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.
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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.
We are a biotechnology company marketing or developing a number
of products and are devoting substantially all of its efforts to developing technologies, raising capital, establishing customer
and vendor relationships, and recruiting and retaining new employees.
Use of Estimates
Management is required to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those
estimates.
Recently Issued Accounting Guidance
Accounting Standards Update (ASU) 2018-07, 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
adopted ASU 2018-07 during our first quarter of fiscal year 2020, and the impact was considered immaterial on our consolidated
financial statements.
ASU 2016-02, Leases (Topic 842) was issued by
the FASB in February 2016. The purpose of this amendment is to recognize most operating leases by recording a right-to-use
asset and corresponding lease liability. 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. The Company adopted ASU 2016-02 during
our first quarter of fiscal year 2020, and the impact has been recorded within the consolidated financial statement using the
modified retrospective method.
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,
2020 and September 30, 2019.
Inventories
Inventories are stated at the lower of cost or net realizable
value. The cost of inventories comprises expenditures incurred in acquiring the inventories, the cost of conversion and other costs
incurred in bringing them to their existing location and condition. The cost of raw materials, goods-in-progress and finished goods
and other products are determined on a First in First out (FiFo) basis. When determining net realizable value, appropriate consideration
is given to obsolescence, excessive levels, deterioration, and other factors in evaluating net realizable value. Inventory reserves
are included in research and development expenses for the fiscal year ended September 30, 2020.
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.
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, 2020 and
2019 there has not been any impairment of long-lived assets.
Leases
The Company determines if an arrangement is a lease at its inception.
Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over
the lease term. As our lease does not provide an implicit interest rate, we use an incremental borrowing rate based on the information
available at commencement date in determining the present value of lease payments. Lease expense for lease payments is recognized
on a straight-line basis over the lease term. As of September 30, 2020, our ROU asset is included in prepaid expenses and
other current assets and the lease obligations is included in accrued expenses and other current liabilities on our consolidated
balance sheets. The impact upon adoption was considered immaterial to the consolidated financial statements. As of September 30,
2020, the right-of-use (“ROU”) asset of approximately $39,000 represents our right to use an underlying asset for the
lease term and the lease liabilities of approximately $39,000 represents our obligation to make lease payments arising from the
lease.
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.
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 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 be recognized in the consolidated financial statements based on their fair values. 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. Prior to January 1, 2018, the Company’s
expected volatility was 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. 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, 2020 and September 30, 2019,
the carrying amounts of cash, accounts payable, accrued expenses and other liabilities, approximate fair value because of
their short-term nature. The carrying amounts for the PPP Loan and the Promissory convertible debt approximate fair
value.
Derivative Liabilities
The Company accounts for its warrants and other derivative financial
instruments as either equity or liabilities based upon the characteristics and provisions of each instrument, in accordance with
FASB ASC Topic 815, Derivatives and Hedging. Warrants classified as equity are recorded at fair value as of the date of
issuance on the Company’s consolidated balance sheets and no further adjustments to their valuation are made. Warrants classified
as derivative liabilities and other derivative financial instruments that require separate accounting as liabilities are recorded
on the Company’s consolidated balance sheets at their fair value on the date of issuance and will be revalued on each subsequent
balance sheet date until such instruments are exercised or expire, with any changes in the fair value between reporting periods
recorded as other income or expense. Management estimates the fair value of these liabilities using option pricing models and assumptions
that are based on the individual characteristics of the warrants or instruments on the valuation date, as well as assumptions for
future financings, expected volatility, expected life, yield, and risk-free interest rate.
Subsequent Events
The Company evaluated all events or transactions that occurred
commencing from October 1, 2020 and ending on December 10, 2020 the date which these consolidated financial statements
were issued. The Company disclosed material subsequent events in Note 20.
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, 2020, 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.
Finally, some of our product candidates or the materials contained therein (such as the Active Pharmaceutical Ingredients (“APIs”)
for our AC5® product line), are manufactured from facilities in areas impacted by the outbreak of the coronavirus,
which could result in shortages due to ongoing efforts to address the outbreak. 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 its subsidiary 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 continued spread
of coronavirus and uncertain market conditions may also limit the Company’s ability to access capital. If the Company is
unable to obtain adequate capital, the Company may be required to reduce the scope, delay, or eliminate some or all of its planned
commercial activities. These conditions, in the aggregate, raise substantial doubt as to the Company’s ability to continue
as a going concern.
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.
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PROPERTY AND EQUIPMENT
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At September 30, 2020 and September 30,
2019, property and equipment consisted of:
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|
Estimated
Useful Life
|
|
September 30,
2020
|
|
|
September 30,
2019
|
|
Furniture and fixtures
|
|
5 years
|
|
$
|
9,357
|
|
|
$
|
9,357
|
|
|
|
|
|
|
|
|
|
|
|
|
Leasehold improvements
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|
Life of Lease
|
|
$
|
8,983
|
|
|
$
|
8,983
|
|
|
|
|
|
|
|
|
|
|
|
|
Computer equipment
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|
3 years
|
|
$
|
11,141
|
|
|
$
|
8,686
|
|
|
|
|
|
|
|
|
|
|
|
|
Lab equipment
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|
5 years
|
|
$
|
1,000
|
|
|
$
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,481
|
|
|
|
28,026
|
|
|
|
|
|
|
|
|
|
|
|
|
Less – accumulated depreciation
|
|
|
|
|
25,929
|
|
|
|
19,003
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
|
$
|
4,552
|
|
|
$
|
9,023
|
|
For the years ended September 30, 2020 and 2019 depreciation
expense recorded was $6,926 and $8,238, respectively.
The principal components of the Company's
net deferred tax assets consisted of the following at September 30:
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|
2020
|
|
|
2019
|
|
Net operating loss carryforwards
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|
$
|
8,451,214
|
|
|
$
|
7,291,333
|
|
Capitalized expenditures
|
|
|
1,782,185
|
|
|
|
1,717,025
|
|
Research and experimentation credit carryforwards
|
|
|
928,734
|
|
|
|
898,610
|
|
Stock based compensation
|
|
|
2,321,519
|
|
|
|
2,139,119
|
|
Property and Equipment
|
|
|
3,152
|
|
|
|
2,234
|
|
Accrued expenses
|
|
|
18,518
|
|
|
|
13,660
|
|
Inventory allowance
|
|
|
16,497
|
|
|
|
-
|
|
Deferred rent
|
|
|
-
|
|
|
|
492
|
|
Gross deferred tax assets
|
|
|
13,521,819
|
|
|
|
12,062,473
|
|
Deferred tax asset valuation allowance
|
|
|
(13,521,819
|
)
|
|
|
(12,062,473
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
As of September 30, 2020 and 2019, the Company had federal
net operating loss carryforwards of approximately $31,157,000 and $26,890,000, respectively, which may be available to offset future
taxable income and which would begin to expire in 2026. As of September 30, 2020 and 2019, the Company had federal research
and experimentation credit carryforwards of $657,000 and $542,000, respectively, which may be available to offset future income
tax liabilities and which would begin to expire in 2029.
As of September 30, 2020 and 2019, the Company had state
net operating loss carryforwards of approximately $30,737,000 and $26,560,000, respectively, which may be available to offset future
taxable income and which would begin to expire in 2030. As of September 30, 2020 and 2019, the Company had state research
and experimentation credit carryforwards of $345,000 and $305,000, 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, 2020 and 2019 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 increased in 2020 by approximately $1,459,000 and increased in 2019 by approximately $1,835,000. 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, 2020, the Company is open to examination
in the U.S. federal and certain state jurisdictions for tax years ended September 30, 2020, 2019, 2018 and 2017. In addition,
any loss years remain open to the extent that losses are available for carryover to future years. Therefore, the tax years ended
2010 through 2019 remain open for examination by the IRS.
Inventories consist of the following:
|
|
September 30,
2020
|
|
|
September 30,
2019
|
|
Goods-in-process
|
|
$
|
1,028,378
|
|
|
$
|
328,500
|
|
Raw Material
|
|
|
-
|
|
|
|
18,147
|
|
Inventory Reserves
|
|
|
(60,385
|
)
|
|
|
—
|
|
Total
|
|
$
|
967,993
|
|
|
$
|
346,647
|
|
The increase in inventory is due to continued
manufacturing and receipt of product in preparation for commercialization. There was no reserve as of September 30,
2019. Included in research and development expense for the year ended September 30, 2020 is an increase to the inventory
reserve of $60,385 which the majority of which is attributable to required product testing during the manufacturing process.
In determining net realizable value, appropriate consideration is given to obsolescence, excessive levels, deterioration, and
other factors in evaluating net realizable value.
6.
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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, 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.
On June 3, 2020, the Company entered into an agreement
(the “Agreement”) with the holders of a majority (the “Majority Holders”) of the outstanding
Series D Warrants (the “Warrant”) resulting in approximately $850,000 of proceeds as a result of the full
exercise of their Warrants. The Agreement provides for the reduction of the Series D Warrant exercise price from $0.25 to
$0.18 per share, and the elimination of a provision that prevents the Series D Warrants from being exercised if the holder’s
beneficial ownership would exceed 4.9% as a result. Under the terms of the Agreement, in exchange for fully exercising their remaining
Warrants for 4,727,273 shares of common stock on June 4, 2020, the Majority Holders were issued Series J Warrants to
purchase 3,545,454 shares of common stock at an exercise price of $0.25 over a 1 year term.
On June 22, 2020, the Company entered into a Series J
Warrant Issuance Agreement (the “Keyes Sulat Agreement”) with the Keyes Sulat Revocable Trust (the “Trust”),
also a holder of outstanding Series D Warrants, resulting in approximately $82,000 of proceeds as a result of the full exercise
of the Trust’s Warrants. Under the terms of the Keyes Sulat Agreement, in exchange for fully exercising the Trust’s
remaining Warrants for 454,546 shares of common stock on June 22, 2020, the Trust was issued Series J Warrants to purchase
340,910 shares of common stock at an exercise price of $0.25 over a 1 year term. James R. Sulat, a member of the Board, is a co-trustee
of the Trust, of which members of Mr. Sulat’s immediate family are beneficiaries. Mr. Sulat disclosed his interest
in the Trust to the Board prior to its approval of the transaction and abstained from voting on the transaction.
As a result of the issuance of the Series J Warrants, in
conjunction with the exercise of the Series D Warrants, the Company recorded in equity a noncash equity issuance cost valued
at approximately $220,000. This charge was estimated using the Black-Scholes Option Pricing Model with the following assumptions;
expected volatility, 88.15%, risk-free interest rate, 0.16%, expected forfeiture rate, 0%, expected dividend yield, 0%, expected
term, 1.08 years. The series J Warrants are indexed to the Company’s stock and are classified as equity.
During the fiscal year ended September 30, 2020, Series D
Warrants had been exercised on a cash basis for an aggregate issuance of 5,181,819 shares of the Company’s common stock resulting
in gross proceeds to the Company of $932,728. During the fiscal year ended September 30, 2019, no Series D Warrants had
been exercised. As of September 30, 2020, 3,792,570 Series D Warrants expired.
Common Stock
At June 30, 2015 the 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 and the Series J Warrants are indexed to the Company’s stock, they are classified within stockholders’
equity (deficit) 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 61st 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 fiscal years ended September 30, 2020 and 2019,
no Series E Warrants had been exercised. As of September 30, 2020, 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 (deficit)
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.
During the fiscal years ended September 30, 2020 and 2019,
no Series F Warrants had been exercised. As of September 30, 2020, up to 5,591,664 shares may be acquired upon the exercise
of the Series F Warrants.
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 (deficit), 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 was 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 years ended September 30, 2020 and 2019, $0 and $274,404 were recorded to decrease the fair value of derivative,
respectively.
Fair Value Measurements Using Significant Unobservable Inputs
|
|
September 30,
|
|
|
September 30,
|
|
(Level 3)
|
|
2020
|
|
|
2019
|
|
Beginning balance at beginning of year
|
|
$
|
1,000,000
|
|
|
$
|
1,274,404
|
|
|
|
|
|
|
|
|
|
|
Issuances
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Adjustments to estimated fair value
|
|
|
—
|
|
|
|
(274,404
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance at end of year
|
|
$
|
1,000,000
|
|
|
$
|
1,000,000
|
|
The derivative liabilities were valued as of September 30,
2020 and September 30, 2019 using the Black Scholes Model with the following assumptions:
|
|
September 30,
2020
|
|
|
September 30,
2019
|
|
Closing price per share of common stock
|
|
$
|
0.17
|
|
|
$
|
0.24
|
|
Exercise price per share
|
|
$
|
0.75
|
|
|
$
|
0.75
|
|
Expected volatility
|
|
|
84.17
|
%
|
|
|
78.15
|
%
|
Risk-free interest rate
|
|
|
0.13
|
%
|
|
|
1.60
|
%
|
Dividend yield
|
|
|
—
|
|
|
|
—
|
|
Remaining expected term of underlying securities (years)
|
|
|
1.35
|
|
|
|
2.37
|
|
|
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. During the years
ended September 30, 2020 and 2019, no Series G Warrants had been exercised. As of September 30, 2020, 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 (deficit), 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 $2,397,454. 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. On July 2, 2018 the Common Stock subscribed but Unissued was recorded as Common Stock. During the years ended
September 30, 2020 and 2019, $0 and $1,169,073 were recorded to decrease the fair value of derivative, respectively
Fair Value Measurements Using Significant Unobservable Inputs
|
|
September 30,
|
|
|
September 30,
|
|
(Level 3)
|
|
2020
|
|
|
2019
|
|
Beginning balance at beginning of year
|
|
$
|
748,275
|
|
|
$
|
1,917,348
|
|
|
|
|
|
|
|
|
|
|
Issuances
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Adjustments to estimated fair value
|
|
|
—
|
|
|
|
(1,169,073
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance at end of year
|
|
$
|
748,275
|
|
|
$
|
748,275
|
|
The derivative liabilities were valued as of September 30,
2020 and September 30, 2019 using the Black Scholes Model with the following assumptions:
|
|
September 30,
2020
|
|
|
September 30,
2019
|
|
Closing price per share of common stock
|
|
$
|
0.17
|
|
|
$
|
0.24
|
|
Exercise price per share
|
|
$
|
0.70
|
|
|
$
|
0.70
|
|
Expected volatility
|
|
|
83.31
|
%
|
|
|
78.72
|
%
|
Risk-free interest rate
|
|
|
0.15
|
%
|
|
|
1.56
|
%
|
Dividend yield
|
|
|
—
|
|
|
|
—
|
|
Remaining expected term of underlying securities (years)
|
|
|
2.71
|
|
|
|
3.73
|
|
10.
|
2019 REGISTERED DIRECT OFFERING
|
On May 12, 2019, the Company entered into a Securities
Purchase Agreement (“2019 SPA”) with 5 accredited investors (“2019 Investors”) providing for the issuance
and sale by the Company to the 2019 Investors of an aggregate of 8,615,384 units at a purchase price of $0.325 per Unit in a registered
offering (“2019 Financing”). The securities comprising the units sold in the 2019 Financing were issued under the Shelf
Registration Statement, and consisted of a share of Common Stock, and a Series H Warrant to purchase one share of Common Stock
at an exercise price of $0.40 per share at any time prior to the fifth anniversary of the issuance date of the Series H Warrant
subject to certain restrictions on exercise (“2019 Warrants”) and the shares issuable upon exercise of the 2019 Warrants,
(“2019 Warrant Shares”). As of May 14, 2019, the Company recorded the 8,615,384 shares as Common Stock.
The gross proceeds to Arch from the 2019 Financing, which were
received as of May 13, 2019, were approximately $2.8 million before deducting financing costs of approximately $51,200. The
number of shares of the Company’s Common Stock into which each of the Series H Warrants is exercisable and the exercise
price therefore are subject to adjustment, as set forth in the Series H 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 H Warrant for an amount of cash equal to $0.0533 for each share of Common Stock underlying the
Series H Warrant. During the fiscal years ended September 30, 2020 and 2019, no Series H Warrants had been exercised.
As of September 30, 2020, up to 8,615,384 shares may be acquired upon the exercise of the Series H Warrants.
Common Stock
At May 14, 2019 the Closing Date of the 2019 Financing,
the Company issued 8,615,384 shares of Common Stock.
Derivative Liabilities
The Company accounted for the Series H Warrants relating
to the aforementioned 2019 Financing in accordance with ASC 815-10, Derivatives and Hedging. Since the Company may be required
to purchase its Series H Warrants for an amount of cash equal to $0.0533 for each share of Common Stock and the underlying
Series H Warrants are not classified within stockholders’ equity (deficit), 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 $1,628,113. Given that the fair value of the derivative liabilities were less than the net proceeds of the 2019
Financing of $2,748,821, the remaining proceeds of $1,120,708 were allocated to the Common Stock and additional-paid-in-capital. During
the years ended September 30, 2020 and 2019, $679,271 and $380,698, respectively, was recorded to decrease the fair value
of derivative.
Fair Value Measurements Using Significant Unobservable Inputs
|
|
September 30,
|
|
|
September 30,
|
|
(Level 3)
|
|
2020
|
|
|
2019
|
|
Beginning balance at beginning of year
|
|
$
|
1,247,415
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Issuances
|
|
|
—
|
|
|
|
1,628,113
|
|
|
|
|
|
|
|
|
|
|
Adjustments to estimated fair value
|
|
|
(679,271
|
)
|
|
|
(380,698
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance at end of year
|
|
$
|
568,144
|
|
|
$
|
1,247,415
|
|
The derivative liabilities were valued as of September 30,
2020, September 30, 2019 and May 14, 2019 using the Black Scholes Model with the following assumptions:
|
|
September 30,
2020
|
|
|
September 30,
2019
|
|
|
May 14,
2019
|
|
Closing price per share of common stock
|
|
$
|
0.17
|
|
|
$
|
0.24
|
|
|
$
|
0.283
|
|
Exercise price per share
|
|
$
|
0.40
|
|
|
$
|
0.40
|
|
|
$
|
0.40
|
|
Expected volatility
|
|
|
82.24
|
%
|
|
|
92.11
|
%
|
|
|
93.44
|
%
|
Risk-free interest rate
|
|
|
0.22
|
%
|
|
|
1.55
|
%
|
|
|
2.20
|
%
|
Dividend yield
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Remaining expected term of underlying securities (years)
|
|
|
3.60
|
|
|
|
4.61
|
|
|
|
5.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11.
|
OCTOBER 2019 REGISTERED DIRECT OFFERING
|
On October 16, 2019, the Company entered into a Securities
Purchase Agreement (“October 2019 SPA”) with 7 accredited investors (“October 2019 Investors”)
providing for the issuance and sale by the Company to the 2019 Investors of an aggregate of 14,285,714 units at a purchase price
of $0.175 per Unit in a registered offering (“October 2019 Financing”). The securities comprising the units sold
in the October 2019 Financing were issued under the Shelf Registration Statement, and consisted of a share of Common Stock,
and a Series I Warrant to purchase one share of Common Stock at an exercise price of $0.22 per share at any time prior to
the fifth anniversary of the issuance date of the Series I Warrant subject to certain restrictions on exercise (“October 2019
Warrants”) and the shares issuable upon exercise of the October 2019 Warrants, (“October 2019 Warrant Shares”).
As of October 18, 2019, the Company recorded the 14,285,714 shares as Common Stock. Pursuant to the Engagement Agreement (as
defined below), the Company also agreed to issue to the Placement Agent, or its designees, warrants to purchase up to 1,071,429
shares (the “Placement Agent Warrants”). The Placement Agent Warrants have substantially the same terms as the Series I
Warrants, except that the exercise price of the Placement Agent Warrants is $0.21875 per share and the term of the Placement Agent
Warrants is five years.
The gross proceeds to Arch from the October 2019 Financing,
which were received as of October 18, 2019, were approximately $2.5 million before deducting financing costs of approximately
$333,000 which includes approximately $158,000 of placement fees. The number of shares of the Company’s Common Stock
into which each of the Series I Warrants is exercisable and the exercise price therefore are subject to adjustment, as set
forth in the Series I Warrants, including adjustments for stock subdivisions or combinations (by any stock split, stock dividend,
recapitalization, reorganization, scheme, arrangement or otherwise).
We engaged H.C. Wainwright (“Wainwright”) as our
exclusive institutional investor placement agent in connection with the October SPA pursuant to an engagement agreement (the
“Engagement Agreement”) dated as of October 10, 2019, and in consideration for the services provided by it, Wainwright
was entitled to receive cash fees equal ranging from 6.0% to 8.2% of the gross proceeds received by us, as well as reimbursement
for all reasonable expenses incurred by it in connection with its engagement. We received gross proceeds of approximately $2.5
million in the aggregate, resulting in a fee of approximately $158,000.
During the year ended September 30, 2020, no Series I
Warrants or Placement Agent Warrants had been exercised. As of September 30, 2020, up to 14,285,714 and 1,071,429 shares may
be acquired upon the exercise of the Series I Warrants and Placement Agent Warrants, respectively.
Common Stock
At October 18, 2019 the Closing Date of the October 2019
Financing, the Company issued 14,285,714 shares of Common Stock.
Equity Value of Warrants
The Company accounted for the Series I Warrants and the
Placement Agent Warrants relating to the aforementioned October 2019 Registered Direct Offering in accordance with ASC 815-40,
Derivatives and Hedging. Because the Series I Warrants and the Placement Agent Warrants are indexed to the Company’s
stock, they are classified within stockholders’ equity (deficit) in the accompanying consolidated financial statements.
On June 4, 2020, the Company issued unsecured 10% Convertible
Notes in the aggregate principal amount of $550,000. The Series 1 Convertible Notes provide, among other things, for (i) a
term of approximately three (3) years; (ii) the Company’s ability to prepay the Series 1 Convertible Notes,
in whole or in part, at any time; (iii) the automatic conversion of the Series 1 Convertible Notes upon a Change of Control
(all capitalized terms not otherwise defined to have the meaning ascribed to such terms in the Series 1Convertible Notes)
into shares of the Company’s common stock, par value $0.001 per share (Common Stock), at a per share price of $0.27 (the
“Conversion Price”); (iv) the ability of a holder of a Convertible Note (a “Holder”)
to convert the Series 1 Convertible Note and accrued interest, in whole or in part, into shares of Common Stock at the Conversion
Price; (v) the Company’s ability to convert all Note Obligations outstanding upon a Qualified Equity Financing into
shares of Common Stock at the Conversion Price; (vi) the Company’s ability to convert Series 1Convertible Notes
and accrued interest, in whole or in part, into shares of Common Stock at the Conversion Price in the event the volume weighted
average price (“VWAP”) of the Common Stock equals or exceeds $0.32 per share for at least fifteen (15) consecutive
Trading Days; (vii) the Company’s ability to convert all outstanding Note Obligations into shares of Common Stock at
the Conversion Price (an “In-Kind Note Repayment”) in lieu of repaying the Note Obligations outstanding on the
Maturity Date, June 30, 2023; provided, however, that in the case of an In-Kind Note Repayment, the outstanding Note Obligations
will be calculated by increasing by thirty-five percent (35%) the aggregate sum of the unpaid Principal Amount held by each Holder
and the accrued interest at a rate of ten percent (10%) per annum, subject to, with respect to any portion of the Principal Amount
that is converted or prepaid before the twelve month anniversary of the Issuance Date, a minimum interest payment equal to ten
percent (10%) of the amount that is converted or prepaid.
During the year ended September 30, 2020, the Company recorded
interest expense as part of general and administrative expenses of approximately $18,000.
13.
|
PAYROLL PROTECTION PROGRAM LOAN
|
On April 25, 2020, the Company executed a promissory note
(the “PPP Note”) evidencing an unsecured loan in the amount of $176,300 under the Paycheck Protection Program
(the “PPP Loan”). The Paycheck Protection Program (or “PPP”) was established under the Coronavirus
Aid, Relief, and Economic Security Act (the “CARES Act”) and is administered by the U.S. Small Business Administration
(“SBA”). The Loan has been made through First Republic Bank (the “Lender”).
The PPP Loan has a two-year term and bears interest at a rate
of 1.00% per annum. Monthly principal and interest payments are deferred until the earliest of ten months after the end of our
covered period or the date the SBA makes a decision on our loan forgiveness application. Unless the PPP Loan is forgiven, the Company
will be required to make monthly payments of principal and interest of approximately $20,000 to the Lender.
The PPP Note contains customary events of default relating to,
among other things, payment defaults, providing materially false and misleading representations to the SBA or Lender, or breaching
the terms of the PPP Loan documents. The occurrence of an event of default may result in the immediate repayment of all amounts
outstanding, collection of all amounts owing from the Company, or filing suit and obtaining judgment.
Under the terms of the CARES Act, PPP Loan recipients can apply
for and be granted forgiveness for all or a portion of loan granted under the PPP. Such forgiveness will be determined, subject
to limitations, based on the use of loan proceeds for payment of payroll costs and any payments of mortgage interest, rent, and
utilities. However, no assurance is provided that forgiveness for any portion of the PPP Loan will be obtained. During November 2020,
the Company applied for forgiveness of the PPP Loan.
|
14.
|
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, 2020, a maximum
number of 28,114,256 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, 2020, the aggregate number of authorized shares under the Plan
was further increased by 3,000,000 shares to a total of 31,114,256 shares.
As of September 30, 2020, a total of 19,179,212 options
had been issued to employees and directors and 7,717,500 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 year ended September 30, 2020, the Company granted
2,685,000 options to employees and directors and 690,000 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 year
ended September 30, 2020 was based on the fair market value 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 year ended September 30,
2020; expected volatility, 79.44% - 119.44%, risk-free interest rate, 0.13% - 3.23%, expected forfeiture rate, 0%, expected dividend
yield, 0%, expected term, 5.6 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 was 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, 2020 follows:
|
|
Option
Shares
Outstanding
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term (years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at September 30, 2019
|
|
|
15,807,911
|
|
|
$
|
0.40
|
|
|
|
3.14
|
|
|
$
|
142,810
|
|
Awarded
|
|
|
3,375,000
|
|
|
$
|
0.22
|
|
|
|
—
|
|
|
|
—
|
|
Forfeited/Cancelled
|
|
|
(934,565
|
)
|
|
$
|
0.44
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding at September 30, 2020
|
|
|
18,248,346
|
|
|
$
|
0.36
|
|
|
|
2.59
|
|
|
$
|
79,330
|
|
Vested at September 30, 2020
|
|
|
16,077,006
|
|
|
$
|
0.38
|
|
|
|
2.78
|
|
|
$
|
69,305
|
|
Vested and expected to vest at September 30, 2020
|
|
|
18,248,346
|
|
|
$
|
0.36
|
|
|
|
2.59
|
|
|
$
|
79,330
|
|
As of September 30, 2020, 4,750,008 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 year ended September 30, 2020 and 2019 resulting from stock options awarded to the Company’s employees,
directors and consultants was approximately $678,000 and $830,000, respectively. Of this amount during the years ended September 30,
2020 and 2019, $288,000 and $483,000, respectively, were recorded as research and development expenses, and $390,000 and $347,000,
respectively were recorded as general and administrative expenses in the Company’s Consolidated Statements of Operations.
During the year ended September 30, 2020, no stock options
awarded under the 2013 Stock Incentive Plan were exercised for cash. During the year ended September 30, 2019, 87,567 stock
options awarded under the 2013 Stock Incentive Plan were exercised for cash resulting in proceeds to the Company of $32,400. During
the year ended September 30, 2020, no stock options awarded under the 2013 Stock Incentive Plan were exercised on a cashless
basis. During the year ended September 30, 2019, 1,437,433 stock options awarded under the 2013 Stock Incentive Plan were
exercised on a cashless basis for an aggregate issuance of 477,269 shares of the Company’s Common Stock.
As of September 30, 2020, there is approximately $268,000
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 1.80 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. Avtar Dhillon
in his capacity as a consultant. The shares subject to this grant are awarded under the 2013 Plan and 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. As of September 30, 2020, all restricted shares have vested.
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. As of September 30, 2020, all restricted
shares have vested.
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 were awarded under the
2013 Plan and fully vested 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 would have immediately vested.
Restricted stock activity in shares under the 2013 Plan for
the years ended September 30, 2020 and 2019 follows:
|
|
2020
|
|
|
2019
|
|
Non Vested at September 30, 2019 and 2018
|
|
|
965,000
|
|
|
|
2,815,000
|
|
Awarded
|
|
|
-
|
|
|
|
—
|
|
Vested
|
|
|
(965,000
|
)
|
|
|
(1,850,000
|
)
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
Non Vested at September 30, 2020 and 2019
|
|
|
-
|
|
|
|
965,000
|
|
The weighted average restricted stock award date fair value
information for the years ended September 30, 2020 and 2019 follows:
|
|
2020
|
|
|
2019
|
|
Non Vested at September 30, 2019 and 2018
|
|
$
|
0.43
|
|
|
$
|
0.57
|
|
Awarded
|
|
|
—
|
|
|
|
—
|
|
Vested
|
|
|
(0.43
|
)
|
|
|
(0.64
|
)
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
Non Vested at September 30, 2020 and 2019
|
|
$
|
-
|
|
|
$
|
0.43
|
|
For the years ended September 30, 2020 and 2019 compensation
expense recorded for the restricted stock awards was approximately $220,000 and $397,000, respectively.
|
15.
|
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 were scheduled to 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 would have immediately vested. During the year ended September 30, 2020 and 2019, 0 and
1,767,000 shares of restricted stock, respectively, awarded outside the 2013 Plan vested.
Restricted Stock activity in shares for the year ended September 30,
2020 and 2019 is as follows:
|
|
2019
|
|
Non Vested at September 30, 2019 and 2018
|
|
|
1,767,000
|
|
Awarded
|
|
|
—
|
|
Vested
|
|
|
(1,767,000
|
)
|
Forfeited
|
|
|
—
|
|
Non Vested at September 30, 2020 and 2019
|
|
|
—
|
|
The weighted average restricted stock award date fair value
information for the year ended September 30, 2020 and 2019 follows:
|
|
2019
|
|
Non Vested at September 30, 2019 and 2018
|
|
$
|
0.39
|
|
Awarded
|
|
|
—
|
|
Vested
|
|
|
0.39
|
|
Forfeited
|
|
|
—
|
|
Non Vested at September 30, 2020 and 2019
|
|
$
|
—
|
|
For both of the years ended September 30, 2020 and 2019,
compensation expense recorded for the restricted stock awards was $0.
16.
|
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,
2020 and 2019, 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, 2020 and 2019. For the years ended September 30, 2020 and 2019, 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 through 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, 2020.
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
The Company’s corporate offices are located in Framingham,
MA. 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. During August 2020, we extended the lease through September 30, 2021
at our current location pursuant to which we are obligated to pay annual rent of $42,000. As of September 30, 2020, the right-of-use
(“ROU”) asset of approximately $39,000 represents our right to use an underlying asset for the lease term and the lease
liabilities of approximately $39,000 represents our obligation to make lease payments arising from the lease. Our ROU asset is
included in prepaid expenses and other current assets and the lease obligations is included in accrued expenses and other current
liabilities on our consolidated balance sheets. The impact upon adoption was considered immaterial to the consolidated financial
statements. We believe our present offices are suitable for our current and planned near-term operations. For the fiscal year ending
September 30, 2021 the Company’s annual lease commitment is $42,000.
17.
|
Selected Quarterly Financial Data (unaudited)
|
The following table provides selected quarterly financial data
for the fiscal years ended September 30, 2020 and 2019:
|
|
Quarters Ended
|
|
|
|
December 31,
2019
|
|
|
March 31,
2020
|
|
|
June 30,
2020
|
|
|
September 30,
2020
|
|
Net sales
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
$
|
(1,619,567
|
)
|
|
$
|
(1,154,569
|
)
|
|
$
|
(1,241,700
|
)
|
|
|
(1,354,812
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,659,754
|
)
|
|
$
|
(731,884
|
)
|
|
$
|
(904,367
|
)
|
|
$
|
(1,395,373
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share - basic and diluted
|
|
$
|
(0.01
|
)
|
|
$
|
-
|
|
|
$
|
(0.01
|
)
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares – basic and diluted
|
|
|
184,102,916
|
|
|
|
186,897,947
|
|
|
|
188,340,505
|
|
|
|
192,855,962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2019
|
|
|
2019
|
|
|
2019
|
|
Net sales
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
$
|
(1,767,824
|
)
|
|
$
|
(1,507,366
|
)
|
|
$
|
(1,572,261
|
)
|
|
$
|
(1,524,305
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,600,237
|
)
|
|
$
|
169,962
|
|
|
$
|
(1,289,162
|
)
|
|
$
|
(828,144
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) per share - basic and diluted
|
|
$
|
(0.02
|
)
|
|
$
|
-
|
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares - basic
|
|
|
161,057,300
|
|
|
|
163,285,738
|
|
|
|
168,396,553
|
|
|
|
172,575,820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares - diluted
|
|
|
161,057,300
|
|
|
|
163,620,980
|
|
|
|
168,396,553
|
|
|
|
172,575,820
|
|
18.
|
Risks and Uncertainties – COVID-19
|
The Company sources its materials and services for its products
and product candidates from facilities in areas impacted or which may be impacted by the outbreak of the coronavirus. This may
impact the Company’s ability to obtain future inventory and impact the company’s revenue stream as efforts to address
this worldwide outbreak are undertaken. In addition, the Company has historically and principally funded its operations through
debt borrowings, the issuance of convertible debt, and the issuance of units consisting of common stock and warrants which may
also be impacted by economic conditions beyond the Company’s control. To the extent in which the coronavirus will impact
the global economy and the Company is uncertain and cannot be reasonably measured.
19.
|
Authorized Common Stock
|
On July 1, 2020, a special meeting of the Company was held.
At the meeting, the stockholders approved an increase to the number of authorized shares of our common stock, par value $0.001
per share (“Common Stock”), from 300,000,000 to 800,000,000 shares. The results of the stockholders’ vote were
103,553,044 votes for, 33,707,332 votes against and 3,678519 abstained.
The Company evaluated all events or transactions that occurred
through December 10, 2020, the date which these consolidated financial statements were available to be issued. On November 6,
2020, the Company issued unsecured 10% Series 2 Convertible Notes in the aggregate principal amount of $1,050,000. The Series 2
Convertible Notes provide, among other things, for (i) a term of approximately three (3) years; (ii) the Company’s
ability to prepay the Series 2 Convertible Notes, in whole or in part, at any time; (iii) the automatic conversion of
the Convertible Notes upon a Change of Control (all capitalized terms not otherwise defined to have the meaning ascribed to such
terms in the Convertible Notes) into shares of the Company’s common stock, par value $0.001 per share (Common Stock), at
a per share price of $0.25 (the “Conversion Price”); (iv) the ability of a holder of a Series 2 Convertible
Note (a “Holder”) to convert the Series 2 Convertible Note and accrued interest, in whole or in part, into
shares of Common Stock at the Conversion Price; (v) the Company’s ability to convert all Note Obligations outstanding
upon a Qualified Equity Financing into shares of Common Stock at the Conversion Price; (vi) the Company’s ability to
convert Series 2 Convertible Notes and accrued interest, in whole or in part, into shares of Common Stock at the Conversion
Price in the event the volume weighted average price (“VWAP”) of the Common Stock equals or exceeds $0.32 per share
for at least fifteen (15) consecutive Trading Days; (vii) the Company’s ability to convert all outstanding Note Obligations
into shares of Common Stock at the Conversion Price (an “In-Kind Note Repayment”) in lieu of repaying the Note
Obligations outstanding on the Maturity Date, November 30, 2023; provided, however, that in the case of an In-Kind Note Repayment,
the outstanding Note Obligations will be calculated by increasing by thirty-five percent (35%) the aggregate sum of the unpaid
Principal Amount held by each Holder and the accrued interest at a rate of ten percent (10%) per annum, subject to, with respect
to any portion of the Principal Amount that is converted or prepaid before the twelve month anniversary of the Issuance Date, a
minimum interest payment equal to ten percent (10%) of the amount that is converted or prepaid.
In addition, on November 6, 2020, as consideration for
investment in the Convertible Notes, the Company entered into that certain Amendment to Series J Warrant to Purchase Common
Stock, a holder of a Series J Warrant exercisable for up to 3,375,000 shares of Common Stock, to extend the term of the Series J
Warrant from one (1) year to thirty (30) months.
Arch
Therapeutics, Inc.and Subsidiaries
Consolidated Balance Sheets
As of December 31, 2020 (Unaudited) and September 30, 2020
|
|
December
31, 2020
|
|
|
September
30, 2020
|
|
ASSETS
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
879,413
|
|
|
$
|
959,309
|
|
Inventory
|
|
|
1,015,740
|
|
|
|
967,993
|
|
Prepaid expenses and other current assets
|
|
|
197,131
|
|
|
|
215,673
|
|
Total current assets
|
|
|
2,092,284
|
|
|
|
2,142,975
|
|
|
|
|
|
|
|
|
|
|
Long-term assets:
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
4,180
|
|
|
|
4,552
|
|
Other assets
|
|
|
3,500
|
|
|
|
3,500
|
|
Total long-term assets
|
|
|
7,680
|
|
|
|
8,052
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,099,964
|
|
|
$
|
2,151,027
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
391,151
|
|
|
$
|
342,050
|
|
Accrued expenses and other liabilities
|
|
|
294,022
|
|
|
|
266,749
|
|
Current portion of PPP Loan
|
|
|
57,273
|
|
|
|
37,442
|
|
Total current liabilities
|
|
|
742,446
|
|
|
|
646,241
|
|
|
|
|
|
|
|
|
|
|
Long-term liabilities:
|
|
|
|
|
|
|
|
|
Long-tem portion of PPP loan
|
|
|
119,027
|
|
|
|
138,858
|
|
Series 1 convertible notes
|
|
|
550,000
|
|
|
|
550,000
|
|
Series 2 convertible notes
|
|
|
1,050,000
|
|
|
|
-
|
|
Derivative liability
|
|
|
2,207,475
|
|
|
|
2,316,419
|
|
Total long-term liabilities
|
|
|
3,926,502
|
|
|
|
3,005,277
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
4,668,948
|
|
|
|
3,651,518
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ deficit:
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value, 800,000,000 shares
authorized as of December 31, 2020 and September 30, 2020, 193,094,766 and 193,044,766 shares issued and
outstanding as of December 31, 2020 and September 30, 2020, respectively
|
|
|
193,045
|
|
|
|
193,045
|
|
Additional paid-in capital
|
|
|
41,948,512
|
|
|
|
41,862,901
|
|
Accumulated deficit
|
|
|
(44,710,541
|
)
|
|
|
(43,556,437
|
)
|
Total stockholders’deficit
|
|
|
(2,568,984
|
)
|
|
|
(1,500,491
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ deficit
|
|
$
|
2,099,964
|
|
|
$
|
2,151,027
|
|
The accompanying notes are an integral part of these consolidated financial statements.
Arch
Therapeutics, Inc.and Subsidiaries
Consolidated Statements of Operations (Unaudited)
For the Three Months Ended December 31, 2020 and 2019
|
|
Three Months
Ended
December
31, 2020
|
|
|
Three Months
Ended
December
31, 2019
|
|
Revenues
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
919,458
|
|
|
|
975,833
|
|
Research and development expenses
|
|
|
343,590
|
|
|
|
643,734
|
|
Total operating expenses
|
|
|
1,263,048
|
|
|
|
1,619,567
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(1,263,048
|
)
|
|
|
(1,619,567
|
)
|
|
|
|
|
|
|
|
|
|
Other income/(expense)
|
|
|
|
|
|
|
|
|
Decrease (increase) to fair value of derivative
|
|
|
108,944
|
|
|
|
(40,187
|
)
|
Total
other income (expense)
|
|
|
108,944
|
|
|
|
(40,187
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,154,104
|
)
|
|
$
|
(1,659,754
|
)
|
|
|
|
|
|
|
|
|
|
Earnings per share - basic and diluted
|
|
|
|
|
|
|
|
|
Net loss per common share - basic and diluted
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
Weighted common shares - basic and diluted
|
|
|
193,044,766
|
|
|
|
184,102,916
|
|
The accompanying notes are an integral part of these consolidated financial statements.
Arch
Therapeutics, Inc.and Subsidiaries
Consolidated Statements of Changes in Stockholders' (Deficit) (Unaudited)
For the Three Months Ended December 31. 2020 and 2019
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Stockholders'
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
(Deficit)
|
|
Balance at September 30, 2019
|
|
|
172,612,233
|
|
|
$
|
172,612
|
|
|
$
|
37,885,151
|
|
|
$
|
(38,865,060
|
)
|
|
$
|
(807,297
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,659,754
|
)
|
|
|
(1,659,754
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock and warrants, net of financing costs
|
|
|
14,285,714
|
|
|
|
14,286
|
|
|
|
2,152,876
|
|
|
|
-
|
|
|
|
2,167,162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
199,052
|
|
|
|
-
|
|
|
|
199,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2019
|
|
|
186,897,947
|
|
|
$
|
186,898
|
|
|
$
|
40,237,079
|
|
|
$
|
(40,524,814
|
)
|
|
$
|
(100,837
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2020
|
|
|
193,044,766
|
|
|
$
|
193,045
|
|
|
$
|
41,862,901
|
|
|
$
|
(43,556,437
|
)
|
|
|
(1,500,491
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,154,104
|
)
|
|
|
(1,154,104
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock based compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
85,611
|
|
|
|
-
|
|
|
|
85,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2020
|
|
|
193,044,766
|
|
|
$
|
193,045
|
|
|
$
|
41,948,512
|
|
|
$
|
(44,710,541
|
)
|
|
$
|
(2,568,984
|
)
|
The accompanying notes are an integral part of these consolidated financial statements.
Arch
Therapeutics, Inc.and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
For the Three Months Ended December 31. 2020 and 2019
|
|
Three Months
Ended
December
31, 2020
|
|
|
Three Months
Ended
December
31, 2019
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,154,104
|
)
|
|
$
|
(1,659,754
|
)
|
Adjustments to reconcile net
loss to cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
372
|
|
|
|
1,936
|
|
Stock-based compensation
|
|
|
85,611
|
|
|
|
199,052
|
|
(Decrease) increase to fair value of derivative
|
|
|
(108,944
|
)
|
|
|
40,187
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
(Increase) decrease in:
|
|
|
|
|
|
|
|
|
Inventory
|
|
|
(47,747
|
)
|
|
|
146,292
|
|
Prepaid expenses and other current assets
|
|
|
18,542
|
|
|
|
33,194
|
|
Increase (decrease) in:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
49,101
|
|
|
|
(132,007
|
)
|
Accrued expenses and other liabilities
|
|
|
27,273
|
|
|
|
49,452
|
|
Net cash used in operating activities
|
|
|
(1,129,896
|
)
|
|
|
(1,321,648
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
-
|
|
|
|
(2,455
|
)
|
Net cash used in investing activities
|
|
|
-
|
|
|
|
(2,455
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds received from Series 2 convertible notes
|
|
|
1,050,000
|
|
|
|
-
|
|
Proceeds from issued common stock and warrants, net of financing costs
|
|
|
-
|
|
|
|
2,167,162
|
|
Net cash provided by financing activities
|
|
|
1,050,000
|
|
|
|
2,167,162
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash
|
|
|
(79,896
|
)
|
|
|
843,059
|
|
|
|
|
|
|
|
|
|
|
Cash, beginning of year
|
|
|
959,309
|
|
|
|
2,180,329
|
|
|
|
|
|
|
|
|
|
|
Cash, end of period
|
|
$
|
879,413
|
|
|
$
|
3,023,388
|
|
The accompanying notes are an integral part of these consolidated financial statements.
ARCH THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
|
BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
|
Organization and Description of Business
Arch Therapeutics, Inc., (together with its subsidiary,
the “Company” or “Arch”) was incorporated under the laws of the State of Nevada on September 16, 2009,
under the name “Almah, Inc.”. Effective June 26, 2013, the Company completed a merger (the “Merger”)
with Arch Biosurgery, Inc. (formerly known as Arch Therapeutics, Inc.), a Massachusetts corporation (“ABS”),
and Arch Acquisition Corporation (“Merger Sub”), the Company’s wholly owned subsidiary formed for the purpose
of the transaction, pursuant to which Merger Sub merged with and into ABS and ABS thereby became the wholly owned subsidiary of
the Company. As a result of the acquisition of ABS, the Company abandoned its prior business plan and changed its operations to
the business of a biotechnology company. Our principal offices are located in Framingham, Massachusetts.
For financial reporting purposes, the Merger represented a “reverse
merger”. ABS was deemed to be the accounting acquirer in the transaction and the predecessor of Arch. Consequently, the accumulated
deficit and the historical operations that are reflected in the Company’s consolidated financial statements prior to the
Merger are those of ABS. All share information has been restated to reflect the effects of the Merger. The Company’s financial
information has been consolidated with that of ABS after consummation of the Merger on June 26, 2013, and the historical financial
statements of the Company before the Merger have been replaced with the historical financial statements of ABS before the Merger
in this report.
ABS was incorporated under the laws of the Commonwealth of Massachusetts
on March 6, 2006 as Clear Nano Solutions, Inc. On April 7, 2008, ABS changed its name from Clear Nano Solutions, Inc.
to Arch Therapeutics, Inc. Effective upon the closing of the Merger, ABS changed its name from Arch Therapeutics, Inc.
to Arch Biosurgery, Inc.
The Company has generated no operating revenues to date and
is devoting substantially all of its efforts toward product research and development. To date, the Company has principally raised
capital through debt borrowings, the issuance of convertible debt, and the issuance of units consisting of common stock and warrants.
The Company expects to incur substantial expenses for the foreseeable
future relating to research, development and commercialization of its potential products. However, there can be no assurance that
the Company will be successful in securing additional resources when needed, on terms acceptable to the Company, if at all. Therefore,
there exists substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements
do not include any adjustments related to the recoverability of assets that might be necessary despite this uncertainty.
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
The accompanying unaudited interim consolidated financial statements
of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“US
GAAP”). The interim consolidated financial statements included herein are unaudited; however, they contain all normal recurring
accruals and adjustments that, in the opinion of management, are necessary to present fairly our results of operations and financial
position for the interim periods.
Although we believe that the disclosures in these unaudited
interim consolidated financial statements are adequate to make the information presented not misleading, certain information normally
included in the footnotes prepared in accordance with US GAAP has been omitted as permitted by the rules and regulations of
the Securities and Exchange Commission (“SEC”). These unaudited interim consolidated financial statements should be
read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual
Report on Form 10-K for the fiscal year ended September 30, 2020, filed with the SEC on December 11, 2020.
For a complete summary of our significant accounting policies,
please refer to Note 2 included in Item 8 of our Form 10-K for the fiscal year ended September 30, 2020. There have been
no material changes to our significant accounting policies during the three months ended December 31, 2020.
Basis of Presentation
The consolidated financial statements include the accounts of
Arch Therapeutics, Inc. and its wholly owned subsidiary, Arch Biosurgery, Inc., a biotechnology company. All intercompany
accounts and transactions have been eliminated in consolidation.
We are a biotechnology company marketing or developing a number
of products and are devoting substantially all of its efforts to developing technologies, raising capital, establishing customer
and vendor relationships, and recruiting and retaining new employees.
Use of Estimates
Management is required to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those
estimates.
Recently Issued Accounting Guidance
Accounting Standards Update (ASU) 2018-13, “Fair Value
Measurement (Topic 820) Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement” was
issued by the Financial Accounting Standards Board (FASB) in August 2018. The purpose of this amendment in this Update is to modify
the disclosure requirements on fair value measurements in Topic 820. The amendments in this Update are effective for public business
entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019. The Company adopted
ASU 2018-13 during our first quarter of fiscal year 2021.
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 December 31, 2020
and September 30, 2020.
Inventories
Inventories are stated at the lower of cost or net
realizable value. The cost of inventories comprises expenditures incurred in acquiring the inventories, the cost of
conversion and other costs incurred in bringing them to their existing location and condition. The cost of raw materials,
goods-in-process and finished goods are determined on a First in First out (FiFo) basis. When determining
net realizable value, appropriate consideration is given to obsolescence, excessive levels, deterioration, and other factors.
Concentration of Credit Risk
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.
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 three months ended December 31, 2020
and 2019 there has not been any impairment of long-lived assets.
Leases
The Company determines if an arrangement is a lease at its inception.
Operating lease right-of-use (“ROU”) assets and liabilities are recognized at commencement date based on the present
value of lease payments over the lease term. As our lease does not provide an implicit interest rate, we use an incremental borrowing
rate based on the information available at commencement date in determining the present value of lease payments. Lease expense
for lease payments is recognized on a straight-line basis over the lease term. As of December 31, 2020 and September 30,
2020, our ROU asset is included in prepaid expenses and other current assets and the lease obligations is included in accrued
expenses and other current liabilities on our consolidated balance sheets. As of December 31, 2020, ROU asset of approximately $30,000 represents our right to
use an underlying asset for the lease term and the lease liabilities of approximately $30,000 represents our obligation to make
lease payments arising from the lease.
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.
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 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 be recognized in the consolidated financial statements based on their fair values. 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. Prior to January 1, 2018,
the Company’s expected volatility was 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. The expected life
for awards uses the 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 December 31, 2020 and September 30, 2020, the
carrying amounts of cash, accounts payables and accrued expenses and other liabilities approximate fair value because of
their short-term nature. The carrying amounts for the PPP Loan and the Convertible Notes approximate fair
value.
Derivative Liabilities
The Company accounts for its warrants and other derivative financial
instruments as either equity or liabilities based upon the characteristics and provisions of each instrument, in accordance with
FASB ASC Topic 815, Derivatives and Hedging. Warrants classified as equity are recorded at fair value as of the date of
issuance on the Company’s consolidated balance sheets and no further adjustments to their valuation are made. Warrants classified
as derivative liabilities and other derivative financial instruments that require separate accounting as liabilities are recorded
on the Company’s consolidated balance sheets at their fair value on the date of issuance and will be revalued on each subsequent
balance sheet date until such instruments are exercised or expire, with any changes in the fair value between reporting periods
recorded as other income or expense. Management estimates the fair value of these liabilities using option pricing models and assumptions
that are based on the individual characteristics of the warrants or instruments on the valuation date, as well as assumptions for
future financings, expected volatility, expected life, yield, and risk-free interest rate.
Financial Statement Reclassification
Certain balances in the prior year consolidated financial statements
have been reclassified for comparison purposes to conform to the presentation in the current period consolidated financial statements.
Subsequent Events
The Company evaluated all events or transactions that occurred
commencing from January 1, 2021 and ending on February 25, 2021 the date which these unaudited interim consolidated
financial statements were issued. The Company disclosed material subsequent events, if any, in Note 16.
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 December 31, 2020, 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.
Finally, some of our product candidates or the materials contained therein (such as the Active Pharmaceutical Ingredients (“APIs”)
for our AC5® product line), are manufactured from facilities in areas impacted by the outbreak of the coronavirus,
which could result in shortages due to ongoing efforts to address the outbreak. 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 its subsidiary 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 continued spread
of coronavirus and uncertain market conditions may also limit the Company’s ability to access capital. If the Company is
unable to obtain adequate capital, the Company may be required to reduce the scope, delay, or eliminate some or all of its planned activities. These conditions, in the aggregate, raise substantial doubt as to the Company’s ability to continue
as a going concern.
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 December 31, 2020 and September 30,
2020, property and equipment consisted of:
|
|
Estimated
Useful
Life
|
|
December 31,
2020
|
|
|
September 30,
2020
|
|
Furniture and fixtures
|
|
5 years
|
|
$
|
9,357
|
|
|
$
|
9,357
|
|
|
|
|
|
|
|
|
|
|
|
|
Leasehold improvements
|
|
Life of Lease
|
|
|
8,983
|
|
|
|
8,983
|
|
|
|
|
|
|
|
|
|
|
|
|
Computer equipment
|
|
3 years
|
|
|
11,141
|
|
|
|
11,141
|
|
|
|
|
|
|
|
|
|
|
|
|
Lab equipment
|
|
5 years
|
|
|
1,000
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,481
|
|
|
|
30,481
|
|
|
|
|
|
|
|
|
|
|
|
|
Less – accumulated depreciation
|
|
|
|
|
26,301
|
|
|
|
25,929
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
|
$
|
4,180
|
|
|
$
|
4,552
|
|
For the three months ended December 31, 2020 and 2019 depreciation
expense recorded was $372 and $1,936, respectively.
Inventories consist of the following:
|
|
December 31,
2020
|
|
|
September 30,
2020
|
|
Finished Goods
|
|
$
|
300,009
|
|
|
$
|
-
|
|
Goods-in-process
|
|
|
715,731
|
|
|
|
967,993
|
|
Total
|
|
$
|
1,015,740
|
|
|
$
|
967,993
|
|
The Company capitalizes inventory that has been produced for
commercial sale and has been determined to have a probable future economic
benefit. The determination of whether or not the inventory has a future economic benefit requires estimates by management. Our
inventory levels are analyzed to identify inventory that may expire prior to sale. To the extent that inventory is expected to
expire prior to being sold, the Company will write down the value of inventory.
5.
|
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, 2020, a maximum
number of 28,114,256 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, 2020, the aggregate number of authorized shares under the Plan
was further increased by 3,000,000 shares to a total of 31,114,256 shares.
As of December 31, 2020, a total of 19,179,212 options
had been issued to employees and directors and 8,692,500 options had been issued to consultants. The exercise price of each option
has either been equal to the closing price of a share of our common stock on the date of grant or has been determined to be in
compliance with Internal Revenue Section 409A.
Share-based awards
During the three months ended December 31, 2020, the
Company granted no options to employees and directors and 975,000 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 three
months ended December 31, 2020 was based on the fair market value or grant date fair value estimated using the Black-Scholes
Option Pricing Model. The following assumptions were used to calculate the fair value of share based compensation for the three
months ended December 31, 2020; expected volatility, 79.44% - 119.44%, risk-free interest rate, 0.13% - 2.85%, expected forfeiture
rate, 0%, expected dividend yield, 0%, expected term, 5.6 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 was 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 three
months ended December 31, 2020 follows:
|
|
Option
Shares
Outstanding
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Term (years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at September 30, 2020
|
|
|
18,248,346
|
|
|
$
|
0.36
|
|
|
|
2.59
|
|
|
$
|
79,330
|
|
Awarded
|
|
|
975,000
|
|
|
$
|
0.17
|
|
|
|
—
|
|
|
|
—
|
|
Forfeited/Cancelled
|
|
|
(148,191
|
)
|
|
$
|
0.44
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding at December 31, 2020
|
|
|
19,075,155
|
|
|
$
|
0.35
|
|
|
|
2.61
|
|
|
$
|
119,733
|
|
Vested at December 31, 2020
|
|
|
16,587,085
|
|
|
$
|
0.37
|
|
|
|
2.64
|
|
|
$
|
70,693
|
|
Vested and expected to vest at December 31, 2020
|
|
|
19,075,155
|
|
|
$
|
0.35
|
|
|
|
2.61
|
|
|
$
|
119,733
|
|
As of December 31, 2020, 6,873,199 shares are available
for future grants under the 2013 Plan. Share-based compensation expense recorded in the Company’s Consolidated Statements
of Operations for the three months ended December 31, 2020 and 2019 resulting from stock options awarded to the Company’s
employees, directors and consultants was approximately $86,000 and $159,000, respectively. Of this amount during the three months
ended December 31, 2020 and 2019, $26,000 and $76,000, respectively, were recorded as research and development expenses, and
$60,000 and $83,000, respectively were recorded as general and administrative expenses in the Company’s Consolidated Statements
of Operations.
During the three months ended December 31, 2020 and
2019, no stock options awarded under the 2013 Stock Incentive Plan were exercised.
As of December 31, 2020, there is approximately $265,000
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 1.41 years.
Restricted Stock
On October 14, 2020, the Company awarded 50,000 shares
of Restricted Stock to a consultant. The shares subject to this grant are awarded under the 2013 Plan and vest 90 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 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. Avtar Dhillon
in his capacity as a consultant. The shares subject to this grant are awarded under the 2013 Plan and 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. As of September 30, 2020, all restricted shares have vested.
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. As of September 30, 2020, all restricted
shares have vested.
Restricted stock activity in shares under the 2013 Plan for
the three months ended December 31, 2020 and 2019 follows:
|
|
2020
|
|
|
2019
|
|
Non Vested at September 30, 2020 and 2019
|
|
|
-
|
|
|
|
965,000
|
|
Awarded
|
|
|
50,000
|
|
|
|
—
|
|
Vested
|
|
|
—
|
|
|
|
—
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
Non Vested at December 31, 2020 and 2019
|
|
|
50,000
|
|
|
|
965,000
|
|
The weighted average restricted stock award date fair value
information for the three months ended December 31, 2020 and 2019 follows:
|
|
2020
|
|
|
2019
|
|
Non Vested
at September 30, 2020 and 2019
|
|
$
|
-
|
|
|
$
|
0.57
|
|
Awarded
|
|
|
0.18
|
|
|
|
—
|
|
Vested
|
|
|
—
|
|
|
|
—
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
Non
Vested at December 31, 2020 and 2019
|
|
$
|
0.18
|
|
|
$
|
0.57
|
|
For the three months ended December 31, 2020 and 2019 compensation
expense recorded for the restricted stock awards was approximately $0 and $40,000, respectively.
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, 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.
On June 3, 2020, the Company entered into an agreement
(the “Agreement”) with the holders of a majority (the “Majority Holders”) of the outstanding Series D
Warrants (the “Warrant”) resulting in approximately $850,000 of proceeds as a result of the full exercise of their
Warrants. The Agreement provides for the reduction of the Series D Warrant exercise price from $0.25 to $0.18 per share,
and the elimination of a provision that prevents the Series D Warrants from being exercised if the holder’s beneficial
ownership would exceed 4.9% as a result. Under the terms of the Agreement, in exchange for fully exercising their remaining Warrants
for 4,727,273 shares of common stock on June 4, 2020, the Majority Holders were issued Series J Warrants to purchase
3,545,454 shares of common stock at an exercise price of $0.25 over a 1 year term.
On June 22, 2020, the Company entered into a Series J
Warrant Issuance Agreement (the “Keyes Sulat Agreement”) with the Keyes Sulat Revocable Trust (the “Trust”),
also a holder of outstanding Series D Warrants, resulting in approximately $82,000 of proceeds as a result of the full exercise
of the Trust’s Warrants. Under the terms of the Keyes Sulat Agreement, in exchange for fully exercising the Trust’s
remaining Warrants for 454,546 shares of common stock on June 22, 2020, the Trust was issued Series J Warrants to purchase
340,910 shares of common stock at an exercise price of $0.25 over a 1 year term. James R. Sulat, a member of the Board, is a co-trustee
of the Trust, of which members of Mr. Sulat’s immediate family are beneficiaries. Mr. Sulat disclosed his interest
in the Trust to the Board prior to its approval of the transaction and abstained from voting on the transaction.
On
November 6, 2020, as consideration for investment in the Convertible Notes, the Company entered into that certain Amendment
to Series J Warrant to Purchase Common Stock, a holder of a Series J Warrant exercisable for up to 3,375,000 shares of
Common Stock, to extend the term of the Series J Warrant from one (1) year to thirty (30) months.
As a result of the issuance of the Series J Warrants, in
conjunction with the exercise of the Series D Warrants, the Company recorded in equity a noncash equity issuance cost valued
at approximately $220,000. This charge was estimated using the Black-Scholes Option Pricing Model with the following assumptions;
expected volatility, 88.15%, risk-free interest rate, 0.16%, expected forfeiture rate, 0%, expected dividend yield, 0%, expected
term, 1.08 years. The Series J Warrants are indexed to the Company’s stock and are classified as equity.
During the year ended September 30, 2020, Series D
Warrants had been exercised on a cash basis for an aggregate issuance of 5,181,819 shares of the Company’s common stock resulting
in gross proceeds to the Company of $932,728. During the fiscal year ended September 30, 2019, no Series D Warrants had
been exercised. As of September 30, 2020, 3,792,570 Series D Warrants expired.
Common Stock
At June 30, 2015 the 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 and the Series J Warrants are indexed to the Company’s stock, they are classified within stockholders’
equity (deficit) 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 61st 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 three months ended December 31, 2020 and 2019,
no Series E Warrants had been exercised. As of December 31, 2020, 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 (deficit)
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, a Series F Warrant equal to 55% of the shares 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.
During the three months ended December 31, 2020 and 2019,
no Series F Warrants had been exercised. As of December 31, 2020, up to 5,591,664 shares may be acquired upon the exercise
of the Series F Warrants.
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 (deficit), 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 was 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 three months ended December 31, 2020 and 2019, $0 and $274,404 were recorded to decrease the fair value of derivative,
respectively.
Fair Value Measurements Using Significant Unobservable Inputs
|
|
December 31,
|
|
|
September 30,
|
|
(Level 3)
|
|
2020
|
|
|
2020
|
|
Beginning balance at September 30, 2020 and 2019
|
|
$
|
1,000,000
|
|
|
$
|
1,000,000
|
|
|
|
|
|
|
|
|
|
|
Issuances
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Adjustments to estimated fair value
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Ending balance at December 31, 2020 and September 30, 2020
|
|
$
|
1,000,000
|
|
|
$
|
1,000,000
|
|
The derivative liabilities were valued as of December 31,
2020 and September 30, 2020 using the Black Scholes Model with the following assumptions:
|
|
December 31,
2020
|
|
|
September 30,
2020
|
|
Closing price per share of common stock
|
|
$
|
0.15
|
|
|
$
|
0.17
|
|
Exercise price per share
|
|
$
|
0.75
|
|
|
$
|
0.75
|
|
Expected volatility
|
|
|
82.10
|
%
|
|
|
84.17
|
%
|
Risk-free interest rate
|
|
|
0.10
|
%
|
|
|
0.13
|
%
|
Dividend yield
|
|
|
—
|
|
|
|
—
|
|
Remaining expected term of underlying securities (years)
|
|
|
1.09
|
|
|
|
1.35
|
|
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, a Series G Warrant to
purchase up to a number of shares of our common stock equal to 75% of the shares 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. 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. 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, 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. During the three
months ended December 31, 2020 and 2019, no Series G Warrants had been exercised. As of December 31, 2020, 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 (deficit), 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 $2,397,454. 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 three months ended December 31, 2020 and 2019, $0 were recorded to decrease the fair value of derivative, respectively.
Fair Value Measurements Using Significant Unobservable Inputs
|
|
December 31,
|
|
|
September 30,
|
|
(Level 3)
|
|
2020
|
|
|
2020
|
|
Beginning balance at September 30, 2020 and 2019
|
|
$
|
748,275
|
|
|
$
|
748,275
|
|
|
|
|
|
|
|
|
|
|
Issuances
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Adjustments to estimated fair value
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Ending balance at December 31, 2020 and September 30, 2020
|
|
$
|
748,275
|
|
|
$
|
748,275
|
|
The derivative liabilities were valued as of December 31,
2020 and September 30, 2020 using the Black Scholes Model with the following assumptions:
|
|
December 31,
2020
|
|
|
September 30,
2020
|
|
Closing price per share of common stock
|
|
$
|
0.15
|
|
|
$
|
0.17
|
|
Exercise price per share
|
|
$
|
0.70
|
|
|
$
|
0.70
|
|
Expected volatility
|
|
|
83.31
|
%
|
|
|
83.31
|
%
|
Risk-free interest rate
|
|
|
0.15
|
%
|
|
|
0.15
|
%
|
Dividend yield
|
|
|
—
|
|
|
|
—
|
|
Remaining expected term of underlying securities (years)
|
|
|
2.46
|
|
|
|
2.71
|
|
10.
|
2019 REGISTERED DIRECT OFFERING
|
On May 12, 2019, the Company entered into a
Securities Purchase Agreement (“2019 SPA”) with 5 accredited investors (“2019 Investors”) providing
for the issuance and sale by the Company to the 2019 Investors of an aggregate of 8,615,384 units at a purchase price of
$0.325 per Unit in a registered offering (“2019 Financing”). The securities comprising the units sold in the 2019
Financing were issued under the Shelf Registration Statement, and consisted of a share of Common Stock, and a Series H
Warrant to purchase one share of Common Stock at an exercise price of $0.40 per share at any time prior to the fifth
anniversary of the issuance date of the Series H Warrant subject to certain restrictions on exercise
(“the 2019 Warrant Shares”) and the shares issuable upon exercise of the 2019 Warrants, (“2019
Warrant Shares”). As of May 14, 2019, the Company recorded the 8,615,384 shares as Common Stock.
The gross proceeds to Arch from the 2019 Financing, were approximately $2.8 million before deducting financing costs of approximately $51,200. The
number of shares of the Company’s Common Stock into which each of the Series H Warrants is exercisable and the exercise
price therefore are subject to adjustment, as set forth in the Series H 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 H Warrant for an amount of cash equal to $0.0533 for each share of Common Stock underlying the
Series H Warrant. During the three months ended December, 2020 and 2019, no Series H Warrants had been exercised. As
of December 31, 2020, up to 8,615,384 shares may be acquired upon the exercise of the Series H Warrants.
Common Stock
At May 14, 2019 the Closing Date of the 2019 Financing,
the Company issued 8,615,384 shares of Common Stock.
Derivative Liabilities
The Company accounted for the Series H Warrants relating
to the aforementioned 2019 Financing in accordance with ASC 815-10, Derivatives and Hedging. Since the Company may be required
to purchase its Series H Warrants for an amount of cash equal to $0.0533 for each share of Common Stock and the underlying
Series H Warrants are not classified within stockholders’ equity (deficit), 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 $1,628,113. Given that the fair value of the derivative liabilities were less than the net proceeds
of the 2019 Financing of $2,748,821, the remaining proceeds of $1,120,708 were allocated to the Common Stock and
additional-paid-in-capital. During the three months ended December 31, 2020 and 2019 $108,944 and ($40,187) was
recorded to decrease/(increase) the fair value of derivative liability.
Fair Value Measurements Using Significant Unobservable Inputs
|
|
December 31,
|
|
|
September 30,
|
|
(Level 3)
|
|
2020
|
|
|
2020
|
|
Beginning balance at September 30, 2020 and 2019
|
|
$
|
568,144
|
|
|
$
|
1,247,415
|
|
|
|
|
|
|
|
|
|
|
Issuances
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Adjustments to estimated fair value
|
|
|
(108,944
|
)
|
|
|
(679,271
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance at December 31, 2020 and September 30, 2020
|
|
$
|
459,200
|
|
|
$
|
568,144
|
|
The derivative liabilities were valued as of December 31,
2020 and September 30, 2020 using the Black Scholes Model with the following assumptions:
|
|
December 31,
2020
|
|
|
September 30,
2020
|
|
Closing price per share of common stock
|
|
$
|
0.15
|
|
|
$
|
0.17
|
|
Exercise price per share
|
|
$
|
0.40
|
|
|
$
|
0.40
|
|
Expected volatility
|
|
|
82.41
|
%
|
|
|
82.24
|
%
|
Risk-free interest rate
|
|
|
0.27
|
%
|
|
|
0.22
|
%
|
Dividend yield
|
|
|
—
|
|
|
|
—
|
|
Remaining expected term of underlying securities (years)
|
|
|
3.34
|
|
|
|
3.60
|
|
11.
|
OCTOBER 2019 REGISTERED DIRECT OFFERING
|
On October 16, 2019, the Company entered into a Securities
Purchase Agreement (“October 2019 SPA”) with 7 accredited investors (“October 2019 Investors”)
providing for the issuance and sale by the Company to the 2019 Investors of an aggregate of 14,285,714 units at a purchase price
of $0.175 per Unit in a registered offering (“October 2019 Financing”). The securities comprising the units sold
in the October 2019 Financing were issued under the Shelf Registration Statement, and consisted of a share of Common Stock,
and a Series I Warrant to purchase one share of Common Stock at an exercise price of $0.22 per share at any time prior to
the fifth anniversary of the issuance date of the Series I Warrant subject to certain restrictions on exercise (“October 2019
Warrants”) and the shares issuable upon exercise of the October 2019 Warrants, (“October 2019 Warrant Shares”).
As of October 18, 2019, the Company recorded the 14,285,714 shares as Common Stock. Pursuant to the Engagement Agreement (as
defined below), the Company also agreed to issue to the Placement Agent, or its designees, warrants to purchase up to 1,071,429
shares (the “Placement Agent Warrants”). The Placement Agent Warrants have substantially the same terms as the Series I
Warrants, except that the exercise price of the Placement Agent Warrants is $0.21875 per share and the term of the Placement Agent
Warrants is five years.
The gross proceeds to Arch from the October 2019 Financing were approximately $2.5 million before deducting financing costs of approximately
$333,000 which includes approximately $158,000 of placement fees. The number of shares of the Company’s Common Stock
into which each of the Series I Warrants is exercisable and the exercise price therefore are subject to adjustment, as set
forth in the Series I Warrants, including adjustments for stock subdivisions or combinations (by any stock split, stock dividend,
recapitalization, reorganization, scheme, arrangement or otherwise).
We engaged H.C. Wainwright (“Wainwright”) as our
exclusive institutional investor placement agent in connection with the October SPA pursuant to an engagement agreement (the
“Engagement Agreement”) dated as of October 10, 2019, and in consideration for the services provided by it, Wainwright
was entitled to receive cash fees ranging from 6.0% to 8.2% of the gross proceeds received by us, as well as reimbursement
for all reasonable expenses incurred by it in connection with its engagement. We received gross proceeds of approximately $2.5
million in the aggregate, resulting in a fee of approximately $158,000.
During the three months ended December 31, 2020 and 2019,
no Series I Warrants or Placement Agent Warrants had been exercised. As of December 31, 2020, up to 14,285,714 and 1,071,429
shares may be acquired upon the exercise of the Series I Warrants and Placement Agent Warrants, respectively.
Common Stock
At October 18, 2019 the Closing Date of the October 2019
Financing, the Company issued 14,285,714 shares of Common Stock.
Equity Value of Warrants
The Company accounted for the Series I Warrants and the
Placement Agent Warrants relating to the aforementioned October 2019 Registered Direct Offering in accordance with ASC 815-40,
Derivatives and Hedging. Because the Series I Warrants and the Placement Agent Warrants are indexed to the Company’s
stock, they are classified within stockholders’ equity (deficit) in the accompanying consolidated financial statements.
12.
|
SERIES 1 CONVERTIBLE NOTES
|
On June 4, 2020, the Company issued unsecured 10%
Convertible Notes in the aggregate principal amount of $550,000. The Series 1 Convertible Notes provide, among other
things, for (i) a term of approximately three (3) years; (ii) the Company’s ability to prepay the
Series 1 Convertible Notes, in whole or in part, at any time; (iii) the automatic conversion of the Series 1
Convertible Notes upon a Change of Control (all capitalized terms not otherwise defined to have the meaning ascribed to such
terms in the Series 1 Convertible Notes) into shares of the Company’s common stock, par value $0.001 per share
(Common Stock), at a per share price of $0.27 (the “Conversion Price”); (iv) the ability of a holder
of a Convertible Note (a “Holder”) to convert the Series 1 Convertible Note and accrued interest, in
whole or in part, into shares of Common Stock at the Conversion Price; (v) the Company’s ability to convert all
Note Obligations outstanding upon a Qualified Equity Financing into shares of Common Stock at the Conversion Price;
(vi) the Company’s ability to convert Series 1 Convertible Notes and accrued interest, in whole or in part,
into shares of Common Stock at the Conversion Price in the event the volume weighted average price (“VWAP”) of
the Common Stock equals or exceeds $0.32 per share for at least fifteen (15) consecutive Trading Days; (vii) the
Company’s ability to convert all outstanding Note Obligations into shares of Common Stock at the Conversion Price (an
“In-Kind Note Repayment”) in lieu of repaying the Note Obligations outstanding on the Maturity Date,
June 30, 2023; provided, however, that in the case of an In-Kind Note Repayment, the outstanding Note Obligations will
be calculated by increasing by thirty-five percent (35%) the aggregate sum of the unpaid Principal Amount held by each Holder
and the accrued interest at a rate of ten percent (10%) per annum, subject to, with respect to any portion of the Principal
Amount that is converted or prepaid before the twelve month anniversary of the Issuance Date, a minimum interest payment
equal to ten percent (10%) of the amount that is converted or prepaid.
During the three months ended December 31, 2020, the Company
recorded interest expense as part of general and administrative expenses of approximately $14,000.
13.
|
SERIES 2 CONVERTIBLE NOTES
|
On November 6, 2020, the Company issued unsecured 10%
Series 2 Convertible Notes in the aggregate principal amount of $1,050,000. The Series 2 Convertible Notes provide,
among other things, for (i) a term of approximately three (3) years; (ii) the Company’s ability to
prepay the Series 2 Convertible Notes, in whole or in part, at any time; (iii) the automatic conversion of the
Series 2 Convertible Notes upon a Change of Control (all capitalized terms not otherwise defined to have the meaning ascribed
to such terms in the Series 2 Convertible Notes) into shares of the Company’s common stock, par value $0.001 per share
(Common Stock), at a per share price of $0.25 (the “Conversion Price”); (iv) the ability of a holder
of a Series 2 Convertible Note (a “Holder”) to convert the Series 2 Convertible Note and accrued
interest, in whole or in part, into shares of Common Stock at the Conversion Price; (v) the Company’s ability to
convert all Note Obligations outstanding upon a Qualified Equity Financing into shares of Common Stock at the Conversion
Price; (vi) the Company’s ability to convert Series 2 Convertible Notes and accrued interest, in whole or in
part, into shares of Common Stock at the Conversion Price in the event the volume weighted average price (“VWAP”)
of the Common Stock equals or exceeds $0.32 per share for at least fifteen (15) consecutive Trading Days; (vii) the
Company’s ability to convert all outstanding Note Obligations into shares of Common Stock at the Conversion Price (an
“In-Kind Note Repayment”) in lieu of repaying the Note Obligations outstanding on the Maturity Date,
November 30, 2023; provided, however, that in the case of an In-Kind Note Repayment, the outstanding Note Obligations
will be calculated by increasing by thirty-five percent (35%) the aggregate sum of the unpaid Principal Amount held by each
Holder and the accrued interest at a rate of ten percent (10%) per annum, subject to, with respect to any portion of the
Principal Amount that is converted or prepaid before the twelve month anniversary of the Issuance Date, a minimum interest
payment equal to ten percent (10%) of the amount that is converted or prepaid.
During the three months ended December 31, 2020, the Company
recorded interest expense as part of general and administrative expenses of approximately $15,000.
14.
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PAYROLL PROTECTION PROGRAM LOAN
|
On April 25, 2020, the Company executed a promissory note
(the “PPP Note”) evidencing an unsecured loan in the amount of $176,300 under the Paycheck Protection Program
(the “PPP Loan”). The Paycheck Protection Program (or “PPP”) was established under the Coronavirus
Aid, Relief, and Economic Security Act (the “CARES Act”) and is administered by the U.S. Small Business Administration
(“SBA”). The Loan has been made through First Republic Bank (the “Lender”).
The PPP Loan has a two-year term and bears interest at a rate
of 1.00% per annum. Monthly principal and interest payments are deferred until the earliest of ten months after the end of our
covered period or the date the SBA makes a decision on our loan forgiveness application. Unless the PPP Loan is forgiven, the Company
will be required to make monthly payments of principal and interest of approximately $20,000 to the Lender.
The PPP Note contains customary events of default relating to,
among other things, payment defaults, providing materially false and misleading representations to the SBA or Lender, or breaching
the terms of the PPP Loan documents. The occurrence of an event of default may result in the immediate repayment of all amounts
outstanding, collection of all amounts owing from the Company, or filing suit and obtaining judgment.
Under the terms of the CARES Act, PPP Loan recipients can apply
for and be granted forgiveness for all or a portion of loan granted under the PPP. Such forgiveness will be determined, subject
to limitations, based on the use of loan proceeds for payment of payroll costs and any payments of mortgage interest, rent, and
utilities. However, no assurance is provided that forgiveness for any portion of the PPP Loan will be obtained. During November 2020,
the Company applied for forgiveness of the PPP Loan.
15.
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RISKS AND UNCERTAINTIES – COVID-19
|
The Company sources its materials and services for its products
and product candidates from facilities in areas impacted or which may be impacted by the outbreak of the coronavirus. This may
impact the Company’s ability to obtain future inventory and impact the Company’s revenue stream as efforts to address
this worldwide outbreak are undertaken. In addition, the Company has historically and principally funded its operations through
debt borrowings, the issuance of convertible debt, and the issuance of units consisting of common stock and warrants which may
also be impacted by economic conditions beyond the Company’s control. To the extent in which the coronavirus will impact
the global economy and the Company is uncertain and cannot be reasonably measured.
The Company evaluated all events or transactions that occurred
through the date which these consolidated financial statements were issued. On February 12, 2021, the Company announced
that it had entered into a securities purchase agreement with certain institutional and accredited investors to raise approximately
$6.9 million through the issuance of an aggregate of 43,125,004 shares of its common stock and warrants to purchase up to an aggregate
of 32,343,753 shares of common stock, at a combined purchase price of $0.16 per share of common stock and associated warrant in
a private placement (the “2021 Financing”). The Series K Warrants have an exercise price of $0.17 per share and are
exercisable for a period of 5.5 years. The gross proceeds to Arch from the 2021 Financing, which is expected to close
on February 17, 2021, are expected to be approximately $6.9 million before deducting financing costs of approximately $700,000.
The Company engaged H.C. Wainwright & Co., LLC (the “Placement
Agent) as exclusive placement agent for the 2021 Financing. Pursuant to the Company’s engagement letter with the Placement
Agent, the Company also agreed to issue to the Placement Agent, or its designees, warrants to purchase up to 3,234,375 shares (the
“Placement Agent 2 Warrants”). The Placement Agent 2 Warrants have substantially the same terms as the Series K Warrants,
except that the exercise price of the Placement Agent Warrants is $0.20 per share.
ARCH THERAPEUTICS, INC.
PROSPECTUS
Up
to 82,589,497 Shares of Common Stock
Prospectus dated February 26, 2021