5™ Topical Hemostat”), are being designed to achieve hemostasis during surgical, wound and interventional
care. They rely on our self-assembling peptide (“SAP”) technology and are being designed to achieve hemostasis in skin
wounds and in minimally invasive and open surgical procedures. We intend to develop other product candidates based on our technology
platform for use in a range of indications. AC5 is being designed as a product containing synthetic biocompatible peptides comprising
L-amino acids, commonly referred to as naturally occurring amino acids. When applied to a wound, AC5 intercalates into the interstices
of the connective tissue where it self-assembles into a physical, mechanical nanoscale structure that provides a barrier to leaking
substances, such as blood. AC5 may be applied directly as a liquid, which we believe will make it user-friendly and able to conform
to irregular wound geometry. Additionally, AC5 does not possess sticky or glue-like handling characteristics, which we believe
will enhance its utility in several settings, including minimally invasive surgical procedures. Further, in certain settings, AC5
lends itself to a concept that we call Crystal Clear Surgery™; the transparency and physical properties of AC5 may enable
a surgeon to operate through it in order to maintain a clearer field of vision and prophylactically stop or lessen bleeding as
it starts.
We believe that the results of early data from preclinical tests
as well as certain clinical investigations have shown quick and effective hemostasis with the use of AC5 relative to that reported
with other types of hemostatic agents, and that time to hemostasis is comparable among test subjects regardless of whether such
test subject had or had not been treated with therapeutic doses of anticoagulant or antiplatelet medications, commonly called “blood
thinners”. Based on testing results, we believe that AC5 is biocompatible. Arch Therapeutics’ technology has demonstrated
hemostasis in liver and other organs in
in vivo
surgical models, including durable hemostasis within 15 seconds. SAP compositions
have been tested in small animal organs (i.e. liver, skin, muscle, brain, eye, spine, spleen, arteries and veins). In mammalian
vision models (severed hamster optic tract and in our ocular tissue pilot studies), SAPs demonstrated biocompatibility and the
ability to rapidly and reliably stop bleeding and limit inflammation.
We have devoted much of our operational effort to date to the
research and development of our core technology, including selecting our initial product composition, conducting safety and other
related tests, conducting a human trial for safety and performance of AC5, developing methods for manufacturing scale-up, reproducibility,
and validation, and developing and protecting the intellectual property rights underlying our technology platform. Manufacturing
method and formulation optimization and validation are important parts of peptide development. Manufacturing and formulation optimization
for our product candidates has been and continues to be done with extensive collaboration among our team and partners. The processes
are focused on optimizing traditional product parameters to target specifications covering performance, biocompatibility, physical
appearance, stability, and handling characteristics, among others. We and our partners intend to continue to monitor manufacturing
processes and formulation methods closely, as success or failure in both setting and realizing appropriate specifications may directly
impact our ability to conduct additional preclinical and clinical trials as we establish and execute our commercialization efforts.
Clinical Development
In October 2016, we reported that we completed a
single-center, randomized, single-blind prospective clinical study (NCT 02704104) of AC5 previously referred on AC5
Topical Hemostatic Device in skin lesion patients with bleeding wounds. This was the first study assessing the safety and
performance of AC5 in humans.
The clinical study enrolled 46 patients, including 10 who were
taking antiplatelet monotherapy. Each patient had bleeding wounds created as a result of the excision of at least two skin lesions
under local anesthetic in the same setting. On a randomized basis, one lesion received AC5 and the other(s) received a control
treatment consisting of standard therapy (saline). Each subject was followed-up for safety assessment both on Day 7 and again on
Day 30, which marked the end of the subject's participation in the clinical study.
The objectives of the study were to evaluate the safety and
performance of AC5 in patients scheduled to undergo excision of skin lesions on their trunk or upper limbs. The primary endpoint
was safety throughout the surgical procedure and until the end of a 30-day follow-up period post procedure. Safety of the clinical
investigation device was determined by monitoring for treatment related adverse events. The primary objective was met, as the safety
outcomes of both the AC5 treatment group and the control group were similar. No serious adverse events were reported.
A secondary endpoint was performance as assessed by time to
hemostasis. The median time to hemostasis of wounds in the AC5 treatment group was 41% faster than for those in the control group.
This result was statistically significant (p< 0.001, Wilcoxon signed rank test). An additional secondary endpoint of healing
of treated wounds was assessed as measured by the ASEPSIS wound score at Days 7 and 30. There was no evidence, at either follow-up
day, of an adverse effect of AC5 treatment on the wound ASEPSIS score. The ASEPSIS score did not appear to be compromised, as the
majority of patients had an ASEPSIS score of 0 in both wounds at Days 7 and 30. All AC5-treated wounds healed satisfactorily as
per wound healing scoring criteria.
Additionally, the clinical study indicated that AC5 shortened
time to hemostasis ("TTH") versus a control whether or not patients were taking antiplatelet therapy, suggesting that
AC5 performance is not affected by antiplatelet therapy. The reduced median TTH of the AC5 treated wounds versus the control wounds
was statistically significant for both the overall group of 46 patients (p<0.001) and for the subgroup of 10 patients on
antiplatelet therapy (p=0.005). Further, the median TTH for wounds treated with AC5 was less than 30 seconds for both the overall
study group and for the subset of patients taking antiplatelet therapy.
On September 5, 2018 we announced topline data for the irritation/sensitization
patch test study of AC5 Topical Gel that we conducted to address a request by the Food and Drug Administration (FDA or “the
Agency”). The study, designed as a single-center, prospective, clinical investigation, in approximately 50 healthy subjects,
comprised an induction phase separated from a challenge phase by a rest period.
During the induction phase, AC5 on a patch was applied to each
subject’s back three times weekly over 21 days for a total of 9 applications. With each re-application, the skin
beneath the patch was evaluated, and any findings were scored per protocol. After a 14-day rest period, subjects entered the challenge
phase, received one additional application of AC5, and after a two-day rest period, were evaluated over 48 hours.
The results indicated
that AC5 is neither an irritant nor a sensitizer. Additionally, no immunogenic response and no serious or other adverse events
attributable to the device were reported in any of the enrolled subjects.
Preclinical Development
In a paper presented by Dr. Terrence Norchi and Dr. Rutledge
Ellis-Behnke, using the experimental intraocular inflammation model of injected Lipopolysaccharide (“LPS”), an
intraocular application of AC5 with LPS was associated with a marked reduction in retinal inflammation. The density of activated
retinal microglial cells was significantly lower in the eyes of the study animals with LPS and AC5 than in the eyes of the LPS-only
control group. The results suggest that the use of AC5 for hemostasis of a wound will also subsequently reduce inflammation.
SAPs may be considered a new class of devices (anti-inflammatory
agents) to control ocular inflammation. SAPs have shown a similar effect in other organs, including liver and kidney. SAPs may
show promise to control inflammation along with the stabilization of tissue after injury, and may be an important component of
field-based wound care and stabilization for transport.
Previously, we completed the components of the planned
preclinical program for AC5 that were required before we started our first human safety and performance trial, which was
completed in 2016. We are focused on further scale-up of selected manufacturing methods and formulation optimization. In
parallel, we are continuing to conduct further in vivo and in vitro tests, while additional testing will continue after
completion of manufacturing scale-up and formulation optimization steps and the clinical trial. Self-assembling peptide
manufacturing and formulation optimization are challenging, and any delays could negatively impact anticipated clinical trial
and subsequent commercialization timelines. In order to market and sell AC5 and other Arch planned products, successful human
clinical trials, additional testing, and regulatory approvals and certifications will be required. A co-founding inventor of
certain of our technology, Dr. Rutledge Ellis-Behnke, performed a significant portion of the early preclinical animal
experimentation conducted on our technology. Some of the most significant findings from Dr. Ellis-Behnke’s studies have
been published. Additionally, through collaboration with the National University of Ireland system, preclinical bench-top and
animal studies have been performed in Dublin and Cork, Ireland. As a continuation of our commitment to our product
development we entered into a collaboration agreement with National University of Ireland Galway (“NUIG”) in
Galway, Ireland on May 28, 2015 (the “Project Agreement”) that concluded in the third quarter of fiscal 2018.
Pursuant to the Project Agreement, NUIG provided additional research services, via the CÚRAM Centre for Research in
Medical Devices (“CÚRAM”), which is a major national research center headquartered at NUIG established in
January 2015. We have also engaged, on a fee for service basis, several private third party facilities in the United
States and abroad to perform certain preclinical bench-top and animal studies, which are often conducted with assistance from
our scientific team, and we continue to engage third parties for such services as needed and as appropriate.
In preclinical animal tests conducted to date, AC5 has
demonstrated rapid average time to hemostasis (“TTH”) when applied to a range of animal tissues. Certain studies
have tested TTH when using AC5 during surgical procedures compared to TTH when using an active control, a saline
control, a peptide control, and a cautery control during those same procedures. The results of those
tests have shown a TTH of approximately 10 – 30 seconds when AC5 was applied, compared to a TTH ranging from 80 seconds
to significantly more than 300 seconds when various control substances were applied, depending on the nature of the control
substance and procedure performed. In several studies comparing AC5 to popular commercially available branded hemostatic
agents (absorbable cellulose, flowable gelatin with and without thrombin, and fibrin) applied to stop the bleeding from full
thickness penetrating wounds surgically created in rat livers, AC5 achieved hemostasis in significantly less than 30 seconds,
whereas the control products took from 50% to over 400% longer than AC5 to achieve hemostasis. Additionally, the preclinical
tests that have been conducted to date provide evidence that AC5 can stop bleeding in models of liver bleeding in animals
that had been treated with therapeutic amounts of anticoagulant and antiplatelet medications, commonly called “blood
thinners.” In one preclinical study, an independent third-party research group obtained positive data assessing the use
of AC5 in animals that had been treated with therapeutic doses of the antiplatelet medications Plavix® (clopidogrel) and
aspirin, alone and in combination. The results of the study were consistent with data obtained from two prior preclinical
studies, in which AC5 quickly stopped bleeding from surgical wounds created in rats following treatment with clinically
relevant doses of the anticoagulant medication heparin. In these studies, the average TTH after AC5 was applied to
bleeding liver wounds of animals that had been medicated with anticoagulants was comparable to the average TTH as measured in
their non-anticoagulated counterparts. Similar results were obtained in independent third-party studies assessing the use of
AC5 in patients on the anticoagulant heparin and in patients on the anti-platelet medication, ticagrelor (Brilinta® in
the US, Brilique® in Europe.)
In preclinical tests conducted to date, AC5 has demonstrated
biocompatibility and normal healing of tissue treated with the product. Further, animals whose liver, spleen, femoral artery, eye
or brain was treated with AC5 have shown no adverse effects We believe that the peptide degrades into the amino acids from which
it was originally synthesized, which are molecules that already exist in large quantities in the human body.
Our current and planned near-term activities are focused on
continued manufacturing scale-up, formulation optimization, and other preclinical activities, and conducting further clinical trial
testing of AC5. In its first clinical study for safety and performance, AC5 was demonstrated to be safe and to reduced TTH in wounds
versus controls. Our clinical study also demonstrated that in a subgroup of 10 patients who were taking a prescribed antiplatelet
medication, commonly known as a blood thinner, such as aspirin, AC5 had similar effects.
Development and Commercialization Strategy
Our present business model is to operate with a relatively
small internal team of key personnel and engage third party service providers to conduct larger scale research, development
and manufacturing activities. Our internal team collectively has a broad range of expertise and experience working with and
managing third party vendors. This general approach enables us to use the services of third party entities, which are expert
in various aspects of our operations, while preserving capital and efficiencies by avoiding certain internal scale-up costs
and resource duplication.
Research and Development; Manufacturing
Use of Third Party Relationships
To date, we have engaged third party laboratory facilities run
by experts in the U.S. and abroad to perform both research and preclinical and clinical development activities. Those engagements
have assisted in our development of our primary product candidate, as well as our generation of appropriate analytical methods,
scale-up, and other procedures for use as a “blueprint” for third party manufacturers to produce the product on a larger
scale for purposes of further preclinical and clinical testing and ultimately, if required approvals are obtained, commercialization.
We have initiated the transition to traditional contract manufacturing
and related organizations. We have commenced relationships and work with manufacturers operating with the current good manufacturing
practices (“cGMP”) required by applicable regulatory agencies in order to scale up and produce material
to be used for preclinical testing and clinical trials.
Manufacturing Methods
We believe that the manufacturing methods used for a product,
including the type and source of ingredients and the burden of waste byproduct elimination, are important determinants of its opportunity
for profitability. Industry participants are keenly aware of the downsides of technologies that rely on expensive biotechnology
techniques and facilities for manufacture, onerous and expensive programs to eliminate complex materials, or ingredients that are
sourced from the complicated process of human or other animal plasma separation, since those products typically are expensive,
burdensome to produce, and at greater risk for failing regulatory oversight.
The manufacturing methods that we intend to use to produce
AC5 and other potential future product candidates rely on detailed, complex and difficult to manage synthetic organic
chemistry processes. Although use of those methods requires that we engage manufacturers that possess the expertise, skill
and know-how involved with those methods, the required equipment to use those methods is widely available. Furthermore,
improvements in relevant synthetic manufacturing techniques over the past 15 years have reduced their complexity and cost,
while increasing large-scale cGMP capacity. Moreover, our planned product candidates, including AC5, will be synthesized from
naturally occurring ingredients that are not sourced from humans or other animals, but do exist in their natural state in
humans. That type of ingredient may be more likely to be categorized as “generally recognized as safe”, or
“GRAS”, by the FDA.
Regulatory
Medical Device Classification
In February of 2015, we announced that The British Standards
Institution (“BSI”), a Notified Body (which is a private commercial entity designated by the national government of
a European Union (“EU”) member state as being competent to make independent judgments about whether a medical device
complies with applicable regulatory requirements) in the EU, confirmed that AC5 fulfills the definition of a medical device within
the EU and will be classified as such in consideration for CE mark designation. The FDA and other regulatory authorities or related
bodies separately determine the classification of AC5. The FDA also determined it to be a medical device. Generally, a product
is a medical device if it requires neither metabolic nor chemical activity to achieve the desired effect. Furthermore, a medical
device can achieve its desired effects without requiring a body (animal/human), whereas a drug or a biologic requires a body in
order to operate. The AC5 mechanism of assembly into a barrier can occur outside of a body and is accordingly consistent with the
medical device definition.
Medical devices in the EU and the U.S. are classified along
a spectrum. Class III status, which is the higher-level classification for devices compared to Classes II and I, involves additional
procedures and regulatory scrutiny of the product candidate to obtain approvals. AC5 could be regulated as either a Class III or
a Class II medical device in these jurisdictions, depending upon the application, subject to the process for obtaining a CE mark
in the EU and the premarketing authorization process in the U.S. It has been determined that our AC5™ Topical Gel used for
external wounds will be a Class II medical device.
Biocompatibility Tests and Clinical Trials
Before initiating our European or most other human clinical
trials, we are required to have completed the biocompatibility assessment of AC5. Standard required tests to assess biocompatibility,
as set forth in ISO 10993 issued by the International Organization for Standardization, may include:
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in
vitro blood compatibility;
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in
vitro Ames assay (mutagenic activity);
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irritation/intracutaneous
reactivity;
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sensitization
(allergenic reaction);
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implantation
(performed on devices that contact the body’s interior);
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pyrogenicity
(causing fever or inflammation);
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in
vitro chromosome aberration assay (structural chromosome changes).
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We completed the biocompatibility studies required to initiate
our first human trial of AC5 in Western Europe. We will perform further biocompatibility testing that we deem necessary for additional
indications, classifications, jurisdictions, and/or as required by regulatory authorities.
On August 15, 2016, we announced that the AC5 Topical Hemostatic
Device met its primary and secondary endpoints in our first clinical trial for safety and performance. On October 31, 2016, the
Company further announced that additional analysis of the subgroup of 10 patients who were taking a prescribed antiplatelet medication,
commonly known as a blood thinner, such as aspirin, indicated that AC5 had similar effects for this subgroup.
On July 25, 2017, we announced that we had made a 510(k) submission
to FDA for our AC5™ Topical Gel. On December 18, 2017, we
voluntarily withdrew the
application after receiving questions from the FDA for which an adequately comprehensive response could not be provided within
the FDA’s congressionally-mandated 90-day review period.
On October 1, 2018, we announced that we both completed the
necessary steps required to file a 510(k) submission to the FDA for our AC5™ Topical Gel and filed that 510(k) submission during
the third calendar quarter. As previously disclosed, these steps included developing a required study protocol and submitting it
to the FDA in a pre-submission letter in the first calendar quarter, completing the pre-submission process and initiating the study
in the second calendar quarter, and completing the study. On December 17, 2018, we
announced
that the 510(k) premarket notification for AC5
™
Topical Gel has been reviewed and cleared by the FDA, allowing for the product to be marketed.
In addition, we currently anticipate filing our first CE
Mark application by the end of calendar year 2018, to subsequently seek regulatory approval for expanded indications, and to
pursue internal use commercial opportunities for other AC5-related products through the premarket authorization process.
Commercialization
Our commercialization plan for at least some of our product
candidates could entail entering into one or more collaboration agreements or strategic partnerships. Based on our general approach
and strategy of utilizing the expertise and resources of third party service providers and maintaining a relatively small internal
team, we currently expect that we may pursue some degree of strategic collaborations or partnerships with third parties, which
could include licensing arrangements, distribution and supply partnerships, engagement of external regulatory experts and/or marketing
and sales teams, among other types of potential relationships. We presently believe that certain relationships could improve our
ability to obtain regulatory approval for our product candidates and attain market acceptance for and profitable sales of those
product candidates, and that our current and planned activities and milestones relating to AC5 are well-aligned with the needs
of the market and potential partners and collaborators that may wish to enter or expand their presence in our target markets.
We envision the potential future customers in the marketplace
for AC5 and any other hemostatic or sealant agent we may pursue will include surgeons and other doctors, government agencies such
as the Department of Defense, hospital and operating room management and ambulance and other trauma specialists.
Plan of Operations
Our long-term business plan includes the following goals:
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conducting
required biocompatibility studies and, subsequently, additional clinical trials on AC5 and related products;
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expanding
and maintaining protection of our intellectual property portfolio;
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developing
additional third party relationships to manufacture, distribute, market and otherwise commercialize AC5;
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obtaining
regulatory approval or certification of AC5 and related products in the EU, the U.S., and other jurisdictions as we may determine;
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continuing
or developing academic, scientific and institutional relationships to collaborate on product research and development; and
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developing
additional product candidates in the hemostatic, sealant, and/or other fields.
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In furtherance of our long-term business goals, we expect to
continue to focus on the following activities during the next twelve months:
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seek
additional funding as required to support the milestones described previously and our operations generally;
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work
with our large scale manufacturing partners to scale up production of product compliant with current good manufacturing practices
(“cGMP”), which activities will be ongoing as we seek to advance toward, enter into, and, if successful, subsequently
increase commercialization activities;
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further
clinical development of our product platform;
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pursue
regulatory clearance for commercialization;
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continue
to expand and enhance our financial and operational reporting and controls;
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seek
commercial partnerships;
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expand
and enhance our intellectual property portfolio by filing new patent applications, obtaining allowances on currently filed patent
applications, and/or adding to our trade secrets in self-assembly, manufacturing, analytical methods and formulation, which activities
will be ongoing as we seek to expand our product candidate portfolio;
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obtain
regulatory input into subsequent clinical trial designs;
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assess
our self-assembling peptide platforms in order to identify and select product candidates for advancement into development.
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In addition to capital required for operating expenses, depending
upon additional input from EU and US regulatory authorities, as well as the potential for additional regulatory filings and approvals
during the next 2 years, additional capital, may be required.
The estimated capital requirements potentially could
increase significantly if a number of risks relating to conducting these activities were to occur, including without
limitation those set forth under the heading “
RISK FACTORS
” in this filing. We anticipate that our
operating and other expenses will continue to increase as we continue to implement our business plan and pursue and achieve
these goals. After giving effect to the funds received in past equity and debt financings and assuming our use of that
funding at the rate we presently anticipate, as of December 17, 2018 we believe that our current cash on hand will
meet our anticipated cash requirements into the third quarter of fiscal 2019. We could spend our financial resources much
faster than we expect, in which case our current funds may not be sufficient to operate our business for the entire duration
of that period.
We have no commitments for any future capital. As indicated
above, we will require significant additional financing to fund our planned operations, including further research and development
relating to AC5, seeking regulatory approval of that or any other product we may choose to develop, commercializing any product
for which we are able to obtain regulatory approval or certification, seeking to license or acquire new assets or business, and
maintaining our intellectual property rights, pursuing new technologies and for financing the investor relations and incremental
administrative costs associated with being a public corporation. We do not presently have, nor do we expect in the near future
to have, revenue to fund our business from operations, and we will need to obtain all of our necessary funding from external sources
for the foreseeable future. We may not be able to obtain additional financing on commercially reasonable or acceptable terms when
needed, or at all. If we cannot raise the money that we need in order to continue to develop our business, we will be forced to
delay, scale back or eliminate some or all of our proposed operations. If any of these were to occur, there is a substantial risk
that our business would fail and our stockholders could lose all of their investment.
Since inception, we have funded our operations primarily through
debt borrowings and the issuance of convertible debt and units consisting of Common Stock and warrants, and we may continue to
seek to do so in the future. If we obtain additional financing by issuing equity securities, our existing stockholders’ ownership
will be diluted. The terms of securities we may issue in future capital-raising transactions may be more favorable for our new
investors. Further, newly issued securities may include preferences, superior voting rights and the issuance of warrants or other
derivative securities, which may have additional dilutive effects. If we obtain additional financing by incurring debt, we may
become subject to significant limitations and restrictions on our operations pursuant to the terms of any loan or credit agreement
governing the debt. Further, obtaining any loan, assuming a loan would be available when needed on acceptable terms, would increase
our liabilities and future cash commitments. We may also seek funding from additional collaboration or licensing arrangements in
the future, which may require that we relinquish potentially valuable rights to our product candidates or proprietary technologies
or grant licenses on terms that are not favorable to us. Moreover, regardless of the manner in which we seek to raise capital,
we may incur substantial costs in those pursuits, including investment-banking fees, legal fees, accounting fees, printing and
distribution expenses and other related costs.
Industry and Competition
Arch is developing technology for surgery and trauma care applications.
Planned products include, among others, barriers for both bleeding tissues and leaking fluids that create an environment permissive
to normal healing. The initial focus has been on procedures and surgeries, with plans to follow with trauma applications. The initial
clinical trial assessed AC5’s use in an external application, while internal human studies are intended to follow. Our intent
is to provide a product set with broad utility and relatively few constraints based on bleeding, leakage, and wound type. Features
of the technology highlight its potential utility in a range of settings, including traditional open procedures and the often more
challenging minimally invasive surgeries.
According to a 2012 report produced by MedMarket Diligence,
LLC, approximately 114 million surgical and procedure-based wounds occur annually worldwide, including 36 million from surgery
in the U.S. Since the early days of modern minimally invasive surgery in the 1990s, the percent of surgeries performed minimally
invasively has increased significantly such that it is now widespread and common. Minimally invasive surgery is often called laparoscopic
surgery, although there are additional types. Minimally invasive surgical procedures often present the surgeon with fewer margins
for potential error and less capacity to deal with certain risks, such as excessive bleeding, without converting the surgery to
a traditional open procedure. We believe that the performance and safety of both minimally invasive and traditional surgeries and
other procedures could benefit from newer hemostatic agents and sealants, because surgical and trauma patients are at significant
risk for morbidity and mortality from bleeding and/or leaking body fluid.
Additional trends that support a demand for hemostatic and sealant
products include the following:
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overall
procedure volume growth;
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ambulatory
same day surgery volume growth;
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minimally
invasive surgery procedure volume growth;
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efforts
to reduce operating room time; and
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increased
use of anticoagulants, which predispose patients to bleeding.
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As a result of this demand, use of hemostatic agents and sealants
is increasing. According to a 2015 MedMarket Diligence, LLC report, the market for these products achieved approximately $4.2 billion
in worldwide sales in 2015 and is projected to reach $4.8 billion in 2017 and surpass $7.5 billion in 2022. Approximately three
quarter of those sales are for hemostats, which are currently growing faster than sealants, as defined in the data survey. However,
we believe that due to a currently poorly met need and pent up demand, the projected growth rate for sealants could become greater
than that for hemostats once additional products become available.
In spite of the large size of the market for these products,
many available hemostatic agents and sealants possess a combination of limitations, including slow onset of action, general unreliability,
user-unfriendliness, and risk for adverse effects, such as healing problems, adhesion formation, infection and other safety concerns.
Many of the deficiencies of currently available hemostatic agents and sealants are comparable to those of their earlier-generation
counterparts, as revolutionary advances in underlying technologies have been elusive.
In the course of developing AC5, we engaged commercial strategy
and marketing consultants and communicated directly with care providers to understand the needs of potential customers and to assess
product feature preferences. As we expected, better efficacy and reliability were identified as product features important to those
customers, and we discovered that other product features are important to achieving broad market acceptance. Surgeons, operating
room managers, sales representatives for currently available hemostatic products, and hospital decision-makers identified a number
of desirable characteristics for a hemostatic agent, which we carefully consider while developing AC5. These features include that
a product is:
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easily
handled and applied;
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able
to promote a clear field of vision and not obstruct view;
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non-viscous
and flowable;
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non-sticky
(to tissue or equipment);
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able
to permit normal healing;
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indifferent
to status of coagulation cascade or “blood thinning” drugs;
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not
sourced from human or other animal blood or tissue components.
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We anticipate that AC5 will meet these particular market
demands, and we anticipate its eventual use in minimally invasive or laparoscopic surgery as well as open surgical
procedures. While open procedures represents the more established market for hemostatic agents, the number of surgeries
performed by minimally invasive techniques, including laparoscopic surgery, has been growing over the past two decades and is
significant. Less invasive laparoscopic procedures tend to result in shorter recovery times, faster discharges, less
scarring, less pain and less need for pain medications. Many of the hemostasis products currently available do not possess
certain features and handling characteristics that are ideal for use in a laparoscopic setting. For instance, many available
products are difficult to use laparoscopically because they tend to be sticky, powdery, fabric-based or are otherwise
difficult to control and/or insert into the small tubes used during many laparoscopic procedures. We believe that the novel
features and differentiating characteristics of AC5 will make it more suitable for laparoscopic surgeries than many or most
presently available alternatives.
Further, available data indicates that there may be increased
pressure to perform more complex surgeries at reduced costs, including conducting operations in less expensive outpatient settings.
Although accurate current statistics are difficult to obtain, a National Health Statistics Report from 2006 and updated in 2009
indicates that outpatient surgery volume was increasing by approximately 5% annually, and a 2009 report covering U.S. surgical
procedures suggests that inpatient surgery volume was declining 1% per year. We believe that a motivating factor of this trend
may be the increased costs associated with hospital inpatient procedures performed in operating rooms, which, according to MedMarket
Diligence, have been estimated to cost between $2,000 and $10,000 per hour. These costs likely motivate increased operating room
throughput and increased volume of procedures performed in outpatient settings. Both of those trends highlight the need for highly
effective hemostatic agents and sealants that can decrease operating room time for inpatient procedures and help to increase the
safety of performing more types of procedures in less expensive outpatient settings.
Participants in the hemostatic and sealant market currently
include large companies, such as Johnson & Johnson and its affiliated companies, C. R. Bard, Inc., Baxter International Inc.,
as well as various smaller companies. Certain companies in other sectors, such as pharmaceuticals, wound care, and orthopedics,
among others, are also interested in these markets.
Commercially available products in the hemostasis field with
which we would expect AC5 to compete if it obtains required regulatory approvals can cost between $50 and $500 per procedure, with
the higher value added products generally priced at the upper end of that range. Production costs of many of those products are
significant, as they may require biotechnology or plasma separation technologies to manufacture, and they may require ingredients
or other materials that are expensive to obtain. We believe that, assuming receipt of required regulatory approvals, AC5 will be
well positioned to compete against currently available products as a result of its broad applicability in various types of surgical
settings and its features that address drawbacks seen in many available hemostatic agents. Furthermore, our planned use of a manufacturing
method that we expect will be cost-effective compared to methods used to manufacture many currently available hemostatic products
could enable any future sales to be made at competitive price points within the market range.
Potential Disadvantages of AC5 Compared to the Competition
Some potential disadvantages of AC5 compared to the hemostatic
agents currently on the market with which we would expect AC5 to compete if it obtains required regulatory approvals are as follows:
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The
favorable handling characteristics of AC5 are the result of its non-sticky and non-glue-like nature. However, if a surgeon or
healthcare provider requires a product to adhere tissues together, or provide similar glue-like action, then AC5 in its current
form would not achieve that effect.
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While
we project that AC5 will be relatively economical to manufacture at scale, it may not be able to compete from a price perspective
with inexpensive means to stop bleeding, such as application of pressure or use of bandages or other inexpensive hemostatic agents.
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Research and Development Expenditures
Our research and development expenses to date have primarily
included labor and third party consulting costs to develop our core technology and AC5. Research and development expense during
the year ended September 30, 2018 was $2,884,245, an increase of $789,450 compared to $2,094,795 for the year ended September 30,
2017. We expect our research and development activities and expenses to increase significantly as we execute on our business plan
and commence additional clinical trials.
Regulation by the FDA and Similar Foreign Agencies
Our research, development and clinical programs, as well as
our manufacturing and marketing operations that may be performed by us or third party service providers on our behalf, are subject
to extensive regulation in the U.S. and other countries. Most notably, we believe that AC5 will be subject to regulation as a medical
device under the U.S. Food Drug and Cosmetic Act (the “FDCA”) as implemented and enforced by the FDA and equivalent
regulations enforced by foreign agencies in any other countries in which we desire to pursue commercialization. The FDA and its
foreign counterparts generally govern the following activities that we do or will perform or that will be performed on our behalf,
as well as potentially additional activities, to ensure that products we may manufacture, promote and distribute domestically or
export internationally are safe and effective for their intended uses:
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product
design, preclinical and clinical development and manufacture;
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product
premarket clearance and approval;
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product
safety, testing, labeling and storage;
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record
keeping procedures;
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product
marketing, sales and distribution; and
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post-marketing
surveillance, complaint handling, medical device reporting, reporting of deaths, serious injuries or device malfunctions and repair
or recall of products.
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Pre-Marketing Regulation by the U.S. FDA
Medical Device Classification
As described previously, we expect that AC5 currently is
classified as a medical device because its primary desired activity does not depend on metabolic or chemical activity in a
body. The FDA classifies medical devices into one of the following three classes on the basis of the amount of risk
associated with the medical device and the controls deemed necessary to reasonably ensure their safety and effectiveness:
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Class
I, requiring general controls, including labeling, device listing, reporting and, for some products, adherence to good manufacturing
practices through the FDA’s quality system regulations and pre-market notification;
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Class
II, requiring general controls and special controls, which may include performance standards and post-market surveillance; or
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Class
III, requiring general controls and approval of a premarket approval application (“PMA”), which may include post-market
approval conditions and post-market surveillance.
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Class III devices are those that are deemed by the FDA to pose
the greatest risks, such as life-sustaining, life-supporting or implantable devices, or that have a new intended use or use advanced
technology that is not substantially equivalent to that of a legally marketed device. As a result of the intended use of AC5 and
the novel technology on which is it based, we further anticipate that AC5 could be regulated as either a Class III or a Class II
medical device in these jurisdictions, depending upon the application.
US Regulatory Approval Process
Products that are regulated as medical devices and that require
review by the FDA are subject to either a premarket notification, also known as a 510(k), which must be submitted to the FDA for
clearance, or a PMA application, which the FDA must approve prior to marketing in the U.S. The FDA ultimately determines the
appropriate regulatory path.
We believe that the products we are currently pursuing
for internal use will require a PMA approval prior to commercialization. However, we believe that we may commercialize an
initial product for external use after clearance through the 510(k) process. To obtain 510(k) marketing clearance for a
medical device, an applicant must submit a premarket notification to the FDA demonstrating that the device is
"substantially equivalent" to a predicate device or devices, which is typically a legally marketed Class II device in the
United States. A device is substantially equivalent to a predicate device if it has the same intended use and (i) the same
technological characteristics, or (ii) has different technological characteristics and the information submitted demonstrates
that the device is as safe and effective as a legally marketed device and does not raise different questions of safety
or effectiveness. In some cases, the submission must include data from human clinical studies. Marketing may commence when
the FDA issues a clearance letter finding substantial equivalence.
On July 25, 2017, we announced that we had made a 510(k)
submission to FDA for our AC5™ Topical Gel. On December 18, 2017, we
voluntarily
withdrew the application after receiving questions from the FDA for which an adequately comprehensive response could not be
provided within the FDA’s congressionally-mandated 90-day review period.
On October 1, 2018, we announced that
we both completed the necessary steps required to file a 510(k) submission to the FDA for our AC5™ Topical Gel and
filed that 510(k) submission during the third calendar quarter of 2018. As previously disclosed, these steps included developing a
required study protocol and submitting it to the FDA in a pre-submission letter in the first calendar quarter of 2018, completing the
pre-submission process and initiating the study in the second calendar quarter of 2018, and completing the study. On December 17, 2018, we
announced
that the 510(k) premarket notification for AC5
™
Topical Gel has been reviewed and cleared by the FDA, allowing for the product to be marketed.
We currently anticipate filing our first CE Mark application
by the end of calendar year 2018, to subsequently seek regulatory approval for expanded indications, and to pursue internal use
commercial opportunities for other AC5-related products through the premarket authorization process.
A PMA must be submitted to the FDA if a device cannot be cleared
through another approval process or is not otherwise exempt from the FDA’s premarket clearance requirements.
A PMA is required for most Class III medical devices. A PMA must generally be supported by extensive data, including without limitation
technical, preclinical, clinical trial, manufacturing and labeling data, to demonstrate to the FDA’s satisfaction the safety
and efficacy of the device for its intended use. During the review period, the FDA will typically request additional information
or clarification of the information previously provided. Also, experts from outside the FDA may be convened
to review and evaluate the PMA and provide recommendations to the FDA as to the approvability of the device, although the FDA may
or may not accept any such recommendations. In addition, the FDA will generally conduct a pre-approval inspection
of the manufacturing facility or facilities involved with producing the device to ensure compliance with the cGMP regulations.
Upon approval of a PMA, the FDA may require that certain conditions of approval, such as conducting a post-market approval clinical
trial, be met.
The PMA approval process can be lengthy and expensive and requires
an applicant to demonstrate the safety and efficacy of the device based, in part, on data obtained from clinical trials. The PMA
process is estimated to take from one to three years or longer, from the time the PMA application is submitted to the FDA until
an approval is obtained.
Further, if post-approval modifications are made, including, for example, certain types of modifications to the device’s indication for
use, manufacturing process, labeling or design, then new PMAs or PMA supplements would be required. PMA supplements often require
submission of the same type of information as a PMA, except that the supplement is typically limited to information needed to support
the changes from the device covered by the original PMA and accordingly may not require as extensive clinical and other data.
We have not submitted to the FDA a PMA or commenced the required
clinical trials for an internal use product. We have not submitted a premarket notification. Even if we conduct successful
preclinical and clinical studies and submit a PMA for an approval or premarket application for clearance, the FDA may not permit
commercialization of AC5 for the desired internal use indications, on a timely basis, or at all. Our inability to achieve regulatory
approval for AC5 in the U.S. for an internal use product, a large market for hemostatic products, would materially adversely affect
our ability to grow our business.
Clinical Trials
Obtaining PMA approval requires the completion of human
clinical trials that produce successful results demonstrating the safety and efficacy of the product. Clinical trials for a
Class III medical device typically may require an application for an investigational device exemption (“IDE”),
which would need to be approved in advance by the FDA for a specified number of patients and study sites. Human clinical
trials are subject to extensive monitoring, recordkeeping and reporting requirements, and must be conducted under the
oversight of an institutional review board (“IRB”) for the relevant clinical trial sites and comply with
applicable FDA regulations, including those relating to good clinical practices (“GCP”).
In order to complete a clinical trial, we are required to enroll
a sufficient number of patients to conduct the trial after obtaining each patient’s informed consent in a form and substance
that complies with both FDA requirements and state and federal privacy and human subject protection regulations. Many factors could
lead to delays or inefficiencies in conducting clinical trials, some of which are discussed under the heading “RISK FACTORS”
in this Annual Report on Form 10-K. Further, we, the FDA or the IRB could suspend a clinical trial at any time for various reasons,
including a belief that the risks to the subjects of the trial outweigh the anticipated benefits. Even if a trial is completed,
the results of clinical testing may not adequately demonstrate the safety and efficacy of the device or may otherwise not be sufficient
to obtain FDA clearance or approval to market the product in the U.S.
On December 16, 2015, we announced that we had received clearance
from a regulatory authority in Western Europe to initiate a human clinical trial to assess the safety and performance of AC5 in
humans. The initial patient was treated in the first quarter of 2016 and on June 6, 2016, we announced we had completed patient
enrollment in this study. On August 15, 2016, we announced that the AC5 Topical Hemostatic Device met its primary and secondary
endpoints in our first clinical trial. On October 31, 2016, the Company announced that additional analysis of the subgroup of 10
patients who were taking a prescribed antiplatelet medication, commonly known as a blood thinner, such as aspirin, indicated that
AC5 had similar effects for this patient population.
Pre-Marketing Regulation in the EU
Medical Device Classification
Similar to the U.S., the EU recognizes different classes of
medical devices. The EU recognizes Class I, Class IIa, Class IIb or Class III medical devices, with the classification determination
depending on the amount of potential risk to the patient associated with use of the medical device. Classification involves rules
found in the EU’s Medical Device Directive. Key questions of relevance include the degree of the device’s contact with
the patient, invasiveness, active nature, and indications for use. The medical device classes recognized in the EU are as follows:
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Class
I, which are considered low risk devices, such as wheelchairs and stethoscopes, and require pre-market notification prior to placing
the devices onto the EU market;
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Class
IIa, which are considered low-medium risk devices and require certification by a Notified Body;
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Class
IIb, which are considered medium-high risk devices and require certification by a Notified Body; and
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Class
III, which are considered high-risk devices and require certification by a Notified Body.
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In February of 2015, we announced that BSI confirmed that AC5
fulfills the definition of a medical device within the EU and will be classified as such in consideration for CE mark designation.
We anticipate that AC5 could be regulated as either a Class III or a Class II medical device in these jurisdictions, depending
upon the application.
CE Mark Approval Process
Approval Process
The EU has adopted numerous directives and standards regulating
the design, manufacture, clinical trials, labeling, and adverse event reporting for medical devices. Recently, the EU has revised
its rules and regulations and have implemented increasingly stringent requirements. In addition, each EU member state has implemented
legislation applying these directives and standards at a national level. Many countries outside of the EU have also voluntarily
adopted laws and regulations that mirror those of the EU with respect to medical devices, potentially increasing the time and cost
necessary to potentially achieve an approval.
Under applicable EU medical device directives, a CE mark
is a symbol placed on a product that declares that the product is compliant with the essential requirements of
applicable EU health, safety and environmental protection legislation. In order to receive a CE mark for a product candidate,
the company producing the product candidate must select a country in which to apply. Each country in the EU has one competent
authority (“CA”) that implements the national regulations by interpreting the EU directives. CAs also designate
and regulate Notified Bodies. An assessment by a Notified Body in the selected country within the EU is required in order to
commercially distribute the device. In addition, compliance with ISO 13485 issued by the International Organization for
Standardization, among other standards, establishes the presumption of conformity with the essential requirements for CE
marking. Certification to the ISO 13485 standard demonstrates the presence of a quality management system that can be used by
a manufacturer for design and development, production, installation and servicing of medical devices and the design,
development and provision of related services.
Devices that comply with the requirements of the laws of the
selected member state applying the applicable EU directive are entitled to bear a CE mark and can be distributed throughout the
member states of the EU, as well as in other countries that have mutual recognition agreements with the EU or have adopted the
EU’s regulatory standards.
We currently anticipate filing our first CE mark application
by the end of the 2018 calendar year. We have identified several potential countries through which we may pursue a CE mark for
AC5.
Clinical Trials
As with U.S. Class III and certain Class II medical
device approvals, EU Class III and certain Class II medical device approvals require the successful completion of human
clinical trials. However, there are several key differences between the jurisdictions with respect to the approvals and
processes. Obtaining a CE mark is not equivalent to obtaining FDA clearance or approval, in that a CE mark confirms the
safety, but not the effectiveness, of a product. Furthermore, a CE mark affixed to a product serves as a declaration by the
responsible party that the product conforms to applicable provisions and that relevant conformity assessment procedures have
been completed with respect to the product. Accordingly, we anticipate that the required EU clinical trial(s) for AC5 will be
smaller, faster, and less expensive than what we expect would be required for AC5 to obtain equivalent approvals in the
U.S.
Post-Approval Regulation
After a medical device obtains approval from the applicable
regulatory agency and is launched in the market, numerous post-approval regulatory requirements would apply. Many of those requirements
are similar in the U.S. and in member states of the EU, and include:
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product
listing and establishment registration;
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requirements
that manufacturers, including third-party manufacturers, follow stringent design, testing, control, documentation and other quality
assurance procedures during all aspects of the design and manufacturing process;
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labeling
and other advertising regulations, including prohibitions against the promotion of products for uncleared, unapproved or off-label
use or indication;
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approval
of product modifications that affect the safety or effectiveness of any of our devices that may achieve approval;
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post-approval
restrictions or conditions, including post-approval study commitments;
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post-market
surveillance regulations, which apply, when necessary, to protect the public health or to provide additional safety and effectiveness
data for the device;
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the
recall authority of the applicable government agency and regulations pertaining to voluntary recalls; and
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reporting
requirements, including reports of incidents in which a product may have caused or contributed to a death or serious injury or
in which a product malfunctioned, and notices of corrections or removals.
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Failure by us or by our third-party manufacturers and other
suppliers to comply with applicable regulatory requirements could result in enforcement action by various regulatory authorities,
which may result in monetary fines, the imposition of operating restrictions, product recalls, criminal prosecution or other sanctions.
Regulation by Other Foreign Agencies
International sales of medical devices outside the EU may be
subject to government regulations in each country in which the device is marketed and sold, which vary substantially from country
to country. The time required to obtain approval by a non-EU foreign country may be longer or shorter than that required for FDA
or CE mark clearance or approval, and the requirements may substantially differ.
Other Governmental Regulations and Environmental Matters
We are or may become subject to various laws and regulations
regarding laboratory practices and the use of animals in testing, as well as environmental laws and regulations governing, among
other things, any use and disposal by us of hazardous or potentially hazardous substances in connection with our research. At this
time, costs attributable to environmental compliance are not material. In each of these areas, applicable U.S. and foreign government
agencies have broad regulatory and enforcement powers, including, among other things, the ability to levy fines and civil penalties,
suspend or delay issuance of approvals, seize or recall products, and withdraw approvals, any one or more of which could have a
material adverse effect on our business. Additionally, if we are able to successfully obtain approvals for and commercialize our
product candidates, then the Company and our products may become subject to various federal, state and local laws targeting fraud,
abuse, privacy and security in the healthcare industry.
Intellectual Property
We are focused on the development of self-assembling compositions,
particularly self-assembling peptide compositions, and methods of making and using such compositions primarily in healthcare applications.
Suitable applications of these compositions include limiting or preventing the movement of bodily fluids and contaminants within
or on the human body, preventing adhesions, treatment of leaky or damaged tight junctions, and reinforcement of weak or damaged
vessels, such as aneurysms. Our strategy to date has been to develop an intellectual property portfolio in high-value jurisdictions
that tend to uphold intellectual property rights.
As of November 19, 2018, we either own or license from others
a number of U.S. patents, U.S. patent applications, foreign patents and foreign patent applications.
Five patent portfolios assigned to Arch Biosurgery, Inc. include
a total of 30 patents and pending applications in a total of nine jurisdictions, including ten patents and pending applications
in the US. These portfolios cover self-assembling peptides and methods of use thereof and self-assembling peptidomimetics and methods
of use thereof, including five issued US patents (US 9,415,084; US 9,162,005; US 9,789,157; US 9,821,022 and US 9,339,476) that
expire between 2026 and 2034 (absent patent term extension), as well as ten patents that have been either allowed, issued or granted
in foreign jurisdictions.
We have also entered into a license agreement with Massachusetts
Institute of Technology and Versitech Limited (“MIT”) pursuant to which we have been granted exclusive rights under
two portfolios of patents and non-exclusive rights under another three portfolios of patents.
The two portfolios exclusively licensed from MIT include a total
of 23 patents and pending applications drawn to self-assembling peptides and methods of use thereof and self-assembling peptidomimetics
and methods of use thereof in a total of nine jurisdictions. The portfolios include four issued US patents (US 9,511,113; US 9,084,837;
US 9,327,010; and US 9,364,513) that expire between 2026 and 2027 (absent patent term extension), as well as thirteen patents that
have been either allowed, issued or granted in foreign jurisdictions
.
The three portfolios non-exclusively licensed from MIT include
a number of US and foreign applications, including four issued US patents (US 7,449,180; US 7,846,891; US 7,713,923; and US 8,901,084)
that expire between 2021 and 2027 (absent patent term extension), as well as four patents that have been either allowed, issued
or granted in foreign jurisdictions.
Our license agreement with MIT imposes certain diligence, capital
raising, and other obligations on us, including obligations to raise certain amounts of capital by specific dates. Additionally,
we are responsible for all patent prosecution and maintenance fees under that agreement. Our breach of any material terms of our
license agreement with MIT could permit the counterparty to terminate the agreement, which could result in our loss of some or
all of our rights to use certain intellectual property that is material to our business and our lead product candidate. Our loss
of any of the rights granted to us under our license agreement with MIT could materially harm our product development efforts and
could cause our business to fail.
We have pending trademark applications for AC5 Surgical Hemostatic
Device™, AC5 Surgical Hemostat™, AC5™, Crystal Clear Surgery™, NanoDrape™ and NanoBioBarrier™.
Employees
We presently have eight full-time employees and one part-time
employee, and make extensive use of third party contractors, consultants, and advisors to perform many of our present activities.
We expect to increase the number of our employees as we increase our operations.
ITEM 1A. RISK FACTORS
Investment in our Common Stock involves a high degree of
risk. You should carefully consider the following risk factors before making an investment decision. If any of the following risks
and uncertainties actually occurs, our business, financial condition, and results of operations could be negatively impacted and
you could lose all or part of your investment.
Risks Related to our Business
There is substantial doubt about our ability to continue
as a going concern.
We are a development stage company with no commercial
products. Our primary product candidate is in the process of being developed, and will require additional investment before
it could potentially be commercialized. As a result, we have not generated any revenue from operations since inception, and
we have incurred substantial net losses to date. While as of December 17, 2018, we believe that our current cash on
hand will meet our anticipated cash requirements into the third quarter of fiscal 2019, depending upon additional input from
EU and US regulatory authorities, we may need to raise additional capital prior to the third quarter of Fiscal 2019. For
example, on December 18, 2017, we
voluntarily withdrew
a 510(k) notification for
AC5 Topical Gel after receiving questions from the FDA for which an adequately comprehensive response could not be provided
within the FDA’s
congressionally-mandated 90-day review period.
While on
October 1, 2018, we announced that we both completed the necessary steps required to re-file our 510(k) submission for our
AC5™ Topical Gel, and filed a 510(k) submission during the third calendar quarter, the resubmission process required us
to expend a minimum of $100,000 that we had not previously anticipated spending.
In any event, during or prior to the third quarter of Fiscal
2019, we will need to obtain additional cash to continue operations and fund our planned future operations, which include research
and development of our primary product candidate, seeking regulatory approval for that product candidate, and pursuing its commercialization
in the U.S., Europe and other markets. Those circumstances raise substantial doubt about our ability to continue as a going concern.
We have incurred significant losses since inception. We
expect to continue to incur losses for the foreseeable future, and we may never generate revenue or achieve or maintain profitability.
As noted above under the risk factor entitled “
There
is substantial doubt about our ability to continue as a going concern
,
”
we are a development stage company
with no commercial products. Consequently, we have incurred losses in each year since our inception and we expect that losses will
continue to be incurred in the foreseeable future in the operation of our business. To date, we have financed our operations entirely
through equity and debt investments by founders, other investors and third parties, and we expect to continue to rely on these
sources of funding, to the extent available in the foreseeable future. Losses from operations have resulted principally from costs
incurred in research and development programs and from general and administrative expenses, including significant costs associated
with establishing and maintaining intellectual property rights, significant legal and accounting costs incurred in connection with
both the closing of the Merger and complying with public company reporting and control obligations, and personnel expenses. We
have devoted much of our operations to date to the research and development of our core technology, including selecting our initial
product composition, conducting initial safety and other related tests, generating scale-up, reproducibility and manufacturing
and formulation methods, conducting our initial clinical trial for AC5, and developing and protecting the intellectual property
rights underlying our technology platform.
We expect to continue to incur significant expenses and we anticipate
that those expenses and losses may increase in the foreseeable future as we seek to:
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develop
our principal product candidate, AC5, and the underlying technology, including advancing applications and conducting biocompatibility
and other preclinical studies;
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raise
capital needed to fund our operations;
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build
and enhance investor relations and corporate communications capabilities;
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conduct
additional clinical trials relating to AC5 and any other product candidate we seek to develop;
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attempt
to gain regulatory approvals for product candidates;
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build
relationships with contract manufacturing partners, and invest in product and process development through such partners;
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maintain,
expand and protect our intellectual property portfolio;
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advance
additional product candidates and technologies through our research and development pipeline;
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seek
to commercialize selected product candidates which may require regulatory approval; and
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hire
additional regulatory, clinical, quality control, scientific, financial, and management, consultants and advisors.
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To become and remain profitable, we must succeed in developing
and eventually commercializing product candidates with significant market potential. This will require us to be successful in a
number of challenging activities, including successfully completing preclinical testing and clinical trials of product candidates,
obtaining regulatory approval for our product candidates and manufacturing, marketing and selling any products for which we may
obtain regulatory approval. We are only in the preliminary stages of many of those activities. We may never succeed in those activities
and may never generate operating revenues or achieve profitability. Even if we do generate operating revenues sufficient to achieve
profitability, we may not be able to sustain or increase profitability. Our failure to generate operating revenues or become and
remain profitable would impair our ability to raise capital, expand our business or continue our operations, all of which would
depress the price of our Common Stock. A further decline or lack of increase in the prices of our Common Stock could cause our
stockholders to lose all or a part of their investment in the Company.
We will need substantial additional funding and may be
unable to raise capital when needed, which would force us to delay, reduce or eliminate our product development programs or commercialization
efforts and could cause our business to fail.
Based on our current operating expenses and working capital
requirements, as of December 17, 2018, we believe that our current cash on hand will meet our anticipated cash requirements into
the third quarter of fiscal 2019. Notwithstanding that, depending upon additional input from EU and US regulatory authorities,
we may need to raise additional capital prior to the third quarter of Fiscal 2019. For example, on December 18, 2017, we
voluntarily
withdrew
a 510(k) notification for AC5 Topical Gel after receiving questions from the FDA for which an adequately comprehensive
response could not be provided within the FDA’s
congressionally-mandated 90-day review
period.
While on October 1, 2018, we announced that we both completed the necessary steps required to re-file our 510(k)
submission for our AC5™ Topical Gel, and filed a 510(k) submission during the third calendar quarter, the resubmission process
required us to expend a minimum of $100,000 that we had not anticipated spending.
In any event, during or prior to the third quarter of Fiscal
2019, we will need to obtain additional cash to continue operations and fund our planned future operations, including the continuation
of our ongoing research and development efforts, the licensing or acquisition of new assets, and researching and developing any
potential patents, the related compounds and any further intellectual property that we may acquire. In addition, our plans may
change and/or we may use our capital resources more rapidly than we currently anticipate. We presently expect that our expenses
will increase in connection with our ongoing activities to support our business operations inclusive of regulatory applications
and approval of AC5 in the U.S. and Europe and therefore we will require additional funding. Our future capital requirements will
depend on many factors, including:
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the
scope, progress and results of our research and development collaborations;
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the
extent of potential direct or indirect grant funding for our research and development activities;
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the
scope, progress, results, costs, timing and outcomes of any regulatory process and clinical trials conducted for any of our product
candidates;
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the
timing of entering into, and the terms of, any collaboration agreements with third parties relating to any of our product candidates;
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the
timing of and the costs involved in obtaining regulatory approvals for our product candidates;
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the
costs of operating, expanding and enhancing our operations to support our clinical activities and, if our product candidates are
approved, commercialization activities;
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the
costs of maintaining, expanding and protecting our intellectual property portfolio, including potential litigation costs and liabilities;
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the
costs associated with maintaining and expanding our product pipeline;
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the
costs associated with expanding our geographic focus;
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operating
revenues, if any, received from sales of our product candidates, if any are approved by the FDA or other applicable regulatory
agencies;
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the
cost associated with being a public company, including obligations to regulatory agencies, and increased investor relations and
corporate communications expenses; and
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the
costs of additional general and administrative personnel, including accounting and finance, legal and human resources employees.
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We intend to obtain additional financing for our business through
public or private securities offerings, the incurrence of additional indebtedness, or some combination of those sources. We have
obtained research and development support through collaborative arrangements, such as the Project Agreement that we entered into
with the National University of Ireland Galway (“NUIG”) on May 28, 2015 and which concluded in the third quarter of
fiscal 2018, and we may continue to seek funding through additional collaborative arrangements with strategic partners if we determine
them to be necessary or appropriate, although these arrangements could require us to relinquish rights to our technology or product
candidates and could result in our receipt of only a portion of any revenues associated with the partnered product. We cannot provide
any assurance that additional financing from these sources will be available on favorable terms, if at all.
In addition, we are bound by certain contractual terms and obligations
that may limit or otherwise impact our ability to raise additional funding in the near-term including, but not limited to, provisions
in the Securities Purchase Agreements that we entered into on February 20, 2017 (“2017 SPA”) and June 28, 2018 (the
“2018 SPA”) in connection with the registered direct financings that closed on February 24, 2017 (“2017 Financing”)
and July 2, 2018 (the “2018 Financing”), respectively, in each case as described in greater detail in the risk factor
entitled “
The terms of the 2017 Financing and 2018 Financing could impose additional challenges on our ability to raise
funding in the future
” below.
These restrictions and provisions could make it more challenging
for us to raise capital through the incurrence of additional debt or through future equity issuances. Further, if we do raise capital
through the sale of equity, or securities convertible into equity, the ownership of our then existing stockholders would be diluted,
which dilution could be significant depending on the price at which we may be able to sell our securities. Also, if we raise additional
capital through the incurrence of indebtedness, we may become subject to covenants restricting our business activities, and the
holders of debt instruments may have rights and privileges senior to those of our equity investors. Finally, servicing the interest
and principal repayment obligations under any debt facilities that we may enter into in the future could divert funds that would
otherwise be available to support research and development, clinical or commercialization activities.
If we are unable to obtain adequate financing on a timely basis
or on acceptable terms in the future, we would likely be required to delay, reduce or eliminate one or more of our product development
activities, which could cause our business to fail.
The terms of the 2017 Financing and 2018 Financing could
impose additional challenges on our ability to raise funding in the future.
In particular, both the 2017 SPA and 2018 SPA contain provisions
that provide that until such time as the three lead investors in the 2017 Financing and 2018 Financing, respectively, collectively
own less than 20% of the Series F Warrants or Series G Warrants, as applicable, purchased by them pursuant to the 2017 SPA or 2018
SPA, as applicable, the Company is prohibited from effecting or entering into an agreement to effect any issuance by the Company
or any of its subsidiaries of Common Stock or securities convertible, exercisable or exchangeable for Common Stock (or a combination
of units thereof) involving a Variable Rate Transaction including, but not limited to, an equity line of credit or “At-the-Market”
financing facility.
As of December 17, 2018, none of the lead
investors for either the 2017 Financing or 2018 Financing have exercised or transferred any of their Series F Warrants or
Series G Warrants. As defined in both the 2017 SPA and 2018 SPA, Variable Rate Transaction means a transaction in which the
Company (a) issues or sells any debt or equity securities that are convertible into, exchangeable or exercisable for, or
include the right to receive additional shares of Common Stock either (A) at a conversion price, exercise price or exchange
rate or other price that is based upon and/or varies with the trading prices of or quotations for the shares of Common Stock
at any time after the initial issuance of such debt or equity securities, or (B) with a conversion, exercise or exchange
price that is subject to being reset at some future date after the initial issuance of such debt or equity security or upon
the occurrence of specified or contingent events directly or indirectly related to the business of the Company or the market
for the Common Stock (excluding adjustments under customary anti-dilution provisions) or (b) enters into, or effects a
transaction under, any agreement, including, but not limited to, an equity line of credit, whereby the Company may issue
securities at a future determined price. These provisions could make our securities less attractive to investors and could
limit our ability to obtain adequate financing on a timely basis or on acceptable terms in the future, which could have
significant harmful effects on our financial condition and business and could include substantial limitations on our ability
to continue to conduct operations.
Our short operating history may hinder our ability to
successfully meet our objectives.
We are a development stage company subject to the risks, uncertainties
and difficulties frequently encountered by early-stage companies in evolving markets. Our operations to date have been primarily
limited to organizing and staffing, developing and securing our technology and undertaking funding preclinical studies of our lead
product candidates, and funding one clinical trial. We have not demonstrated our ability to successfully complete large-scale,
pivotal clinical trials, obtain regulatory approvals, manufacture a commercial scale product or arrange for a third-party to do
so on our behalf, or conduct sales and marketing activities necessary for successful product commercialization.
Because of our limited operating history, we have limited insight
into trends that may emerge and affect our business, and errors may be made in developing an approach to address those trends and
the other challenges faced by development stage companies. Failure to adequately respond to such trends and challenges could cause
our business, results of operations and financial condition to suffer or fail. Further, our limited operating history may make
it difficult for our stockholders to make any predictions about our likelihood of future success or viability.
If we are not able to attract and retain qualified management
and scientific personnel, we may fail to develop our technologies and product candidates.
Our future success depends to a significant degree on the skills,
experience and efforts of the principal members of our scientific and management personnel. These members include Terrence Norchi,
MD, our President and Chief Executive Officer. The loss of Dr. Norchi or any of our other key personnel could harm our business
and might significantly delay or prevent the achievement of research, development or business objectives. Further, our operation
as a public company will require that we attract additional personnel to support the establishment of appropriate financial reporting
and internal controls systems. Competition for personnel is intense. We may not be able to attract, retain and/or successfully
integrate qualified scientific, financial and other management personnel, which could materially harm our business.
If we fail to properly manage any growth we may experience,
our business could be adversely affected.
We anticipate increasing the scale of our operations as we seek
to develop our product candidates, including hiring and training additional personnel and establishing appropriate systems for
a company with larger operations. The management of any growth we may experience will depend, among other things, upon our ability
to develop and improve our operational, financial and management controls, reporting systems and procedures. If we are unable to
manage any growth effectively, our operations and financial condition could be adversely affected.
If we fail to maintain appropriate internal controls in
the future, we may not be able to report our financial results accurately, which may adversely affect our stock price and our business.
Our efforts to comply with Section 404 of the Sarbanes-Oxley
Act of 2002 and the related regulations regarding our required assessment of our internal controls over financial reporting requires
the commitment of significant financial and managerial resources. Internal control over financial reporting has inherent limitations,
including human error, the possibility that controls could be circumvented or become inadequate because of changed conditions,
and fraud. If we are unable to maintain effective internal controls, we may not have adequate, accurate or timely financial information,
and we may be unable to meet our reporting obligations as a publicly traded company or comply with the requirements of the SEC
or the Sarbanes-Oxley Act of 2002. This could result in a restatement of our financial statements, the imposition of sanctions,
including the inability of registered broker dealers to make a market in our stock, or investigation by regulatory authorities.
Any such action or other negative results caused by our inability to meet our reporting requirements or comply with legal and regulatory
requirements or by disclosure of an accounting, reporting or control issue could adversely affect the trading price of our stock
and our business.
We rely significantly on information technology and any
failure, inadequacy, interruption or security lapse of that technology, including any cybersecurity incidents, could harm our ability
to operate our business effectively.
We maintain sensitive data pertaining to our Company on our
computer networks, including information about our research and development activities, our intellectual property and other proprietary
business information. Our internal computer systems and those of third parties with which we contract may be vulnerable to damage
from cyber-attacks, computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical
failures, despite the implementation of security measures. System failures, accidents or security breaches could cause interruptions
to our operations, including material disruption of our research and development activities, result in significant data losses
or theft of our intellectual property or proprietary business information, and could require substantial expenditures to remedy.
To the extent that any disruption or security breach were to result in a loss of, or damage to, our data or applications or inappropriate
disclosure of confidential or proprietary information, we could incur liability and our research and development programs could
be delayed, any of which would harm our business and operations.
Risks Related to the Development and
Commercialization of our Product Candidates
The Company voluntarily withdrew a 510(k) notification
to the FDA on December 18, 2017, and the future success of our business is significantly dependent on the success of our being
able to obtain regulatory approval for our flagship development stage product candidates, known collectively as the AC5 devices.
On July 17, 2017, we filed a 510(k) notification with the
FDA for our AC5™ Topical Gel. As previously announced on December 18, 2017, we voluntarily withdrew the submission
after receiving a communication from FDA near the end of the agency’s 90-day review period for a final decision on
510(k) notifications. The communication contained questions for which a comprehensive response could not be provided in the
limited review time remaining on the submission. Given that it was not possible to respond in the time available, the Company
made the decision to withdraw the 510(k) notification, but noted at the time that it remained committed to continued
collaboration with FDA to appropriately address the outstanding questions and planned to submit a new 510(k) notification as
soon as possible following further discussion with the agency. On March 12, 2018, we announced that we were utilizing the
FDA’s pre-submission process to submit a proposed development strategy to the FDA to address the agency’s
comments on our 510(k) notification. As indicated in that March 12, 2018 announcement, we determined that providing
additional data to the FDA would be the most expeditious path forward for addressing the FDA’s comments, subject to
any further comments that we may receive from the FDA.
On May 8, 2018, the Company announced
that
it would initiate the previously disclosed study designed to address FDA comments on Arch’s previous 510(k) notification
for its AC5
™
Topical Gel. The agency provided feedback via the pre-submission
process and indicated that the proposed study design was acceptable to support the Company’s future marketing application.
On June 15, 2018, the Company further
announced that it completed enrollment for its human skin sensitization study and
that applications of the Company’s AC5™ Topical Gel were underway for all subjects.
On October 1, 2018 the Company
announced
that it submitted a 510(k) notification to the FDA for its AC5
™
Topical Gel
(AC5)
and received acknowledgement from the FDA that the submission
has been received.
On December 17, 2018, we
announced
that the 510(k) premarket notification for AC5
™
Topical Gel has been reviewed and cleared by the FDA, allowing for the product to be marketed.
In
addition to our 510(k) notification, we currently anticipate filing our first CE Mark application by the end of the 2018 calendar
year, to subsequently seek regulatory approval for expanded indications, and to pursue internal use commercial opportunities for
other AC5-related products through the premarket authorization process.
Our business plan is dependent on the success of our flagship
development stage product candidates, known collectively as the AC5 devices.
Our business is currently focused almost entirely on the development
and commercialization of our flagship development stage product candidates, known collectively as the AC5 devices. Our reliance
on the AC5 devices means that, if we are not able to obtain regulatory approvals and market acceptance of at least one of those
product candidates, our chances for success will be significantly reduced. We are also less likely to withstand competitive pressures
if any of our competitors develops and obtains regulatory approval or certification for similar products faster than we can or
that is otherwise more attractive to the market than the AC5 devices. Our current dependence on the AC5 devices increases the risk
that our business will fail if our development efforts for the AC5 devices experience delays or other obstacles or are otherwise
not successful.
The Chemistry, Manufacturing and Control (“CMC”)
process may be challenging.
Because of the complexity of our lead product candidates, the
CMC process, including but not limited to product scale-up activities and cGMP manufacturing for human use, may be difficult to
complete successfully within the parameters required by the FDA or its foreign counterparts. Peptide formulation optimization is
particularly challenging, and any delays could negatively impact our ability to conduct clinical trials and our subsequent commercialization
timeline. Furthermore, we have, and the third parties with whom we may establish relationships may also have, limited experience
with attempting to commercialize a self-assembling peptide as a medical device, which increases the risks associated with completing
the CMC process successfully, on time, or within the projected budget. Failure to complete the CMC process successfully would impact
our ability to complete product development activities, such as conducting clinical trials and submitting applications for regulatory
approval, which could affect the long-term viability of our business.
Our principal product candidates are inherently risky
because they are based on novel technologies.
We are subject to the risks of failure inherent in the development
of products based on new technologies. The novel nature of the AC5 devices creates significant challenges with respect to product
development and optimization, engineering, manufacturing, scale-up, quality systems, pre-clinical in vitro and in vivo testing,
government regulation and approval, third-party reimbursement and market acceptance. Our failure to overcome any one of those challenges
could harm our operations, ability to complete additional clinical trials, and overall chances for success.
If we are required or voluntarily decide to change manufacturers
for commercial or other reasons, the FDA and any other applicable regulatory bodies would also require that we demonstrate structural
and functional comparability between the same products manufactured by our current and any new manufacturer and may require comparability
studies to be performed before qualifying such new manufacturer.
As noted above, we are dependent on third-party manufacturers,
and this dependence exposes us to increased risks associated with delivery schedules, manufacturing capability, quality control,
quality assurance and costs. Our contract manufacturers may not perform as agreed. If we are required to or voluntarily decide
to find a new contract manufacturer, qualifying such new contract manufacturer may be expensive and time consuming since, among
other things, the FDA and any other applicable regulatory bodies would also require that we demonstrate structural and functional
comparability between the same products manufactured by our current and any new manufacturer and may require comparability studies
to be performed before qualifying such new manufacturer. This qualification process may affect product availability, which may
in turn adversely affect our business.
The manufacturing, production, and sterilization methods
that we intend to be utilized are detailed and complex and are a difficult process to manage.
We intend to utilize third-party manufacturers to manufacture
and sterilize our products. We believe that our proposed manufacturing methods make our choice of manufacturer and sterilizer critical,
as they must possess sufficient expertise in synthetic organic chemistry and device manufacturing. If such manufacturers are unable
to properly manufacture to product specifications or sterilize our products adequately, that could severely limit our ability to
market our products.
Compliance with governmental regulations regarding the
treatment of animals used in research could increase our operating costs, which would adversely affect the commercialization of
our technology.
The Animal Welfare Act (“AWA”) is the federal law
that covers the treatment of certain animals used in research. Currently, the AWA imposes a wide variety of specific regulations
that govern the humane handling, care, treatment and transportation of certain animals by producers and users of research animals,
most notably relating to personnel, facilities, sanitation, cage size, and feeding, watering and shipping conditions. Third parties
with whom we contract are subject to registration, inspections and reporting requirements under the AWA. Furthermore, some states
have their own regulations, including general anti-cruelty legislation, which establish certain standards in handling animals.
Comparable rules, regulations, and or obligations exist in many foreign jurisdictions. If our contractors or we fail to comply
with regulations concerning the treatment of animals used in research, we may be subject to fines and penalties and adverse publicity,
and our operations could be adversely affected.
If the FDA or similar foreign agencies or intermediaries
impose requirements or an alternative product classification more onerous than we anticipate, our business could be adversely affected.
The development plan for our lead product candidates is based
on our anticipation of pursuing the medical device regulatory pathway, and in February 2015 we received confirmation from The British
Standards Institution (“BSI”), a Notified Body (which is a private commercial entity designated by the national government
of a European Union (“EU”) member state as being competent to make independent judgments about whether a medical device
complies with applicable regulatory requirements) in the EU, confirmed that AC5 fulfills the definition of a medical device within
the EU and will be classified as such in consideration for CE mark designation. The FDA and other regulatory authorities or related
bodies separately determine the classification of AC5. The FDA also determined our current product to be a medical device. If the
FDA or similar foreign agencies or intermediaries deem our product to be a member of a category other than a medical device, such
as a drug or biologic, or impose additional requirements on our pre-clinical and clinical development than we presently anticipate,
financing needs would increase, the timeline for product approval would lengthen, the program complexity and resource requirements
world increase, and the probability of successfully commercializing a product would decrease. Any or all of those circumstances
would materially adversely affect our business.
We are subject to extensive and dynamic medical device
regulations outside of the United States, which may impede or hinder the approval or sale of our products and, in some cases, may
ultimately result in an inability to obtain approval of certain products or may result in the recall or seizure of previously approved
products.
In the European Union, we are required to comply with applicable
medical device directives, including the Medical Devices Directive, and obtain CE Marking in order to market medical device products.
The CE Mark is applied following approval from an independent notified body or declaration of conformity. As is the case in the
United States, the process of obtaining marketing approval or clearance from comparable agencies in foreign countries for new products,
or with respect to enhancements or modifications to existing products, could:
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take
a significant period of time;
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require
the expenditure of substantial resources;
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involve
rigorous pre-clinical and clinical testing;
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require
extensive post-marketing surveillance;
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require
changes to products; and
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result
in limitations on the indicated uses of products.
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In addition, exported devices are subject to the regulatory
requirements of each country to which the device is exported. Most foreign countries possess medical devices regulations and require
that they be applied to medical devices before they can be commercialized. There can be no assurance that we will receive the required
approvals for our products on a timely basis or that any approval will not be subsequently withdrawn or conditioned upon extensive
post-market study requirements.
Our global regulatory environment is becoming increasingly stringent
and unpredictable, which could increase the time, cost and complexity of obtaining regulatory approvals for our products, as well
as the clinical and regulatory costs of supporting those approvals. Several countries that did not have regulatory requirements
for medical devices have established such requirements in recent years and other countries have expanded existing regulations.
Certain regulators are exhibiting less flexibility by requiring, for example, the collection of local preclinical and/or clinical
data prior to approval. While harmonization of global regulations has been pursued, requirements continue to differ significantly
among countries. We expect the global regulatory environment to continue to evolve, which could impact our ability to obtain future
approvals for our products and increase the cost and time to obtain such approvals. By way of example, the European Union regulatory
bodies recently finalized a new Medical Device Regulation (“MDR”). The MDR changes several aspects of the existing
regulatory framework, such as clinical data requirements, and introduces new ones, such as Unique Device Identification (“UDI”).
We, and the Notified Bodies who will oversee compliance to the new MDR, face uncertainties in the upcoming years as the MDR is
rolled out and enforced, creating risks in several areas, including the CE Marking process, data transparency and application review
timetables.
If we are not able to secure and maintain relationships
with third parties that are capable of conducting clinical trials on our product candidates and support our regulatory submissions,
our product development efforts, and subsequent regulatory approvals could be adversely impacted.
Our management has limited experience in conducting preclinical
development activities and clinical trials. As a result, we have relied and will need to continue to rely on third-party research
institutions, organizations and clinical investigators to conduct our preclinical and clinical trials and support our regulatory
submissions. If we are unable to reach agreement with qualified research institutions, organizations and clinical investigators
on acceptable terms, or if any resulting agreement is terminated prior to the completion of our clinical trials, then our product
development efforts could be materially delayed or otherwise harmed. Further, our reliance on third parties to conduct our clinical
trials and support our regulatory submissions will provide us with less control over the timing and cost of those trials, the ability
to recruit suitable subjects to participate in the trials, and the timing, cost, and probability of success for the regulatory
submissions. Moreover, the FDA and other regulatory authorities require that we comply with standards, commonly referred to as
good clinical practices (“GCP”), for conducting, recording and reporting the results of our preclinical development
activities and our clinical trials, to assure that data and reported results are credible and accurate and that the rights, safety
and confidentiality of trial participants are protected. Additionally, both we and any third-party contractor performing preclinical
and clinical studies are subject to regulations governing the treatment of human and animal subjects in performing those studies.
Our reliance on third parties that we do not control does not relieve us of those responsibilities and requirements. If those third
parties do not successfully carry out their contractual duties, meet expected deadlines or conduct our preclinical development
activities or clinical trials in accordance with regulatory requirements or stated protocols, we may not be able to obtain, or
may be delayed in obtaining, regulatory approvals for our product candidates and will not be able to, or may be delayed in our
efforts to, successfully commercialize our product candidates. Any of those circumstances would materially harm our business and
prospects.
Any clinical trials that are planned or are conducted
on our product candidates may not start or may fail.
Clinical trials are lengthy, complex and extremely expensive
processes with uncertain expenditures and results and frequent failures. While the Company has completed its first clinical trial
in Western Europe, clinical trials that are planned or which have or shall commence for any of our product candidates could be
delayed or fail for a number of reasons, including if:
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the
FDA or other regulatory authorities, or other relevant decision-making bodies do not grant permission to proceed or place a trial
on clinical hold due to safety concerns or other reasons;
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sufficient
suitable subjects do not enroll, enroll more slowly than anticipated or remain in our trials;
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we
fail to produce necessary amounts of product candidate;
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subjects
experience an unacceptable rate of efficacy of the product candidate;
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subjects
experience an unacceptable rate or severity of adverse side effects, demonstrating a lack of safety of the product candidate;
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any
portion of the trial or related studies produces negative or inconclusive results or other adverse events;
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reports
from preclinical or clinical testing on similar technologies and products raise safety and/or efficacy concerns;
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third-party
clinical investigators lose their licenses or permits necessary to perform our clinical trials, do not perform their clinical
trials on the anticipated schedule or consistent with the clinical trial protocol, GCP or regulatory requirements, or other third
parties do not perform data collection and analysis in a timely or accurate manner;
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inspections
of clinical trial sites by the FDA or an institutional review board (“IRB”) or other applicable regulatory authorities
find violations that require us to undertake corrective action, suspend or terminate one or more testing sites, or prohibit us
from using some or all of the resulting data in support of our marketing applications with the FDA or other applicable agencies;
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manufacturing
facilities of our third-party manufacturers are ordered by the FDA or other government or regulatory authorities to temporarily
or permanently shut down due to violations of current good manufacturing practices (“cGMP”) or other applicable requirements;
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third-party
contractors become debarred or suspended or otherwise penalized by the FDA or other government or regulatory authorities for violations
of regulatory requirements;
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the
FDA or other regulatory authorities impose requirements on the design, structure or other features of the clinical trials for
our product candidates that we and/or our third-party contractors are unable to satisfy;
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one
or more IRB refuses to approve, suspends or terminates a trial at an investigational site, precludes enrollment of additional
subjects, or withdraws its approval of the trial;
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the
FDA or other regulatory authorities seek the advice of an advisory committee of physician and patient representatives that may
view the risks of our product candidates as outweighing the benefits;
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the
FDA or other regulatory authorities require us to expand the size and scope of the clinical trials, which we may not be able to
do; or
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the
FDA or other regulatory authorities impose prohibitive post-marketing restrictions on any of our product candidates that attain
regulatory approval.
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Any delay or failure of one or more of our clinical trials may
occur at any stage of testing. Any such delay could cause our development costs to materially increase, and any such failure could
significantly impair our business plans, which would materially harm our financial condition and operations.
We cannot market and sell any product candidate in the
U.S. or in any other country or region if we fail to obtain the necessary regulatory approvals, clearances or certifications from
applicable government agencies.
We cannot sell our product candidates in any country until regulatory
agencies grant marketing approval, clearance or other required certification. The process of obtaining such approval is lengthy,
expensive and uncertain. If we are able to obtain such approvals for our lead product candidate or any other product candidate
we may pursue, which we may never be able to do, it would likely be a process that takes many years to achieve.
To obtain marketing approvals in the U.S. for our product candidates,
we believe that we must, among other requirements, complete carefully controlled and well-designed clinical trials sufficient to
demonstrate to the FDA that the product candidate is safe and effective for each indication for which we seek approval. As described
above, many factors could cause those trials to be delayed or to fail.
We believe that the pathway to marketing approval in the U.S.
for our lead product candidate for internal use will likely require the process of FDA Premarket Approval (“PMA“) for
the product, which is based on novel technologies and likely will be classified as a Class III medical device. This approval pathway
can be lengthy and expensive, and is estimated to take from one to three years or longer from the time the PMA application is submitted
to the FDA until approval is obtained, if approval can be obtained at all.
Similarly, to obtain approval to market our product candidates
outside of the U.S., we will need to submit clinical data concerning our product candidates to and receive marketing approval or
other required certifications from governmental or other agencies in those countries, which in certain countries includes approval
of the price we intend to charge for a product. For instance, in order to obtain the certification needed to market our lead product
candidate in the EU, we believe that we will need to obtain a CE mark for the product, which entails scrutiny by applicable regulatory
agencies and bears some similarity to the PMA process, including completion of one or more successful clinical trials.
We may encounter delays or rejections if changes occur in regulatory
agency policies, if difficulties arise within regulatory or related agencies such as, for instance, any delays in their review
time, or if reports from preclinical and clinical testing on similar technology or products raise safety and/or efficacy concerns
during the period in which we develop a product candidate or during the period required for review of any application for marketing
approval or certification.
Any difficulties we encounter during the approval or certification
process for any of our product candidates would have a substantial adverse impact on our operations and financial condition and
could cause our business to fail.
We cannot guarantee that we will be able to effectively
market our product candidates.
A significant part of our success depends on the various marketing
strategies we plan to implement. Our business model has historically focused solely on product development, and we have never attempted
to commercialize any product. There can be no assurance as to the success of any such marketing strategy that we develop or that
we will be able to build a successful sales and marketing organization. If we cannot effectively market those products we seek
to commercialize directly, such products’ prospects will be harmed.
Any product for which we obtain required regulatory approvals
could be subject to post-approval regulation, and we may be subject to penalties if we fail to comply with such post-approval requirements.
Any product for which we are able to obtain marketing approval
or other required certifications, and for which we are able to obtain approval of the manufacturing processes, post-approval clinical
data, labeling, advertising and promotional activities for such product, will be subject to continual requirements of and review
by the FDA and comparable foreign regulatory authorities, including through periodic inspections. These requirements include, without
limitation, submissions of safety and other post-marketing information and reports, registration requirements, cGMP requirements
relating to quality control, quality assurance and corresponding maintenance of records and documents. Maintaining compliance with
any such regulations that may be applicable to us or our product candidates in the future would require significant time, attention
and expense. Even if marketing approval of a product is granted, the approval may be subject to limitations on the indicated uses
for which the product may be marketed or other conditions of approval, or may contain requirements for costly and time consuming
post-marketing approval testing and surveillance to monitor the safety or efficacy of the product. Discovery after approval of
previously unknown problems with any approved product candidate or related manufacturing processes, or failure to comply with regulatory
requirements, may result in consequences to us such as:
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restrictions
on the marketing or distribution of a product, including refusals to permit the import or export of the product;
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the
requirement to include warning labels on the products;
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withdrawal
or recall of the products from the market;
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refusal
by the FDA or other regulatory agencies to approve pending applications or supplements to approved applications that we may submit;
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suspension
of any ongoing clinical trials;
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fines,
restitution or disgorgement of profits or revenue;
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suspension
or withdrawal of marketing approvals or certifications; or
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civil
or criminal penalties.
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If any of our product candidates achieves required regulatory
marketing approvals or certifications in the future, the subsequent occurrence of any such post-approval consequences would materially
adversely affect our business and operations.
Current or future legislation may make it more difficult
and costly for us to obtain marketing approval or other certifications of our product candidates.
In 2007, the Food and Drug Administration Amendments Act of
2007 (“FDAAA”) was adopted. This legislation grants significant powers to the FDA, many of which are aimed at assuring
the safety of medical products after approval. For example, the FDAAA grants the FDA authority to impose post-approval clinical
study requirements, require safety-related changes to product labeling and require the adoption of complex risk management plans.
Pursuant to the FDAAA, the FDA may require that a new product be used only by physicians with specialized training, only in specified
health care settings, or only in conjunction with special patient testing and monitoring. The legislation also includes requirements
for disclosing clinical study results to the public through a clinical study registry, and renewed requirements for conducting
clinical studies to generate information on the use of products in pediatric patients. Under the FDAAA, companies that violate
these laws are subject to substantial civil monetary penalties. The requirements and changes imposed by the FDAAA, or any other
new legislation, regulations or policies that grant the FDA or other regulatory agencies additional authority that further complicates
the process for obtaining marketing approval and/or further restricts or regulates post-marketing approval activities, could make
it more difficult and more costly for us to obtain and maintain approval of any of our product candidates.
Public perception of ethical and social issues may limit
or discourage the type of research we conduct.
Our clinical trials will involve human subjects, and third parties
with whom we contract also conduct research involving animal subjects. Governmental authorities could, for public health or other
purposes, limit the use of human or animal research or prohibit the practice of our technology. Further, ethical and other concerns
about our or our third-party contractors’ methods, particularly the use of human subjects in clinical trials or the use of
animal testing, could delay our research and preclinical and clinical trials, which would adversely affect our business and financial
condition.
Use of third parties to manufacture our product candidates
may increase the risk that preclinical development, clinical development and potential commercialization of our product candidates
could be delayed, prevented or impaired.
We have limited personnel with experience in medical device
development and manufacturing, do not own or operate manufacturing facilities, and generally lack the resources and the capabilities
to manufacture any of our product candidates on a clinical or commercial scale. We currently intend to outsource all or most of
the clinical and commercial manufacturing and packaging of our product candidates to third parties. However, we have not established
long-term agreements with any third-party manufacturers for the supply of any of our product candidates. There are a limited number
of manufacturers that operate under cGMP regulations and that are capable of and willing to manufacture our lead product candidates
utilizing the manufacturing methods that are required to produce our product candidates, and our product candidates will compete
with other product candidates for access to qualified manufacturing facilities. If we have difficulty locating third-party manufacturers
to develop our product candidates for preclinical and clinical work, then our product development programs will experience delays
and otherwise suffer. We may also be unable to enter into agreements for the commercial supply of products with third-party manufacturers
in the future, or may be unable to do so when needed or on acceptable terms. Any such events could materially harm our business.
Reliance on third-party manufacturers entails risks to our business,
including without limitation:
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the
failure of the third-party to maintain regulatory compliance, quality assurance, and general expertise in advanced manufacturing
techniques and processes that may be necessary for the manufacture of our product candidates;
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limitations
on supply availability resulting from capacity and scheduling constraints of the third parties;
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failure
of the third-party manufacturers to meet the demand for the product candidate, either from future customers or for preclinical
or clinical trial needs;
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the
possible breach of the manufacturing agreement by the third-party; and
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the
possible termination or non-renewal of the agreement by the third-party at a time that is costly or inconvenient for us.
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The failure of any of our contract manufacturers to maintain
high manufacturing standards could result in harm to clinical trial, participants or patients using the products. Such failure
could also result in product liability claims, product recalls, product seizures or withdrawals, delays or failures in testing
or delivery, cost overruns or other problems that could seriously harm our business or profitability. Further, our contract manufacturers
will be required to adhere to FDA and other applicable regulations relating to manufacturing practices. Those regulations cover
all aspects of the manufacturing, testing, quality control and recordkeeping relating to our product candidates and any products
that we may commercialize in the future. The failure of our third-party manufacturers to comply with applicable regulations could
result in sanctions being imposed on us, including fines, injunctions, civil penalties, failure of regulatory authorities to grant
marketing approval or other required certifications of our product candidates, delays, suspension or withdrawal of approvals, license
revocation, seizures or recalls of product candidates, operating restrictions and criminal prosecutions, any of which could significantly
and adversely affect our business, financial condition and operations.
Materials necessary to manufacture our product candidates
may not be available on time, on commercially reasonable terms, or at all, which may delay or otherwise hinder the development
and commercialization of those product candidates.
We will rely on the manufacturers of our product candidates
to purchase from third-party suppliers the materials necessary to produce the compounds for preclinical and clinical studies, and
may continue to rely on those suppliers for commercial distribution if we obtain marketing approval or other required certifications
for any of our product candidates. The materials to produce our products may not be available when needed or on commercially reasonable
terms, and the prices for such materials may be susceptible to fluctuations. We do not have any control over the process or timing
of the acquisition of these materials by our manufacturers. Moreover, we currently do not have any agreements relating to the commercial
production of any of these materials. If these materials cannot be obtained for our preclinical and clinical studies, product testing
and potential regulatory approval of our product candidates would be delayed, which would significantly impact our ability to develop
our product candidates and materially adversely affect our ability to meet our objectives and obtain operations success.
We may not be successful in maintaining or establishing
collaborations, which could adversely affect our ability to develop and, if required regulatory approvals are obtained, commercialize
our product candidates.
As demonstrated by the Project Agreement that we entered into
with NUIG on May 28, 2015, we are interested in collaborating with physicians, patient advocacy groups, foundations, government
agencies, and/or other third parties to assist with the development of our product candidates. If required regulatory approvals
are obtained for any of our product candidates, then we may consider entering into additional collaboration arrangements with medical
technology, pharmaceutical or biotechnology companies and/or seek to establish strategic relationships with marketing partners
for the development, sale, marketing and/or distribution of our products within or outside of the U.S. If we elect to expand our
current relationship with NUIG and/or seek additional collaborators in the future but are unable to reach agreements with NUIG
and/or such other collaborators, as applicable, then we may fail to meet our business objectives for the affected product or program.
Moreover, collaboration arrangements are complex and time consuming to negotiate, document and implement, and we may not be successful
in our efforts, if any, to establish and implement additional collaborations or other alternative arrangements. The terms of any
collaboration or other arrangements that we establish may not be favorable to us, and the success of any such collaboration will
depend heavily on the efforts and activities of our collaborators. Any failure to engage successful collaborators could cause delays
in our product development and/or commercialization efforts, which could harm our financial condition and operational results.
We compete with other pharmaceutical and medical device
companies, including companies that may develop products that make our product candidates less attractive or obsolete.
The medical device, pharmaceutical and biotechnology industries
are highly competitive. If our product candidates become available for commercial sale, we will compete in that competitive marketplace.
There are several products on the market or in development that could be competitors with our lead product candidates. Further,
most of our competitors have greater resources or capabilities and greater experience in the development, approval and commercialization
of medical devices or other products than we do. We may not be able to compete successfully against them. We also compete for funding
with other companies in our industry that are focused on discovering and developing novel improvements in surgical bleeding prevention.
We anticipate that competition in our industry will increase.
In addition, the healthcare industry is characterized by rapid technological change, resulting in new product introductions and
other technological advancements. Our competitors may develop and market products that render our lead product candidate or any
future product candidate we may seek to develop non-competitive or otherwise obsolete. Any such circumstances could cause our operations
to suffer.
If we fail to generate market acceptance of our product
candidates and establish programs to educate and train surgeons as to the distinctive characteristics of our product candidates,
we will not be able to generate revenues on our product candidates.
Acceptance in the marketplace of our lead product candidates
depends in part on our and our third-party contractors’ ability to establish programs for the training of surgeons in the
proper usage of those product candidates, which will require significant expenditure of resources. Convincing surgeons to dedicate
the time and energy necessary to properly train to use new products and techniques is challenging, and we may not be successful
in those efforts. If surgeons are not properly trained, they may ineffectively use our product candidates. Such misuse could result
in unsatisfactory patient outcomes, patient injury, negative publicity or lawsuits against us. Accordingly, even if our product
candidates are superior to alternative treatments, our success will depend on our ability to gain and maintain market acceptance
for those product candidates among certain select groups of the population and develop programs to effectively train them to use
those products. If we fail to do so, we will not be able to generate revenue from product sales and our business, financial condition
and results of operations will be adversely affected.
We face uncertainty related to pricing, reimbursement
and healthcare reform, which could reduce our potential revenues.
If our product candidates are approved for commercialization,
any sales will depend in part on the availability of direct or indirect coverage and reimbursement from third-party payers such
as government insurance programs, including Medicare and Medicaid, private health insurers, health maintenance organizations and
other healthcare related organizations. If our product candidates obtain marketing approval, pricing and reimbursement may be uncertain.
Both the federal and state governments in the U.S. and foreign governments continue to propose and pass new legislation affecting
coverage and reimbursement policies, which are designed to contain or reduce the cost of healthcare. Further, federal, state and
foreign healthcare proposals and reforms could limit the prices that can be charged for the product candidates that we may develop,
which may limit our commercial opportunity. Adoption of our product candidates by the medical community may be limited if doctors
and hospitals do not receive adequate partial or full reimbursement for use of our products or procedures in which our products
are used, if any are commercialized. In some foreign jurisdictions, marketing approval or allowance could be dependent upon pre-marketing
price negotiations. As a result, any denial of private or government payer coverage or inadequate reimbursement for procedures
performed using our products, before or upon commercialization, could harm our business and reduce our prospects for generating
revenue.
In addition, the U.S. Congress recently adopted legislation
regarding health insurance. As a result of this new legislation, substantial changes could be made to the current system for paying
for healthcare in the U.S., including modifications to the existing system of private payers and government programs, such as Medicare,
Medicaid and State Children’s Health Insurance Program, creation of a government-sponsored healthcare insurance source, or
some combination of those, as well as other changes. Restructuring the coverage of medical care in the U.S. could impact reimbursement
for medical devices such as our product candidates. If reimbursement for our approved product candidates, if any, is substantially
less than we expect, or rebate obligations associated with them are substantially increased, our business could be materially and
adversely impacted.
The use of our product candidates in human subjects may
expose us to product liability claims, and we may not be able to obtain adequate insurance or otherwise defend against any such
claims.
We face an inherent risk of product liability claims and currently
have clinical trial liability coverage. We will need to obtain additional product liability insurance coverage if and when we begin
commercialization of any of our product candidates. If claims against us exceed any applicable insurance coverage we may obtain,
then our business could be adversely impacted. Regardless of whether we would be ultimately successful in any product liability
litigation, such litigation could consume substantial amounts of our financial and managerial resources, which could significantly
harm our business.
Risks Related to our Intellectual
Property
If we are unable to obtain and maintain protection for
intellectual property rights that we own, seek, or have licensed from other parties, the value of our technology and products will
be adversely affected.
Our success will depend in large part on our ability to
obtain and maintain protection in the U.S. and other countries for the intellectual property rights covering or incorporated
into our technology and products. The ability to obtain patents covering technology in the field of medical devices generally
is highly uncertain and involves complex legal, technical, scientific and factual questions. We may not be able to obtain and
maintain patent protection relating to our technology or products. Many of our owned or licensed patent applications are
pending. Even if issued, patents issued or licensed to us may be challenged, narrowed, invalidated, held to be unenforceable
or circumvented, or determined not to cover our product candidates or our competitors’ products, which could limit our
ability to stop competitors from marketing identical or similar products. Because our patent portfolio includes certain
patents and applications that are in-licensed on a non-exclusive basis, other parties may be able to develop, manufacture,
market and sell products with similar features covered by the same patent rights and technologies, which in turn could
significantly undercut the value of any of our product candidates and adversely affect our business. Our licensed MIT
European patent No. 1879606 was recently opposed; however, this patent was maintained in amended form following an
administrative hearing. Both parties have appealed this decision. A decision is not expected before the end of 2019. If the
Opponents prevail in the appeal, European Patent No. 1879606 will be fully or partially invalidated, resulting in potential
loss of rights. Our licensed MIT Japanese patent No. 5204646 was challenged in a Japanese court. The Japanese Court issued a
decision in our favor to maintain the patent in its entirety. The Opponent appealed the decision. On October 30, 2018, the
Japanese IP Court issued a decision in our favor to maintain the patent in its entirely. The opponent maintains the right to
appeal this decision. If the Opponent prevails in the appeal, Japanese Patent No. 5204646 will be fully or partially
invalidated, resulting in potential loss of rights. European patent No. 2581097 has been opposed. If the Opponents prevail,
European Patent No. 2581097 could be fully or partially invalidated, resulting in potential loss of rights. Further,
we cannot be certain that we were the first to make the inventions claimed in the patents we own or license, or that
protection of the inventions set forth in those patents was the first to be filed in the U.S. Third parties that have filed
patents or patent applications covering similar technologies or processes may challenge our claim of sole right to use the
intellectual property covered by the patents we own or exclusively license. Moreover, changes in applicable intellectual
property laws or interpretations thereof in the U.S. and other countries may diminish the value of our intellectual property
rights or narrow the scope of our patent protection. Any failure to obtain or maintain adequate protection for our
intellectual property would materially harm our business, product development programs and prospects. In addition, our
proprietary information, trade secrets and know-how are important components of our intellectual property rights. We seek to
protect our proprietary information, trade secrets, know-how and confidential information, in part, with confidentiality
agreements with our employees, corporate partners, outside scientific collaborators, sponsored researchers, consultants and
other advisors. We also have invention or patent assignment agreements with our employees and certain consultants and
advisors. If our employees or consultants breach those agreements, we may not have adequate remedies for any of those
breaches. In addition, our proprietary information, trade secrets and know-how may otherwise become known to or be
independently developed by others. Enforcing a claim that a party illegally obtained and/or for which a party is using our
proprietary information, trade secrets and/or know-how is difficult, expensive and time consuming, and the outcome is
unpredictable. In addition, courts outside the U.S. may be less willing to protect trade secrets. Costly and time-consuming
litigation could be necessary to seek to defend, enforce and/or determine the scope of our intellectual property rights, and
failure to obtain or maintain protection thereof could adversely affect our competitive business position and results of
operations.
Many of our owned or licensed patent applications are
pending, and our patent portfolio includes certain patents and applications that are in-licensed on a non-exclusive basis.
As of November 19, 2018, we either own or license from others
a number of U.S. patents, U.S. patent applications, foreign patents and foreign patent applications.
Three patent portfolios assigned to Arch Biosurgery, Inc. include
a total of 30 patents and pending applications in a total of nine jurisdictions, including ten patents and pending applications
in the US. These portfolios cover self-assembling peptides and methods of use thereof, including five issued US patents (US 9,415,084;
US 9,162,005; US 9,789,157; US 9,821,022; and US 9,339,476) that expire between 2026 and 2034 (absent patent term extension) as
well as ten patents that have been either allowed, issued or granted in foreign jurisdictions.
We have also entered into a license agreement with Massachusetts
Institute of Technology and Versitech Limited (“MIT”) pursuant to which we have been granted exclusive rights under
two portfolios of patents and non-exclusive rights under another three portfolios of patents.
The two portfolios exclusively licensed from MIT include
a total of 23 patents and pending applications drawn to self-assembling peptides and methods of use thereof and
self-assembling peptidomimetrics and methods of use thereof in a total of nine jurisdictions. The portfolios include four
issued US patents (US 9,511,113; US 9,084,837; US 9,327,010; and US 9,364,513) that expire between 2026 and 2027 (absent
patent term extension), as well as thirteen patents that have been either allowed, issued or granted in foreign
jurisdictions.
The three portfolios non-exclusively licensed from MIT include
a number of US and foreign applications, including four issued US patents (US 7,449,180; US 7,846,891; US 7,713,923; and US 8,901,084)
that expire between 2021 and 2027 (absent patent term extension), as well as four patents that have been either allowed, issued
or granted in foreign jurisdictions.
If we lose certain intellectual property rights owned
by third parties and licensed to us, our business could be materially harmed.
We have entered into certain in-license agreements with MIT
and with certain other third parties, and may seek to enter into additional in-license agreements relating to other intellectual
property rights in the future. To the extent we and our product candidates rely heavily on any such in-licensed intellectual property,
we are subject to our and the counterparty’s compliance with the terms of such agreements in order to maintain those rights.
Presently, we, our lead product candidates and our business plans are dependent on the patent and other intellectual property rights
that are licensed to us under our license agreement with MIT. Although that agreement has a durational term through the life of
the licensed patents, it also imposes certain diligence, capital raising, and other obligations on us, our breach of which could
permit MIT to terminate the agreement. Further, we are responsible for all patent prosecution and maintenance fees under that agreement,
and a failure to pay such fees on a timely basis could also entitle MIT to terminate the agreement. Any failure by us to satisfy
our obligations under our license agreement with MIT or any other dispute or other issue relating to that agreement could cause
us to lose some or all of our rights to use certain intellectual property that is material to our business and our lead product
candidates, which would materially harm our product development efforts and could cause our business to fail.
If we infringe or are alleged to infringe the intellectual
property rights of third parties, our business and financial condition could suffer.
Our research, development and commercialization activities,
as well as any product candidates or products resulting from those activities, may infringe or be accused of infringing a patent
or other intellectual property under which we do not hold a license or other rights. Third parties may own or control those patents
or other rights in the U.S. or abroad, and could bring claims against us that would cause us to incur substantial time, expense,
and diversion of management attention. If a patent or other intellectual property infringement suit were brought against us, we
could be forced to stop or delay research, development, manufacturing or sales, if any, of the applicable product or product candidate
that is the subject of the suit. In order to avoid or settle potential claims with respect to any of the patent or other intellectual
property rights of third parties, we may choose or be required to seek a license from a third-party and be required to pay license
fees or royalties or both. Any such license may not be available on acceptable terms, or at all. Even if we or our future collaborators
were able to obtain a license, the rights granted to us or them could be non-exclusive, which could result in our competitors gaining
access to the same intellectual property rights and materially negatively affecting the commercialization potential of our planned
products. Ultimately, we could be prevented from commercializing one or more product candidates, or be forced to cease some aspects
of our business operations, if, as a result of actual or threatened infringement claims, we are unable to enter into licenses on
acceptable terms or at all or otherwise settle such claims. Further, if any such claims were successful against us, we could be
forced to pay substantial damages. Any of those results could significantly harm our business, prospects and operations.
Risks Related to Ownership of our
Common Stock
There is not now, and there may not ever be, an active
market for our Common Stock, which trades in the over-the-counter market in low volumes and at volatile prices.
There currently is a limited market for our Common Stock. Although
our Common Stock is quoted on the OTCQB, an over-the-counter quotation system, trading of our Common Stock is extremely limited
and sporadic and generally at very low volumes. Further, the price at which our Common Stock may trade is volatile and we expect
that it will continue to fluctuate significantly in response to various factors, many of which are beyond our control. The stock
market in general, and securities of small-cap companies driven by novel technologies in particular, has experienced extreme price
and volume fluctuations in recent years. Continued market fluctuations could result in further volatility in the price at which
our Common Stock may trade, which could cause its value to decline. To the extent we seek to raise capital in the future through
the issuance of equity, those efforts could be limited or hindered by low and/or volatile market prices for our Common Stock.
We do not now meet the initial listing standards of the Nasdaq
Stock Market or any other national securities exchange. We presently anticipate that our Common Stock will continue to be quoted
on the OTCQB or another over-the-counter quotation system. In those venues, our stockholders may find it difficult to obtain accurate
quotations as to the market value of their shares of our Common Stock, and may find few buyers to purchase their stock and few
market makers to support its price.
A more active market for our Common Stock may never develop.
As a result, investors must bear the economic risk of holding their shares of our Common Stock for an indefinite period of time.
Our Common Stock is a “penny stock.”
The SEC has adopted regulations that generally define “penny
stock” as an equity security that has a market price of less than $5.00 per share, subject to specific exemptions. The market
price of our Common Stock is, and is expected to continue to be in the near term, less than $5.00 per share and is therefore a
“penny stock.” Brokers and dealers effecting transactions in “penny stock” must disclose certain information
concerning the transaction, obtain a written agreement from the purchaser and determine that the purchaser is reasonably suitable
to purchase the securities. Those rules may restrict the ability of brokers or dealers to sell our Common Stock and may affect
the ability of our stockholders to sell their shares of our Common Stock. In addition, if our Common Stock continues to be quoted
on the OTCQB as we expect, then our stockholders may find it difficult to obtain accurate quotations for our stock, and may find
few buyers to purchase our stock and few market makers to support its price.
If we issue additional shares in the future, including
issuances of shares upon exercise of the Series G Warrants, Series F Warrants, Series E Warrants, and/or the Series D Warrants,
our existing stockholders will be diluted.
Our articles of incorporation authorize the issuance of up
to 300,000,000 shares of Common Stock. In connection with the 2018 Financing that closed on July 2, 2018, we issued an
aggregate of 9,070,000 shares of our Common Stock, which equaled approximately 6% of the 154,052,013 shares of our Common
Stock that were issued and outstanding immediately prior to the commencement of the 2018 Financing. Upon the closing of the
2018 Financing, we also issued Series G Warrants to acquire up to an additional 6,802,500 shares of our Common Stock at an
initial exercise price of $0.70 per share. As of December 17, 2018 up to 6,802,500 shares may be acquired upon the
exercise of the Series G Warrants.
In connection with the 2017 Financing that closed on
February 24, 2017, we issued an aggregate of 10,166,664 shares of our Common Stock, which equaled approximately 7% of the
136,745,712 shares of our Common Stock that were issued and outstanding immediately prior to the commencement of the 2017
Financing. Upon the closing of the 2017 Financing, we also issued Series F Warrants to acquire up to an additional 5,591,664
shares of our Common Stock at an initial exercise price of $0.75 per share. As of December 17, 2018 up to 5,591,664
shares may be acquired upon the exercise of the Series F Warrants.
In connection with the 2016 Private Placement Financing
that closed on May 26, 2016, we issued an aggregate of 9,418,334 shares of our Common Stock, which equaled approximately 8%
of the 118,592,070 shares of our Common Stock that were issued and outstanding immediately prior to the commencement of the
2016 Private Placement Financing. Upon the closing of the 2016 Private Placement Financing, we also issued Series E Warrants
to acquire up to an additional 7,063,748 shares of our Common Stock at an initial exercise price of $0.4380 per share. As of
December 17, 2018 up to 4,214,582 shares may be acquired upon the exercise of the Series E Warrants. Similarly, in
connection with our private placement financing that concluded on July 2, 2015 (“2015 Private Placement
Financing”), we issued an aggregate of 14,390,754 shares of our Common Stock, which equaled approximately 18% of the
78,766,487 shares of our Common Stock that were issued and outstanding immediately prior to the commencement of the 2015
Private Placement Financing. Upon the closing of the 2015 Private Placement Financing, we also issued Series D Warrants to
acquire up to an additional 14,390,754 shares of our Common Stock at an initial exercise price of $0.25 per share. As of
December 17, 2018, up to 8,974,389 shares may be acquired upon the exercise of the Series D Warrants.
Additionally, as of December 17, 2018, 20,518,419 shares of
Common Stock were reserved for future issuance under the 2013 Plan, of which 15,734,210 shares are subject to outstanding option
awards granted under the 2013 Plan at exercise prices ranging from $0.17 to $0.50 per share and with a weighted average exercise
price of $0.40 per share and the numbers issuable under the 2013 Plan will increase by up to 3 million shares on the first business
day of each following fiscal year as set forth in the 2013 Plan. Finally, in addition to the Series G Warrants granted in connection
with the 2018 Financing, the Series F Warrants granted in connection with the 2017 Financing, the Series E Warrants granted in
connection with the 2016 Private Placement Financing, and the Series D Warrants granted in connection with the 2015 Private Placement
Financing, there are currently outstanding warrants to acquire up to 145,985 shares of our Common Stock. Any future grants of options,
warrants or other securities exercisable or convertible into our Common Stock, or the exercise or conversion of such shares, and
any sales of such shares in the market, could have an adverse effect on the market price of our Common Stock.
In addition to capital raising activities, other possible business
and financial uses for our authorized Common Stock include, without limitation, future stock splits, acquiring other companies,
businesses or products in exchange for shares of Common Stock, issuing shares of our Common Stock to partners in connection with
strategic alliances, attracting and retaining employees by the issuance of additional securities under our various equity compensation
plans, compensating consultants by issuing shares or options to purchase shares of our Common Stock, or other transactions and
corporate purposes that our Board of Directors deems are in the Company’s best interest. By way of example, on (i) August
9, 2016, we issued 225,000 shares of restricted stock and options to purchase up to an additional 375,000 shares of Common Stock
at an exercise price of price of $0.72 per share in connection with our entrance 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 such
consulting agreement; and (ii) August 6, 2015, we issued an aggregate of 600,000 shares of restricted stock in connection with
our entrance into separate consulting agreements with two investor relations firms, Excelsior Global Advisors LLC and Acorn, in
each case in consideration of the services to be provided under and in accordance with the terms of each consulting agreement.
Additionally, shares of Common Stock could be used for anti-takeover purposes or to delay or prevent changes in control or management
of the Company. We cannot provide assurances that any issuances of Common Stock will be consummated on favorable terms or at all,
that they will enhance stockholder value, or that they will not adversely affect our business or the trading price of our Common
Stock. The issuance of any such shares will reduce the book value per share and may contribute to a reduction in the market price
of the outstanding shares of our Common Stock. If we issue any such additional shares, such issuance will reduce the proportionate
ownership and voting power of all current shareholders. Further, such issuance may result in a change of control of our corporation.
Future sales of our Common Stock or rights to purchase
Common Stock, or the perception that such sales could occur, could cause our stock price to fall.
As noted above under the risk factor entitled,
“
We will need substantial additional funding and may be unable to raise capital when needed, which would force us
to delay, reduce or eliminate our product development programs or commercialization efforts and could cause our business to
fail
,” as of December 17, 2018 we believe that our current cash on hand will meet our anticipated cash
requirements into the third quarter of fiscal 2019. To raise capital, we may sell Common Stock, convertible securities or
other equity securities in one or more transactions at prices and in a manner we determine from time to time. Any such sales
of our Common Stock by us or resale of our Common Stock by our existing stockholders could cause the market price of our
Common Stock to decline.
Financial Industry Regulatory Authority (“FINRA”)
sales practice requirements may limit a stockholder’s ability to buy and sell our stock.
In addition to the “penny stock” rules described
above, FINRA has adopted rules that require that, in recommending an investment to a customer, a broker-dealer must have reasonable
grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low-priced securities
to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s
financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA has indicated
its belief that there is a high probability that speculative low-priced securities will not be suitable for at least some customers.
These FINRA requirements make it more difficult for broker-dealers to recommend that at least some of their customers buy our Common
Stock, which may limit the ability of our stockholders to buy and sell our Common Stock and could have an adverse effect on the
market for our shares.
There may be additional risks because we completed a reverse
merger transaction in June 2013.
Additional risks may exist because we completed a “reverse
merger” transaction in June 2013. Securities analysts of major brokerage firms may not provide coverage of the Company because
there may be little incentive to brokerage firms to recommend the purchase of our Common Stock. There may also be increased scrutiny
by the SEC and other government agencies and holders of our securities due to the nature of the transaction, as there has been
increased focus on transactions such as the Merger in recent years. Further, since the Company existed as a “shell company”
under applicable rules of the SEC up until the closing of the Merger on June 26, 2013, there will be certain restrictions and limitations
on the Company going forward relating to any potential future issuances of additional securities to raise funding and compliance
with applicable SEC rules and regulations.
The Company may have material liabilities that were not
discovered before the closing of the Merger.
The Company may have material liabilities that were not discovered
before the consummation of the Merger. We could experience losses as a result of any such unasserted liabilities that are eventually
found to be incurred, which could materially harm our business and financial condition. Although the Merger Agreement contained
customary representations and warranties from the Company concerning its assets, liabilities, financial condition and affairs,
there may be limited or no recourse against the Company’s prior owners or principals in the event those prove to be untrue.
As a result, the stockholders of the Company bear risks relating to any such unknown or unasserted liabilities.
Certain of our directors and officers own a significant
percentage of our capital stock and are able to exercise significant influence over the Company.
Certain of our directors and executive officers own a
significant percentage of our outstanding capital stock. As of December 17, 2018, Dr. Terrence W. Norchi, our
Chairman of the Board, President and Chief Executive Officer, James R. Sulat, a director and Punit Dhillon, a director
beneficially own (as determined under Section 13(d) of the Exchange Act and the rules and regulations thereunder)
approximately 13% of our shares of Common Stock. Accordingly, these members of our Board of Directors and management team
have substantial voting power to approve matters requiring stockholder approval, including without limitation the election of
directors, and have significant influence over our affairs. This concentration of ownership could have the effect of delaying
or preventing a change in control of our Company, even if such a change in control would be beneficial to our
stockholders.
The elimination of monetary liability against our directors
and officers under Nevada law and the existence of indemnification rights held by our directors, officers and employees may result
in substantial expenditures by us and may discourage lawsuits against our directors, officers and employees.
Our articles of incorporation eliminate the personal liability
of our directors and officers to our Company and our stockholders for damages for breach of fiduciary duty as a director or officer
to the extent permissible under Nevada law. Further, our amended and restated bylaws provide that we are obligated to indemnify
any of our directors or officers to the fullest extent authorized by Nevada law and, subject to certain conditions, advance the
expenses incurred by any director or officer in defending any action, suit or proceeding prior to its final disposition. Those
indemnification obligations could result in our Company incurring substantial expenditures to cover the cost of settlement or damage
awards against our directors or officers, which we may be unable to recoup. These provisions and resultant costs may also discourage
us from bringing a lawsuit against any of our current or former directors or officers for breaches of their fiduciary duties, and
may similarly discourage the filing of derivative litigation by our stockholders against our directors and officers even if such
actions, if successful, might otherwise benefit us or our stockholders.
We are subject to the reporting requirements of federal
securities laws, compliance with which involves significant time, expense and expertise.
We are a public reporting company in the U.S., and, accordingly,
are subject to the information and reporting requirements of the Exchange Act and other federal securities laws, including the
obligations imposed by the Sarbanes-Oxley Act. The costs associated with preparing and filing annual, quarterly and current reports,
proxy statements and other information with the SEC in the ordinary course, as well as preparing and filing audited financial statements,
has caused, and could continue to cause, our operational expenses to remain at higher levels or continue to increase.
Our present management team has limited experience in managing
public companies. It will be time consuming, difficult and costly for our management team to acquire additional expertise and experience
in operating a public company, and to develop and implement the additional internal controls and reporting procedures required
by Sarbanes-Oxley and other applicable securities laws.
Shares of our Common Stock that have not been registered
under federal securities laws are subject to resale restrictions imposed by Rule 144. In addition, any shares of our Common Stock
that are held by affiliates, including any that are registered, will be subject to the resale restrictions of Rule 144.
Rule 144 imposes requirements on us and our stockholders that
must be met in order to effect a sale thereunder. As a result, it will be more difficult for us to raise funding to support our
operations through the sale of debt or equity securities unless we agree to register such securities under the Securities Act,
which could cause us to expend significant additional time and cash resources and which we presently have no intention to pursue.
Further, it may be more difficult for us to compensate our employees and consultants with our securities instead of cash. We were
a shell company prior to the closing of the Merger, and such status could also limit our use of our securities to pay for any acquisitions
we may seek to pursue in the future (although none are currently planned), and could cause the value of our securities to decline.
In addition, any shares held by affiliates, including shares received in any registered offering, will be subject to certain additional
requirements in order to effect a sale of such shares under Rule 144.
We do not intend to pay cash dividends on our capital
stock in the foreseeable future.
We have never declared or paid any dividends on our shares and
do not anticipate paying any such dividends in the foreseeable future. Any future payment of cash dividends would depend on our
financial condition, contractual restrictions, solvency tests imposed by applicable corporate laws, results of operations, anticipated
cash requirements and other factors and will be at the discretion of our Board of Directors.
We are at risk of securities class action litigation that
could result in substantial costs and divert management’s attention and resources.
In the past, securities class action litigation has been brought
against companies following periods of volatility of its securities in the marketplace, particularly following a company’s
initial public offering. Due to the volatility of our stock price, we could be the target of securities litigation in the future.
Securities litigation could result in substantial costs and divert management’s attention and resources.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
We do not own any real property. In April 2015, we moved our
corporate offices to a property in Framingham, Massachusetts. In July 2017, we entered into a three year operating lease commencing
October 1, 2017 and ending on September 30, 2020 at our current location. We are obligated to pay annual rent of $38,400 during
the first year, $39,600 during the second year and $42,000 during the third year. We believe our present offices are suitable for
our current and planned near-term operations.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of business, we may become a party to
legal proceedings involving various matters. We are unaware of any such legal proceedings presently pending to which we or our
subsidiary is a party or of which any of our property is the subject that management deems to be, individually or in the aggregate,
material to our financial condition or results of operations.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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.
The accompanying notes are an integral part
of these consolidated financial statements.
Notes to the Consolidated Financial Statements
|
1.
|
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 consolidated financial statements of the Company
have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”).
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) 2018-07, “Compensation—Stock
Compensation (Topic 718) Improvements to Nonemployee Share-Based Payment Accounting” was issued by the Financial Accounting
Standards Board (FASB) in June 2018. The purpose of this amendment is to address aspects of the accounting for nonemployee share-based
payment transactions. 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 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 disclosure.
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. The Company adopted ASU 2016-09 during our
first quarter of fiscal year 2018, which had no impact on our consolidated financial statements, and will apply the guidance
in future periods.
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.
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 September 30, 2018
and September 30, 2017.
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 years ended September 30, 2018 and 2017
there has not been any impairment of long-lived assets.
Income Taxes
In accordance with FASB ASC 740,
Income Taxes
, we recognize
deferred tax assets and liabilities for the expected future tax consequences or events that have been included in our consolidated
financial statements and/or tax returns. Deferred tax assets and liabilities are based upon the differences between the financial
statement carrying amounts and the tax bases of existing assets and liabilities and for loss and credit carryforwards using enacted
tax rates expected to be in effect in the years in which the differences are expected to reverse. Deferred tax assets are reduced
by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized.
We provide reserves for potential payments of tax to various
tax authorities related to uncertain tax positions when management determines that it is probable that a loss will be incurred
related to these matters and the amount of the loss is reasonably determinable.
On December 22, 2017, the Tax Cuts and Jobs Act (“TCJA”)
was signed into United States law. The TCJA includes a number of changes to existing tax law, including, among other things, a
permanent reduction in the federal corporate income tax rate to a flat rate of 21%, effective January 1, 2018, as well as the elimination
of net operating loss carrybacks for losses arising in taxable years beginning after December 31, 2017. Further, operating losses
arising in tax years after December 31, 2017, are carried forward indefinitely. Due to the TCJA, the Company’s deferred tax
assets and liabilities recognized prior to 2017 were revalued at the newly enacted tax rates, which resulted in a corresponding
adjustment in the valuation allowance.
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
, including 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 September 30, 2018 and September 30, 2017, the carrying
amounts of cash, accounts payable, accrued expenses and other liabilities, approximate fair value because
of their short-term nature.
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 October 1, 2018 and ending on December 17, 2018 the date which these consolidated financial
statements were issued. The Company disclosed material subsequent events in Note 15.
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 September 30, 2018, 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. Provisions in the Securities Purchase Agreements that the Company entered into on February
20, 2017 (“2017 SPA”) and on June 28, 2018 (“2018 SPA”) restrict the Company’s ability to effect
or enter into an agreement to effect any issuance by the Company or any of its subsidiaries of Common Stock or securities convertible,
exercisable or exchangeable for Common Stock (or a combination of units thereof) involving a Variable Rate Transaction (as defined
in the 2017 SPA and 2018 SPA) including, but not limited to, an equity line of credit or “At-the-Market” financing
facility until the three lead investors in the 2017 Financing and the institutional investors in the 2018 SPA collectively own
less than 20% of the Series F Warrants and the Series G Warrants purchased by them pursuant to the 2017 SPA and 2018 SPA, respectively.
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 September 30, 2018 and September 30,
2017, property and equipment consisted of:
|
|
Estimated
Useful Life
|
|
September 30,
2018
|
|
|
September 30,
2017
|
|
|
|
|
|
|
|
|
|
|
Furniture and fixtures
|
|
5 years
|
|
$
|
9,357
|
|
|
$
|
2,925
|
|
|
|
|
|
|
|
|
|
|
|
|
Leasehold improvements
|
|
3 years
|
|
$
|
8,983
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Computer equipment
|
|
3 years
|
|
$
|
8,686
|
|
|
$
|
8,686
|
|
|
|
|
|
|
|
|
|
|
|
|
Lab equipment
|
|
5 years
|
|
$
|
1,000
|
|
|
$
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,026
|
|
|
|
12,611
|
|
|
|
|
|
|
|
|
|
|
|
|
Less – accumulated depreciation
|
|
|
|
|
10,765
|
|
|
|
5,423
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
|
$
|
17,261
|
|
|
$
|
7,188
|
|
For the years ended September 30, 2018 and 2017 depreciation
expense recorded was $5,342 and $1,498, respectively.
The principal components of the Company's
net deferred tax assets consisted of the following at September 30:
|
|
2018
|
|
|
2017
|
|
Net operating loss carryforwards
|
|
$
|
5,848,080
|
|
|
$
|
7,129,736
|
|
Capitalized expenditures
|
|
|
1,486,679
|
|
|
|
1,511,187
|
|
Research and experimentation credit carryforwards
|
|
|
802,765
|
|
|
|
632,659
|
|
Stock based compensation
|
|
|
2,074,247
|
|
|
|
2,370,477
|
|
Property and Equipment
|
|
|
1,235
|
|
|
|
1,488
|
|
Accrued expenses
|
|
|
13,660
|
|
|
|
20,100
|
|
Deferred rent
|
|
|
328
|
|
|
|
-
|
|
Gross deferred tax assets
|
|
|
10,226,994
|
|
|
|
11,665,647
|
|
Deferred tax asset valuation allowance
|
|
|
(10,226,994
|
)
|
|
|
(11,665,647
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
As of September 30, 2018 and 2017, the Company had federal net
operating loss carryforwards of approximately $21,770,000 and $17,960,000, respectively, which may be available to offset future
taxable income and which would begin to expire in 2026. As of September 30, 2018 and 2017, the Company had federal research and
experimentation credit carryforwards of $616,217 and $380,982, respectively, which may be available to offset future income tax
liabilities and which would begin to expire in 2029.
As of September 30, 2018 and 2017, the Company had state net
operating loss carryforwards of approximately $20,730,000 and $16,771,000, respectively, which may be available to offset future
taxable income and which would begin to expire in 2018. As of September 30, 2018 and 2017, the Company had state research and experimentation
credit carryforwards of $236,000 and $162,000, respectively, which may be able to offset future income tax liabilities and which
would begin to expire in 2023.
As the Company has not yet achieved profitable operations, management
believes the tax benefits as of September 30, 2018 and 2017 did not satisfy the realization criteria set forth in FASB ASC Topic
740, Income Taxes, and therefore has recorded a valuation allowance for the entire deferred tax asset. The valuation allowance
decreased in 2018 by approximately $1,440,000 and increased in 2017 by approximately $3,041,000. The Company’s effective
income tax rate differed from the federal statutory rate due to state taxes and the Company’s full valuation allowance, the
latter of which reduced the Company’s effective federal income tax rate to zero.
The Company experienced an ownership change as a
result of the Merger described in Note 1, causing a limitation on the annual use of the net operating loss carryforwards, which
are subject to a substantial annual limitation due to the ownership change limitations set forth in Internal Revenue Code Section
382 and similar state provisions.
As of September 30, 2018, the Company is open to examination
in the U.S. federal and certain state jurisdictions for tax years ended September 30, 2018, 2017, 2016, and 2015.
|
5.
|
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 year ended September 30, 2018, no Series A Warrants
had been exercised. During the year ended September 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. During
the year ended September 30, 2016, Series C Warrants had been exercised on a cash basis for an aggregate issuance of 3,400,000
shares of the Company’s Common stock, respectively, resulting in gross proceeds to the Company of $680,000. As of September
30, 2018, all Series A Warrants and Series C Warrants have been exercised.
|
6.
|
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 5, 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 year ended September 30, 2018, Series D Warrants
had been exercised on a cash basis for an aggregate issuance of 227,273 shares of the Company’s Common Stock resulting in
gross proceeds to the Company of $56,818. During the year ended September 30, 2017, Series D Warrants had been exercised on a cash
basis for an aggregate issuance of 1,750,001 shares of the Company’s Common stock resulting in gross proceeds to the Company
of $437,500. As of September 30, 2018, up to 8,974,389 shares may be acquired upon the exercise of the Series D Warrants.
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.
|
7.
|
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 gross proceeds to Arch were approximately $3.4 million before deducting
financing costs of approximately $281,000.
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
$171,000.
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 any time 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 year ended September 30, 2018, Series E Warrants
had been exercised on a cash basis for an aggregate issuance of 15,000 shares of the Company’s Common stock resulting in
gross proceeds to the Company of $6,570. During the year ended September 30, 2017, Series E Warrants had been exercised on a cash
basis for an aggregate issuance of 2,128,741 shares of the Company’s Common stock resulting in gross proceeds to the Company
of $932,388. As of September 30, 2018, up to 4,214,582 shares may be acquired upon the exercise of the Series E Warrants.
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.
|
8.
|
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”). Provisions in the 2017 SPA restrict the
Company’s ability to effect or enter into an agreement to effect any issuance by the Company or any of its subsidiaries of
Common Stock or securities convertible, exercisable or exchangeable for Common Stock (or a combination of units thereof) involving
a Variable Rate Transaction (as defined in the 2017 SPA) including, but not limited to, an equity line of credit or “At-the-Market”
financing facility until the three lead investors in the 2017 Financing collectively own less than 20% of the Series F Warrants
purchased by them pursuant to the 2017 SPA. 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 any time 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 September 30, 2018, no Series F Warrants have been exercised.
As of September 30, 2018, up to 5,591,664 shares may be acquired upon the exercise of the Series F Warrants.
As noted in Note 12, on September 28, 2016, the Company and
the Massachusetts Life Sciences Center (“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 Warrants for an amount of cash equal to $0.18 for each share of Common Stock the underlying Series F Warrants
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 net proceeds of the 2017
Financing of $5,987,122, the remaining proceeds of $2,991,012 were allocated to the Common Stock and additional paid-in capital.
During the fiscal years ended September 30, 2018 and 2017, ($2,155,629) and $433,923 was recorded to Increase/(decrease) to fair
value of derivative, respectively.
Fair Value Measurements Using Significant Unobservable Inputs
(Level 3)
|
|
|
|
|
|
|
|
|
September 30,
2018
|
|
|
September 30,
2017
|
|
Beginning balance at beginning of year
|
|
$
|
3,430,033
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Issuances
|
|
|
-
|
|
|
|
2,996,110
|
|
|
|
|
|
|
|
|
|
|
Adjustments to estimated fair value
|
|
|
(2,155,629
|
)
|
|
|
433,923
|
|
|
|
|
|
|
|
|
|
|
Ending balance at end of year
|
|
$
|
1,274,404
|
|
|
$
|
3,430,033
|
|
The derivative liabilities were valued as of February 24, 2017,
September 30, 2017 and September 30, 2018 using the Black Scholes Model with the following assumptions:
|
|
February 24,
2017
|
|
|
September 30,
2017
|
|
|
September 30,
2018
|
|
Closing price per share of common stock
|
|
$
|
0.68
|
|
|
$
|
0.60
|
|
|
$
|
0.42
|
|
Exercise price per share
|
|
$
|
0.75
|
|
|
$
|
0.75
|
|
|
$
|
0.75
|
|
Expected volatility
|
|
|
111.84
|
%
|
|
|
109.77
|
%
|
|
|
98.43
|
%
|
Risk-free interest rate
|
|
|
1.80
|
%
|
|
|
1.89
|
%
|
|
|
2.88
|
%
|
Dividend yield
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Remaining expected term of underlying securities (years)
|
|
|
5.00
|
|
|
|
4.39
|
|
|
|
3.38
|
|
|
9.
|
2018
REGISTERED DIRECT OFFERING
|
On June 28, 2018, the Company entered into a Securities Purchase
Agreement (“2018 SPA”) with 8 accredited investors (“2018 Investors”) providing for the issuance and sale
by the Company to the 2018 Investors of an aggregate of 9,070,000 units at a purchase price of $0.50 per Unit in a registered offering
(“2018 Financing”). The securities comprising the units sold in the 2018 Financing were issued under the Shelf Registration
Statement, and consisted of a share of Common Stock, and 0.75 of a Series G Warrant to purchase one share of Common Stock at an
exercise price of $0.70 per share at any time prior to the fifth anniversary of the issuance date of the Series G Warrant subject
to certain restrictions on exercise (“2018 Warrants”) and the shares issuable upon exercise of the 2018 Warrants, (“2018
Warrant Shares”). On June 30, 2018 the shares were recorded as subscribed but not issued. On July 2, 2018, the Closing Date
of the 2018 Financing, the Company issued 9,070,000 shares of Common Stock.
The 2018 SPA contains certain restrictions in the Company’s
ability to conduct subsequent sales of its equity securities. In particular, subject to certain customary exemptions, from June
28, 2018 until 90 days after July 2, 2018 (i.e., September 30, 2018), neither the Company nor any subsidiary shall issue, enter
into any agreement to issue or announce the issuance or proposed issuance of any shares of Common Stock or securities convertible,
exercisable or exchangeable for Common Stock. Similarly, until such time the three lead investors collectively own less than 20%
of the Series G Warrants purchased by them pursuant to the 2018 SPA, the Company is prohibited from effecting or entering into
an agreement to effect any issuance by the Company or any of its subsidiaries of Common Stock or securities convertible, exercisable
or exchangeable for Common Stock (or a combination of units thereof) involving a Variable Rate Transaction (as defined in the 2018
SPA) including, but not limited to, an equity line of credit or “At-the-Market” financing facility. The gross proceeds
to Arch from the 2018 Financing, which were received as of June 29, 2018, were approximately $4.5 million before deducting financing
costs of approximately $74,000.
The number of shares of the Company’s Common Stock into
which each of the Series G Warrants is exercisable and the exercise price therefore are subject to adjustment, as set forth in
the Series G Warrants, including adjustments for stock subdivisions or combinations (by any stock split, stock dividend, recapitalization,
reorganization, scheme, arrangement or otherwise). 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 G Warrant for an amount
of cash equal to $0.11 for each share of Common Stock underlying the Series G Warrant.
As of September 30, 2018, no Series G Warrants have been exercised.
As of September 30, 2018, up to 6,802,500 shares may be acquired upon the exercise of the Series G Warrants.
Common Stock
On June 30, 2018 the shares were recorded as subscribed but
not issued. On July 2, 2018, the Closing Date of the 2018 Financing, the Company issued 9,070,000 shares of Common Stock.
Derivative Liabilities
The Company accounted for the Series G Warrants relating to
the aforementioned 2018 Financing in accordance with ASC 815-10,
Derivatives and Hedging
. Since the Company may be required
to purchase its Series G Warrants for an amount of cash equal to $0.11 for each share of Common Stock and the underlying Series
G Warrants 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 September 30, 2018 the derivative liabilities were recorded
at fair value of $2,397,454. Given that the fair value of the derivative liabilities were less than the net proceeds of the 2018
Financing of $4,461,248, the remaining proceeds of $2,063,794 were allocated to the Common Stock Subscribed but Unissued and additional
paid-in capital. During the fiscal year ending September 30, 2018, $480,106 was recorded to decrease the fair value of derivative.
Fair Value Measurements Using Significant Unobservable Inputs
(Level 3)
|
|
September 30,
2018
|
|
Balance at September 30, 2017
|
|
$
|
-
|
|
|
|
|
|
|
Issuances
|
|
|
2,397,454
|
|
|
|
|
|
|
Adjustments to estimated fair value
|
|
|
(480,106
|
)
|
|
|
|
|
|
Ending balance at September 30, 2018
|
|
$
|
1,917,348
|
|
The derivative liabilities were valued as of June
30, 2018 and September 30, 2018 using the Black Scholes Model with the following assumptions:
|
|
June 30,
2018
|
|
|
September 30,
2018
|
|
Closing price per share of common stock
|
|
$
|
0.48
|
|
|
$
|
0.42
|
|
Exercise price per share
|
|
$
|
0.70
|
|
|
$
|
0.70
|
|
Expected volatility
|
|
|
105.94
|
%
|
|
|
100.18
|
%
|
Risk-free interest rate
|
|
|
2.73
|
%
|
|
|
2.94
|
%
|
Dividend yield
|
|
|
—
|
|
|
|
—
|
|
Remaining expected term of underlying securities (years)
|
|
|
5.00
|
|
|
|
4.74
|
|
|
10.
|
STOCK-BASED
COMPENSATION
|
2013 Stock Incentive Plan
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, 2018, a maximum number of 22,114,256
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, 2018, the aggregate number of authorized shares under the Plan was further increased by 3,000,000 shares to a total
of 25,114,256 shares.
As of September 30, 2018, a total of 15,569,212 options had
been issued to employees and directors and 6,027,500 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 fiscal year ended September 30, 2018, the Company
granted 1,860,000 options to employees and directors and 745,000 options to consultants to purchase shares of common stock under
the 2013 Plan
.
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 fiscal
year ended September 30, 2018 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 fiscal
year ended September 30, 2018; expected volatility, 93.15% - 119.44%, risk-free interest rate, 1.31% - 2.85%, expected forfeiture
rate, 0%, expected dividend yield, 0%, expected term, 6.25 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. Prior to January 1, 2018, 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. Effective January 1, 2018, 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.
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. Since the Company has a limited history of occurrences of stock option forfeitures and
a small number of employees 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 year
ended September 30, 2018 follows:
|
|
Option
Shares
Outstanding
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term (years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at September 30, 2017
|
|
|
14,634,210
|
|
|
$
|
0.39
|
|
|
|
4.72
|
|
|
$
|
6,178,263
|
|
Awarded
|
|
|
2,605,000
|
|
|
$
|
0.45
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
(435,000
|
)
|
|
$
|
0.37
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited/Cancelled
|
|
|
(1,120,000
|
)
|
|
$
|
0.42
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at September 30, 2018
|
|
|
15,684,210
|
|
|
$
|
0.41
|
|
|
|
3.89
|
|
|
$
|
1,142,521
|
|
Vested
|
|
|
12,703,439
|
|
|
$
|
0.39
|
|
|
|
4.25
|
|
|
$
|
1,123,133
|
|
Vested and expected to vest at September 30, 2018
|
|
|
15,684,210
|
|
|
$
|
0.40
|
|
|
|
3.89
|
|
|
$
|
1,142,521
|
|
As of September 30, 2018, 1,878,980 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 years ended September 30, 2018 and 2017 resulting from stock options awarded to the Company’s employees,
directors and consultants was approximately $913,000 and $1,343,000, respectively. Of this amount during the years ended September
30, 2018 and 2017, $349,000 and $374,000, respectively, was recorded to research and development expenses, and $564,000 and $969,000,
respectively was recorded in general and administrative expenses in the Company’s Consolidated Statements of Operations.
During the year ended September 30, 2018, 225,000 stock options
awarded under the 2013 Stock Incentive Plan were exercised on a cashless basis for an aggregate issuance of 116,883 shares of the
Company’s Common Stock. In addition, during the year ended September 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 September 30, 2018, there is approximately $754,000 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 1.42 years.
Restricted Stock
On July 19, 2018, the Company awarded 745,000 shares of Restricted
Stock to members of the Board of Directors and management and 220,000 shares of Restricted Stock to Dr. Dhillon in his capacity
as a consultant. 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 September 5, 2018, the Company awarded 100,000 shares of
Restricted Stock to a consultant. The shares subject to this grant are awarded under the 2013 Plan and 50,000 vest 90 days from
the date of the award and 50,000 vest 365 days from the date of the award. 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 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 year ended
September 30, 2018 and 2017 follows:
|
|
2018
|
|
|
2017
|
|
Non Vested at September 30, 2017
|
|
|
1,750,000
|
|
|
|
225,000
|
|
Awarded
|
|
|
1,065,000
|
|
|
|
1,750,000
|
|
Vested
|
|
|
-
|
|
|
|
(225,000
|
)
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
Non Vested at September 30, 2018
|
|
|
2,815,000
|
|
|
|
1,750,000
|
|
The weighted average restricted stock award date fair value
information for the year ended September 30, 2018 follows:
|
|
Weighted
Average
Restricted
Stock Award
|
|
Non Vested at September 30, 2017
|
|
$
|
0.65
|
|
Awarded
|
|
|
0.43
|
|
Vested
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
Non Vested at September 30, 2018
|
|
$
|
0.57
|
|
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 years ended September 30, 2018 and 2017 compensation expense recorded for the restricted stock awards was approximately
$600,000 and $372,000, respectively.
|
11.
|
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. On May 1, 2018, the vesting date for 1,767,000 shares was amended to November
2018. 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. During the fiscal year ended September 30, 2018, 233,000 shares of restricted stock awarded outside the 2013 Plan vested.
Restricted Stock activity for the years ended September 30,
2018 and 2017 is as follows:
|
|
2018
|
|
|
2017
|
|
Non Vested at beginning of year
|
|
|
2,000,000
|
|
|
|
2,000,000
|
|
Awarded
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
(233,000
|
)
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
Non Vested at end of year
|
|
|
1,767,000
|
|
|
|
2,000,000
|
|
The weighted average restricted stock award
date fair value information for the years ended September 30, 2018 and 2017 follows:
|
|
2017
|
|
|
2017
|
|
Non Vested at beginning of year
|
|
$
|
0.39
|
|
|
$
|
0.39
|
|
Awarded
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
0.39
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
Non Vested at end of year
|
|
$
|
0.39
|
|
|
$
|
0.39
|
|
For the years ended September 30, 2018 and 2017, compensation
expense recorded for the restricted stock awards was approximately $229,000 and $553,000, respectively.
On September 30, 2013, the Company entered into the Life Sciences
Accelerator Funding Agreement (“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 (“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 (“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 (“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 September 30, 2018.
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 fiscal year ended September 30, 2018 and 2017, approximately $0 and $22,100, respectively
of the loan discount was accreted to interest expense. As of September 30, 2018 and 2017, the balance of the MLSC
loan was $0.
On September 28, 2016, the Company and MLSC entered into that
certain Amendment Agreement to Arch Therapeutics, Inc. Accelerator Funding Agreement (“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 (“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 the 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
expense that would otherwise be incurred under the MLSC Loan Agreement by approximately $250,000.
|
13.
|
COMMITMENTS
AND CONTINGENCIES
|
In the ordinary course of business, the Company enters into
various agreements containing standard indemnification provisions. The Company's indemnification obligations under such provisions
are typically in effect from the date of execution of the applicable agreement through the end of the applicable statute of limitations.
The aggregate maximum potential future liability of the Company under such indemnification provisions is uncertain. As of September
30, 2018 and 2017, no amounts have been accrued related to such indemnification provisions.
From time to time, the Company may be exposed to litigation
in connection with its operations. The Company’s policy is to assess the likelihood of any adverse judgments or outcomes
related to legal matters, as well as ranges of probable losses.
MIT Licensing Agreement
In December 2007, the Company entered into a license agreement
with MIT pursuant to which the Company acquired an exclusive world-wide license to develop and commercialize technology related
to self-assembling peptide compositions, and methods of making and using such compositions in medical and non-medical applications,
including claims that cover the Company’s proposed products and methods of use thereof. The license also provides non-exclusive
rights to additional intellectual property in the fields that cover the Company’s proposed products and methods of use thereof,
in order to provide freedom to operate. The license provides the Company a right to sublicense the exclusively licensed intellectual
property. The Company has not sublicensed the exclusively licensed intellectual property to any party for any field.
In exchange for the licenses granted in the agreement, the Company
has paid MIT license maintenance fees and patent prosecution costs. The Company paid license maintenance fees of $50,000 to MIT
in the fiscal years ended September 30, 2018 and 2017. For the years ended September 30, 2018 and 2017, the annual
MIT license maintenance fees of $50,000 are included in accrued expenses and other liabilities on the Consolidated Balance Sheets.
The license maintenance fees and patent prosecution costs cover the contract year beginning January 1 thru December 31. Annual
license maintenance obligations extend through the life of the patents. In addition, MIT is entitled to royalties on applicable
future product sales, if any. The annual payments may be applied towards royalties payable to MIT for that year for product sales.
The Company is obligated to indemnify MIT and related
parties from losses arising from claims relating to the exercise of any rights granted to the Company under the license, with certain
exceptions. The maximum potential amount of future payments the Company could be required to make under this provision is unlimited.
The Company considers there to be a low performance risk as of September 30, 2018.
The agreement expires upon the expiration or abandonment
of all patents that are issued and licensed to the Company by MIT under such agreement. The Company expects that patents will be
issued from presently pending U.S. and foreign patent applications. Any such patent will have a term of 20 years from the filing
date of the underlying application. MIT may terminate the agreement immediately, if the Company ceases to carry on its business,
if any nonpayment by the Company is not cured or the Company commits a material breach that is not cured. The Company may terminate
the agreement for any reason upon six months’ notice to MIT.
Leases
We do not own any real property. In October 2013,
we entered into a one and one-half year operating sublease agreement pursuant to which we leased the office space of our relocated
headquarters in Wellesley, Massachusetts for a base annual rent equal to $5,031 per month. In April 2015, we moved our corporate
offices to a property in Framingham, Massachusetts. We entered into a month-to-month operating lease agreement, pursuant to which
we are obligated to pay monthly rent of $2,000, with a minimum six month commitment. During July 2017,we entered into a three year
operating lease commencing October 1, 2017 and ending on September 30, 2020 at our current location. Pursuant to which we are obliged
to pay annual rent of $38,400 during the first year, $39,600 during the second year and $42,000 during the third year. We are no
longer party to the October 2013 lease, and we believe our present offices are suitable for our current and planned near-term operations.
The following table reflects the Company’s annual lease
commitments:
Year Ending
September 30,
|
|
|
|
2019
|
|
$
|
39,600
|
|
2020
|
|
|
42,000
|
|
|
|
$
|
81,600
|
|
|
14.
|
Selected Quarterly Financial Data (unaudited)
|
The following table provides selected quarterly financial data
for the fiscal years ended September 30, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended
|
|
|
|
December 31, 2017
|
|
|
March 31, 2018
|
|
|
June 30, 2018
|
|
|
September 30, 2018
|
|
Net sales
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$
|
(1,582,373
|
)
|
|
$
|
(2,013,845
|
)
|
|
$
|
(1,620,134
|
)
|
|
$
|
(2,233,415
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (loss)
|
|
$
|
389,176
|
|
|
$
|
(1,555,361
|
)
|
|
$
|
(2,212,640
|
)
|
|
$
|
(1,435,207
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share - basic and diluted
|
|
$
|
-
|
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares - basic
|
|
|
150,144,575
|
|
|
|
150,302,013
|
|
|
|
150,550,189
|
|
|
|
159,778,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares - diluted
|
|
|
163,527,032
|
|
|
|
150,302,013
|
|
|
|
150,550,189
|
|
|
|
159,778,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended
|
|
|
|
December 31, 2016
|
|
|
March 31, 2017
|
|
|
June 30, 2017
|
|
|
September 30, 2017
|
|
Net sales
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss)
|
|
$
|
(1,375,931
|
)
|
|
$
|
(2,204,123
|
)
|
|
$
|
(1,841,066
|
)
|
|
$
|
(1,881,428
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)
|
|
$
|
(1,401,501
|
)
|
|
$
|
(1,869,432
|
)
|
|
$
|
(1,775,740
|
)
|
|
$
|
(2,742,183
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) per share - basic and diluted
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares - basic and diluted
|
|
|
135,319,847
|
|
|
|
140,513,488
|
|
|
|
147,019,042
|
|
|
|
147,989,550
|
|
The Company evaluated subsequent events from October 1,
2018 through December 17, 2018, and concluded that no subsequent events have occurred that would require recognition or
disclosure in the consolidated financial statements.