ITEM 1. BUSINESS
The following discussion should be read in conjunction with
our consolidated financial statements and the related notes and other financial information included in this Annual Report on Form 10-K.
Corporate Overview
Arch Therapeutics, Inc., (together with its subsidiary,
the “Company” or “Arch”) was incorporated under the laws of the State of Nevada on September 16, 2009,
under the name Almah, Inc. which was a company previously organized to pursue the business of distributing automobile spare
parts online. 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.
As of September 30, 2020, the Company has generated no
operating revenues and has devoted substantially all of its efforts toward product research and development and conducting the
clinical and regulatory programs required to commercialize its products. To date, the Company has principally raised capital through
debt borrowings, the issuance of convertible debt, and the issuance of units consisting of common stock and warrants.
The Company expects to incur substantial expenses for the foreseeable
future relating to research, development, clinical trials and commercialization of its current and 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.
Current Business
We are a biotechnology company marketing or developing a number
of products based on our innovative AC5® self-assembling technology platform. We believe these products can be important
advances in the field of stasis and barrier applications, which includes stopping bleeding (“hemostasis”), controlling
leaking (“sealant”) and managing wounds created during surgery, trauma or interventional care or from disease. We have
generated no revenues to date and have devoted substantially all of our operational effort to the research, development and regulatory
programs necessary to turn our core technology into commercial products. Our goal is to make care faster and safer for patients
with products for use in external wounds, which we refer to as Dermal Sciences applications, and products for use inside the body,
which we refer to as Biosurgery applications.
To date, the Company has principally raised capital through
debt borrowings, the issuance of convertible debt and the issuance of units consisting of its common stock, par value $0.001 per
share (“Common Stock”), and warrants. The Company expects to incur substantial expenses for the foreseeable future
relating to the research, development, clinical trials, and commercialization of its current and potential products. As of December 10,
2020, we believe that our current cash on hand will meet our anticipated cash requirements into the second quarter of fiscal 2021.
The Company will be required to raise additional capital, obtain alternative means of financial support, or both, in order to continue
to fund operations. There can be no assurance that the Company will be successful in securing additional resources when needed
on terms acceptable to the Company, if at all. Therefore, there exists substantial doubt about the Company’s ability to continue
as a going concern.
Core Technology
Our flagship products and product candidates are derived from
our AC5 self-assembling peptide (“SAP”) technology platform and are sometimes referred to as AC5 or the “AC5
Devices.” These include AC5 Advanced Wound System and AC5 Topical Hemostat, which have received marketing authorization as
medical devices in the United States and Europe, respectively, and which are intended for skin applications, such as management
of complicated chronic wounds or acute surgical wounds. Other products are in development for use in minimally invasive or open
surgical procedures and include, for example, AC5-GTM for gastrointestinal endoscopic procedures and AC5-VTM
and AC5 Surgical Hemostat for hemostasis inside the body, all of which are currently investigational devices limited by law to
investigational use.
Products based on the AC5 platform contain a biocompatible peptide
that is synthesized from proteogenic, naturally occurring L-amino acids. Unlike products that contain traditional peptide sequences,
when applied to a wound, AC5-based products intercalate into the interstices of the connective tissue and self-assemble into a
protective physical-mechanical nanoscale structure that can provide a barrier to leaking substances, such as blood, while also
acting as a biodegradable scaffold that enables healing. Self-assembly is a central component of the mechanism of action of our
technology. Individual AC5 peptide units readily build themselves, or self-assemble, into an ordered network of nanofibrils when
in aqueous solution by the following process:
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Peptide strands line up with neighboring peptide strands, interacting via hydrogen bonds (non-covalent bonds) to form a ribbon-like
structure called a beta sheet.
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This process continues such that hundreds of strands organize with charged and polar side chains oriented on one face and non-polar
side chains oriented on the opposite face of the beta sheets.
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Interactions of the resulting structure with water molecules and ions results in formation nanofibrils, which extend in length
and can join together to form larger nanofibers.
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This network of AC5 peptide nanofibers forms the physical-mechanical barrier that is responsible for sealant, hemostatic and
other properties, regardless of the presence of antithrombotic agents, and which subsequently becomes the scaffold that supports
the repair and regeneration of damaged tissue.
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Based on the intended application, we believe that the underlying
AC5 SAP technology can impart important features and benefits to our products that may include, for instance, stopping bleeding
(hemostasis), mitigating contamination, modulating inflammation, donating moisture, and enabling an appropriate wound microenvironment
conducive to healing. For instance, AC5 Advanced Wound System, which is indicated for the management of partial and full-thickness
wounds, such as pressure sores, leg ulcers, diabetic ulcers, and surgical wounds, is shipped and stored at room temperature, is
applied directly as a liquid, can conform to irregular wound geometry, and does not possess sticky or glue-like handling characteristics.
We believe these properties enhance its utility in several settings and contribute to its user-friendly profile.
We believe that our technology lends itself to a range of potential
applications in which there is a wound inside or on the body, and in which there is need for a hemostatic agent or sealant. For
instance, the results of certain preclinical and clinical investigations have shown quick and effective hemostasis with the use
of AC5 SAP technology, and that time to hemostasis (“TTH”) is comparable among test subjects regardless of whether
such test subject had or had not been treated with therapeutic doses of anticoagulant or antiplatelet medications, commonly called
“blood thinners.” Furthermore, the transparency and physical properties of certain AC5 Devices may enable a surgeon
to operate through it in order to maintain a clearer field of vision and prophylactically stop or lessen bleeding as surgery starts,
a concept that we call Crystal Clear Surgery™. An example of a product that contains related features and benefits is AC5
Topical Hemostat, which is indicated for use as a dressing and to control mild to moderate bleeding, each during the management
of injured skin and the micro-environment of an acute surgical wound.
Operations
Much of our operational efforts to date, which we often perform
in collaboration with partners, have included selecting compositions and formulations for our initial products; conducting preclinical
studies, including safety and other tests; conducting a human trial for safety and performance of AC5; developing and conducting
a human safety study to assess for irritation and sensitization potential; securing marketing authorization for our first product
in the United States and in Europe; developing, optimizing, and validating manufacturing methods and formulations, which are particularly
important components of self-assembling peptide development; developing methods for manufacturing scale-up, reproducibility, and
validation; engaging with regulatory authorities to seek early regulatory guidance as well as marketing authorization for our products;
sourcing and evaluating commercial partnering opportunities in the United States and abroad; and developing and protecting the
intellectual property rights underlying our technology platform.
Our present operating model relies on our small core team of
key personnel, including employees, consultants, and advisors, who collaborate with third party service providers and facilities
to conduct scale research, development, clinical, regulatory, manufacturing, commercialization legal, and other activities. Our
internal team collectively has a broad range of expertise and experience working with and managing third party vendors. This general
approach enables us to use the services of third party entities, which are expert in various aspects of our operations, while preserving
capital and efficiencies by avoiding certain internal scale-up costs and resource duplication.
Our long-term business plan includes the following goals:
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conducting biocompatibility, pre-clinical, and clinical studies on our products and product candidates;
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obtaining additional marketing authorization for products in the United States, Europe, and other jurisdictions as we may determine;
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continuing to develop third party relationships to manufacture, distribute, market and otherwise commercialize our products;
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continuing to develop academic, scientific and institutional relationships to collaborate on product research and development;
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expanding and maintaining protection of our intellectual property portfolio; and
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developing additional product candidates in Dermal Sciences, Biosurgery, and other areas.
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In furtherance of our long-term business goals, we expect to
continue to focus on the following activities during the next twelve months:
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seek additional funding as required to support the milestones described previously and our operations generally;
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work with our manufacturing partners to scale up production of product compliant with current good manufacturing practices
(“cGMP”), which activities will be ongoing and tied to our development and commercialization needs;
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further clinical development of our product platform;
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assess our technology platform in order to identify and select product candidates for potential advancement into development;
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seek regulatory input to guide activities related to expanded and new product marketing authorizations;
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continue to expand and enhance our financial and operational reporting and controls;
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pursue commercial partnerships; and
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expand and enhance our intellectual property portfolio by filing new patent applications, obtaining allowances on currently
filed patent applications, and/or adding to our trade secrets in self-assembly, manufacturing, analytical methods and formulation,
which activities will be ongoing as we seek to expand our product candidate portfolio.
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In
addition to capital required for operating expenses, depending upon additional input from EU and US regulatory authorities, as
well as the potential for additional regulatory filings and approvals during the next 2 years, additional capital may be required.
The estimated capital requirements potentially could increase significantly if a number of risks relating to conducting these activities
were to occur, including without limitation those set forth under the heading “RISK FACTORS” in this filing.
We anticipate that our operating and other expenses will continue to increase as we continue to implement our business plan and
pursue and achieve these goals. After giving effect to the funds received in past equity and debt financings and assuming our use
of that funding at the rate we presently anticipate, as of December 10, 2020 we believe that our current cash on hand will
meet our anticipated cash requirements into the second quarter of fiscal 2021. We could spend our financial resources much faster
than we expect, in which case we would need to raise additional capital as our current funds may not be sufficient to operate our
business for the entire duration of that period.
We have no commitments for any future capital. As indicated
above, we will require significant additional financing to fund our planned operations, including further research and development
relating to AC5, seeking regulatory approval of that or any other product we may choose to develop, commercializing any product
for which we are able to obtain regulatory approval or certification, seeking to license or acquire new assets or business, and
maintaining our intellectual property rights, pursuing new technologies and for financing the investor relations and incremental
administrative costs associated with being a public corporation. We do not presently have, nor do we expect in the near future
to have, revenue to fund our business from operations, and we will need to obtain all of our necessary funding from external sources
for the foreseeable future. We may not be able to obtain additional financing on commercially reasonable or acceptable terms when
needed, or at all. If we cannot raise the money that we need in order to continue to develop our business, we will be forced to
delay, scale back or eliminate some or all of our proposed operations. If any of these were to occur, there is a substantial risk
that our business would fail and our stockholders could lose all of their investment.
Since inception, we have funded our operations primarily through
debt borrowings, the issuance of convertible debt and the issuance of units consisting of Common Stock and warrants, and we may
continue to seek to do so in the future. If we obtain additional financing by issuing equity securities, our existing stockholders’
ownership will be diluted. The terms of securities we may issue in future capital-raising transactions may be more favorable for
our new investors. Further, newly issued securities may include preferences, superior voting rights and the issuance of warrants
or other derivative securities, which may have additional dilutive effects. If we obtain additional financing by incurring debt,
we may become subject to significant limitations and restrictions on our operations pursuant to the terms of any loan or credit
agreement governing the debt. Further, obtaining any loan, assuming a loan would be available when needed on acceptable terms,
would increase our liabilities and future cash commitments. We may also seek funding from additional collaboration or licensing
arrangements in the future, which may require that we relinquish potentially valuable rights to our product candidates or proprietary
technologies or grant licenses on terms that are not favorable to us. Moreover, regardless of the manner in which we seek to raise
capital, we may incur substantial costs in those pursuits, including investment-banking fees, legal fees, accounting fees, printing
and distribution expenses and other related costs.
Research and Development
Preclinical and clinical testing of our product candidates is
required in order to receive regulatory marketing authorizations and to support products upon commercialization, and we anticipate
that such testing will continue as deemed appropriate.
Preclinical Testing
We have engaged and continue to engage third parties in the
United States and abroad to advise on and/or perform certain preclinical bench-top and animal research and development studies,
typically with assistance from our team. These third parties can include contract research organizations, academic institutions,
consultants, advisors, scientists, clinicians, and/or other collaborators.
We have conducted and anticipate continuing to conduct in vivo
and in vitro research and development studies on our products and product candidates. A co-founding inventor of certain of our
technology, Dr. Rutledge Ellis-Behnke, performed a significant portion of the early preclinical animal experiments conducted
with our technology. Some of the most significant findings from Dr. Ellis-Behnke’s studies have been published. Additionally,
through collaborations with the National University of Ireland system and related parties, preclinical bench-top and animal research
and development studies were performed in Dublin, Cork and Galway, Ireland over an approximately eight-year period that concluded
in the third quarter of fiscal 2018.
Before initiating our clinical trials and submitting marketing
applications for a given product in most jurisdictions, we are required to have completed a biocompatibility assessment, which
typically consists of a battery of in vitro and in vivo tests. Standard biocompatibility tests, as set forth in ISO 10993 issued
by the International Organization for Standardization, may include:
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in vitro cytotoxicity;
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in vitro blood compatibility;
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in vitro Ames assay (mutagenic activity);
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irritation/intracutaneous reactivity;
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sensitization (allergenic reaction);
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implantation (performed on devices that contact the body’s interior);
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pyrogenicity (causing fever or inflammation);
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systemic toxicity; and
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in vitro chromosome aberration assay (structural chromosome changes).
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We completed the biocompatibility studies required to receive
marketing authorizations for AC5 Advanced Wound System in the United States and AC5 Topical Hemostat in Europe, and such test results
support that the products are biocompatible. We will perform further biocompatibility testing that we deem necessary for additional
indications, classifications, jurisdictions, and/or as required by regulatory authorities.
Acute and survival animal studies assessing safety and performance
of our technology have also demonstrated favorable outcomes in Dermal Sciences and Biosurgical applications.
Porcine studies, also known as swine or pig studies, are often
selected due to the morphological, physiological, and biochemical similarities between porcine skin and human skin and are very
useful to assess the performance of AC5 Advanced Wound System or AC5 Topical Hemostat as a barrier and advanced wound dressing,
as well as their safety and effects on healing.
In an assessment versus saline in a porcine partial thickness
excision wound model, tissue response to AC5 Advanced Wound System over a 28 day follow-up period was consistent with normal wound
healing and included complete re-epithelialization, normal collagen organization, and minimal inflammation and TTH was faster.
In an assessment versus both a market leading skin substitute
and saline in a porcine full thickness 10 mm punch biopsy wound model, AC5 Advanced Wound System was solely associated with complete
epithelialization by the end of the 11 day study.
In an assessment versus each a market leading antimicrobial
burn dressing, a hydrogel, and saline in a porcine second degree burn wound model, AC5 Advanced Wound System was associated with
less progression of thermal damage and less inflammation over three days.
Arch Therapeutics’ technology has also demonstrated hemostasis
in liver and other organs in in vivo surgical models, including rapid hemostasis within 15 seconds. In a range of small and large
animal models, our compositions have been shown to stop bleeding, seal leaking, allow for normal healing, and mitigate inflammation
while being biocompatible.
AC5 Surgical Hemostat demonstrated rapid average TTH when applied
to a range of animal tissues. Certain surgical procedure studies have assessed TTH when using AC5 Surgical Hemostat as well as
using an active control, a saline control, a peptide control, and a cautery control. The results of those tests have shown a TTH
of approximately 10 – 30 seconds when AC5 Surgical Hemostat was applied, compared to 80 seconds to significantly more than
300 seconds when various control substances were applied, depending on the nature of the control substance and procedure performed.
In several studies comparing AC5 Surgical Hemostat to popular commercially available branded hemostatic agents (absorbable cellulose,
flowable gelatin with and without thrombin, and fibrin) applied to stop the bleeding from full thickness penetrating wounds surgically
created in rat livers, AC5 Surgical Hemostat achieved hemostasis in significantly less than 30 seconds, whereas control products
took from over 50% - 400% longer to achieve hemostasis.
AC5 Surgical Hemostat was also demonstrated in preclinical tests
to stop surgically induced liver bleeding in animals that had been treated with therapeutic amounts of anticoagulant and antiplatelet
medications, collectively known as antithrombotic medications and commonly called “blood thinners.” In one preclinical
study, an independent third-party research group obtained positive data assessing the use of AC5 Surgical Hemostat in animals that
had been treated with therapeutic doses of the antiplatelet medications Plavix® (clopidogrel) and aspirin, alone and in combination.
The results of the study were consistent with data obtained from two prior preclinical studies, in which AC5 Surgical Hemostat
quickly stopped bleeding from surgical wounds created in rats following treatment with clinically relevant doses of the anticoagulant
medication heparin. In these studies, the average TTH after AC5 Surgical Hemostat was applied to bleeding liver wounds in animals
that had received anticoagulant medication was comparable to the average TTH as measured in their non-anticoagulated counterparts.
Similar results were obtained in independent third-party studies assessing the use of AC5 Surgical Hemostat in patients on the
anticoagulant heparin and in patients on the anti-platelet medication, ticagrelor (Brilinta® in the US, Brilique® in Europe).
AC5-V was assessed for its ability to provide hemostasis after
bleeding was intentionally created at vascular reconstruction sites in preclinical studies. In an acute study in swine that had
been premedicated with therapeutic doses of heparin before undergoing end-to-end femoral artery anastomosis and synthetic graft
to vessel anastomosis in carotid and femoral arteries, AC5-V promoted effective hemostasis at the vascular anastomotic site and
allowed for clear visualization of the surgical site.
In a 14-day survival study in sheep that had been premedicated
with therapeutic doses of heparin before undergoing end-to-side anastomosis between synthetic vascular grafts and carotid arteries,
AC5-V promoted effective hemostasis at the vascular anastomotic site, the graft remained patent during the study as assessed by
angiography and ultrasound, clinical observations were normal during the study, and tissue response as assessed by histopathological
examination at the end of the study was consistent with expectations for a biodegrading implant.
AC5-G was studied in swine to assess visualization, submucosal
lift generation and durability, and hemostatic and sealant performance when used during endoscopic mucosal resections and endoscopic
submucosal dissections as well as hemostatic performance during endoscopic management of gastrointestinal bleeding. AC5-G was easily
delivered through a 25G endoscopic injection needle into the tissue and provided a durable submucosal lift in the gastric antrum
that lasted beyond 2 hours. When delivered with the visualizing agent prior to tissue dissection, AC5-G allowed for easy visualization
with both snare and electrosurgical knives, and no visible bleeding was observed following polyp removal. AC5-G was also shown
to provide hemostasis in actively bleeding lesions when applied with or without the visualizing agent either topically to a bleeding
site or when injected into the nearby mucosa. AC5-G was found to be useful in conjunction with clips as a potential sealant when
applied following application of clips to a post-polypectomy site for the purpose of mitigating leaks and potentially enabling
healing.
The AC5 self-assembling peptide was studied in an experimental
intraocular inflammation model of injected Lipopolysaccharide (“LPS”), in which an intraocular application of the peptide
with LPS was associated with a marked reduction in retinal inflammation. The density of activated retinal microglial cells
was significantly lower in the eyes of the study animals with LPS and AC5 than in the eyes of the LPS-only control group. The results
suggest that the AC5 self-assembling peptide may reduce inflammation and may represent a new class of devices that act as anti-inflammatory
agents to control ocular inflammation.
Clinical Testing
We have engaged and continue to engage third parties in the
United States and abroad to advise on and/or perform certain clinical studies and related activities, typically with assistance
from our team. These third parties can include contract research organizations, academic institutions, consultants, advisors, scientists,
clinicians, and/or other collaborators.
In order to complete a clinical trial, we are required to enroll
a sufficient number of patients to conduct the trial after obtaining each patient’s informed consent in a form and substance
that complies with FDA and/or other regulatory authority requirements as well as state and federal privacy and human subject protection
regulations. Many factors could lead to delays or inefficiencies in conducting clinical trials, some of which are discussed under
the heading “RISK FACTORS” in this Annual Report on Form 10-K. Further, we, the FDA or an institutional review
board (“IRB”) could suspend a clinical trial at any time for various reasons, including a belief that the risks to
the subjects of the trial outweigh the anticipated benefits. Even if a trial is completed, the results of clinical testing may
not adequately demonstrate the safety and efficacy of the device or may otherwise not be sufficient to obtain FDA clearance or
approval to market the product in the U.S.
We
completed two clinical studies. The first study, which met its primary and secondary endpoints, assessed the safety and
performance of our product candidate in 46 patients with bleeding skin wounds that resulted from excision of skin lesions and followed
for 30 days. The second study assessed our product candidate on skin, determining
that it was neither an irritant nor a sensitizer, and no immunogenic response or serious
or other adverse events attributable to our product were reported in any of the approximately 50 enrolled volunteers. The
product candidate in these studies subsequently received marketing authorization and is presently known as AC5 Advanced Wound System
in the United States and AC5 Topical Hemostat in Europe.
On December 16, 2015, we announced that we had received
clearance from a regulatory authority in Western Europe to initiate our first human study to assess the safety and performance
in humans of our then product candidate that is presently known as AC5 Advanced Wound System in the United States and AC5 Topical
Hemostat in Europe. The single-center, randomized, single-blind prospective clinical study (NCT 02704104) was conducted in Galway, Ireland.
The description below will refer to the product by its European name, AC5 Topical Hemostat.
On August 15, 2016, we announced that AC5 Topical Hemostat
met its primary and secondary endpoints, and on October 31, 2016, we further announced that additional analysis indicated
that it demonstrated similar effects in a subgroup of patients who were taking a prescribed antiplatelet medication, commonly known
as a blood thinner, such as aspirin.
The clinical study enrolled 46 patients, including 10 who were
taking antiplatelet therapy. Each patient had bleeding wounds created as a result of the excision of at least two skin lesions
under local anesthetic in the same setting. On a randomized basis, one lesion received AC5 Topical Hemostat and the other(s) received
a control treatment consisting of standard therapy (saline). Each subject was followed-up for safety assessment both on Day 7 and
again on Day 30, which marked the end of the subject's participation in the clinical study.
The objectives of the study were to evaluate the safety and
performance of AC5 Topical Hemostat in patients scheduled to undergo excision of skin lesions on their trunk or upper limbs. The
primary endpoint was safety throughout the surgical procedure and until the end of a 30-day follow-up period post procedure. Safety
of the clinical investigation device was determined by monitoring for treatment related adverse events. The primary objective was
met, as the safety outcomes of both the AC5 Topical Hemostat treatment group and the control group were similar. No serious adverse
events were reported.
A secondary endpoint was performance as assessed by TTH. The
median TTH of wounds in the AC5 treatment group was 41% faster than for those in the control group. This result was statistically
significant (p< 0.001, Wilcoxon signed rank test). An additional secondary endpoint of healing of treated wounds was assessed
as measured by the ASEPSIS wound score at Days 7 and 30. There was no evidence, at either follow-up day, of an adverse effect of
AC5 Topical Hemostat treatment on the wound ASEPSIS score. The ASEPSIS score did not appear to be compromised, as the majority
of patients had an ASEPSIS score of 0 in both wounds at Days 7 and 30. All AC5-treated wounds healed satisfactorily as per wound
healing scoring criteria.
The clinical study indicated that AC5 Topical Hemostat shortened
TTH versus a control whether or not patients were taking antiplatelet therapy, suggesting that AC5 Topical Hemostat performance
is not affected by antiplatelet therapy. The reduced median TTH of the AC5 Topical Hemostat treated wounds versus the control wounds
was statistically significant for both the overall group of 46 patients (p<0.001) and for the subgroup of 10 patients on
antiplatelet therapy (p=0.005). Further, the median TTH for wounds treated with AC5 Topical Hemostat was less than 30 seconds for
both the overall study group and for the subset of patients taking antiplatelet therapy.
Separately, on September 5, 2018 we announced topline data
for a human irritation/sensitization patch test study that we conducted to address a request by the Food and Drug Administration
(“FDA” or “the Agency”) for a product that eventually received marketing authorization and is known as
AC5 Advanced Wound System. The study, designed as a single-center, prospective, clinical investigation in approximately 50 healthy
subjects, comprised an induction phase separated from a challenge phase by a rest period.
During the induction phase, a patch containing our product was
applied to each subject’s back three times weekly over 21 days for a total of 9 applications. With each re-application, the
skin beneath the patch was evaluated, and any findings were scored per protocol. After a 14-day rest period, subjects entered the
challenge phase, received one additional application, and after a two-day rest period, were evaluated over 48 hours.
The
results indicated that AC5 Advanced Wound System is neither an irritant nor a sensitizer.
Additionally, no immunogenic response and no serious or other adverse events attributable to the device were reported in any of
the enrolled subjects.
At the 2020 Symposium on Advanced Wound Care (SAWC) Fall, which
took place from November 4-6, 2020 and was hosted online due to the Covid-19 pandemic, several observational clinical case
reports were presented. In a patient’s 10-year-old pressure ulcer, also known as a decubitus ulcer, concomitant use of debridement
(surgical excision of dead, contaminated, or damaged tissue) and AC5 Advanced Wound System every other week over a six week period
allowed for a more aggressive procedure with bleeding control in a low acuity clinic setting and without the need for thrombin
or sutures. The nanofiber network formed by AC5 Advanced Wound System appeared to cohesively seal the wound bed surface after debridement
removed biofilm and senescent host cells. The resulting scaffold allowed for the adhesion, migration, and proliferation of healthy
host cells and favorable wound healing outcomes. The patient’s wound approached 50% reduction in volume, despite having previously
been refractory and stalled over the course of a decade. The patient reported that a significant reduction in drainage and bleeding
resulted in easier at-home wound care with fewer in-between clinic visits.
In a patient’s 25-year-old chronic refractory burn wound,
AC5 Advanced Wound System was applied weekly for four weeks with concomitant debridement. AC5 Advanced Wound System enabled aggressive
debridement, facilitated removal of infected granulation tissue, formed a clear conforming seal on the wound and remained affixed
to the surface of the irregular wound bed in the presence of copious bleeding. On a second debridement performed a week later,
the wound bed surface was much less friable and produced less bleeding. After two interventions, the wound bed quality improved
and exhibited a healthier tissue appearance, less exudate, less accumulation of slough on the wound surface, and new evidence of
granulation buds. The patient noted cessation of intermittent bleeding episodes, thus alleviating the burden of at-home wound care.
The use of AC5 Advanced Wound System was associated with accelerated healing of the stalled refractory burn wound and a marked
improvement in the patient’s quality-of-life.
In a patient who underwent an emergency vascular bypass operation
for a limb-threatening posterior tibial ischemia, the surgical site dehisced (opened up), became infected, and resisted healing.
This complex surgical wound was treated with six weeks of standard care without improvement, followed by subsequent treatment with
a collagenase ointment for two weeks and a skin graft, which failed. The non-healing wound was then treated with excisional debridement
and concomitant application of AC5 Advanced Wound System weekly for three weeks. Due to co-existing peripheral arterial disease,
the patient was not a candidate for compression dressings. The combination of debridement and AC5 Advanced Wound System was associated
with quickly restarting the previously stalled healing process, thus allowing the patient to resume at-home wound care. The development
of a healthy and stable granular wound bed and wound closure was achieved without the need for additional skin grafts. The results
indicate that the use of this dressing may obviate the need for continued costly treatments and procedures, thus reducing the total
cost of lower extremity wound care, while improving patients’ quality of life.
Regulatory
We have engaged and continue to engage third parties in the
United States (“U.S.”) and abroad to advise on and/or perform certain regulatory activities, typically with assistance
from our team. These third parties can include contract research organizations, academic institutions, consultants, advisors, scientists,
clinicians, and/or other collaborators.
Our
research, development and clinical programs, as well as our manufacturing and marketing operations that may be performed by us
or third party service providers on our behalf, are subject to extensive regulation in the United States and other countries. Notably,
for example, AC5 Advanced Wound System is subject to regulation as a medical device under the U.S. Food Drug and Cosmetic Act (the
“FDCA”) as implemented and enforced by the FDA and equivalent regulations that are enforced by foreign agencies in
any other countries in which we pursue commercialization. The FDA and its foreign counterparts generally govern the following activities
that we do or will perform or that will be performed on our behalf, as well as potentially additional activities, to ensure that
products we may manufacture, promote and distribute domestically or export internationally are safe and effective for their intended
uses:
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product design, preclinical and clinical development and manufacture;
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product premarket clearance and approval;
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product safety, testing, labeling and storage;
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certain supply chain changes;
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record keeping procedures;
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product marketing, sales and distribution; and
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post-marketing surveillance, complaint handling, medical device reporting, reporting of deaths, serious injuries or device
malfunctions and repair or recall of products.
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Medical Device Classification in the United States and Europe
AC5 Advanced Wound System in the United States and AC5 Topical
Hemostat in Europe are classified as medical devices. Generally, a product is a medical device if it requires neither metabolic
nor chemical activity to achieve the desired effect. Furthermore, a medical device can achieve its desired effects without requiring
a body (animal/human), whereas a drug or a biologic requires a body in order to operate. Self-assembly, which is the desired effect
and which can occur outside of a body, is accordingly consistent with the medical device definition.
Medical devices in the United States and Europe are classified
along a spectrum on the basis of the amount of risk to the patient associated with the medical device and the controls deemed necessary
to reasonably ensure their safety and effectiveness. Class III status, which is the higher-level classification for devices
compared to Classes II and I, involves additional procedures and regulatory scrutiny of the product candidate to obtain approvals.
Class III devices are those that are deemed to pose the greatest risks, such as life-sustaining, life-supporting or implantable
devices, or that have a new intended use or that use advanced technology not substantially equivalent to that of a legally marketed
device.
As a result of the intended use of and the novel technology
on which our products and product candidates are based, in general, we anticipate that they would typically be regulated as either
Class II or Class III medical device in these jurisdictions, depending upon the intended use. Specifically, AC5 Advanced
Wound System is a Class II medical device in the United States, and AC5 Topical Hemostat is a Class IIb medical device
in Europe.
In the United States, the FDA recognizes these classes of medical
devices:
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Class I, requiring general controls, including labeling, device listing, reporting and, for some products, adherence to
good manufacturing practices through the FDA’s quality system regulations and pre-market notification;
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Class II, requiring general controls and special controls, which may include performance standards and post-market surveillance;
or
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Class III, requiring general controls and approval of a premarket approval application (“PMA”), which may
include post-market approval conditions and post-market surveillance.
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European regulatory authorities, likewise, recognize several
classes of medical devices. Classification involves rules found in the European Union Medical Device Directive and is driven
in part by the device’s degree of contact with the patient, invasiveness, active nature, and indications for use. The medical
device classes recognized in the EU are:
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Class IIa, which are considered low-medium risk devices and require certification by a notified body;
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Class IIb, which are considered medium-high risk devices and require certification by a notified body; and
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Class III, which are considered high-risk devices and require certification by a notified body.
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United States Class III and certain Class II
medical device approvals and European Union Class III and certain Class IIa and IIb medical device approvals may
require the successful completion of human clinical trials.
US Regulatory Marketing Authorization Process
Products that are regulated as medical devices and that require
review by the FDA are subject to either a premarket notification, also known as a 510(k), which must be submitted to the FDA for
clearance, or a PMA application, which the FDA must approve prior to marketing in the United States. The FDA ultimately determines
the appropriate regulatory path. For purposes herein, references to regulatory approval and marketing authorization may be used
interchangeably.
We believe that the products we are currently pursuing for internal
use will require a PMA approval prior to commercialization. However, we are in the process of commercializing an initial product
for external use that has been cleared through the 510(k) process. To obtain 510(k) marketing clearance for a medical
device, an applicant must submit a premarket notification to the FDA demonstrating that the device is "substantially equivalent"
to a predicate device or devices, which is typically a legally marketed Class II device in the United States. A device is
substantially equivalent to a predicate device if it has the same intended use and (i) the same technological characteristics,
or (ii) has different technological characteristics and the information submitted demonstrates that the device is as safe
and effective as a legally marketed device and does not raise different questions of safety or effectiveness. In some cases, the
submission must include data from human clinical studies. Marketing may commence when the FDA issues a clearance letter finding
substantial equivalence. Depending upon a product’s underlying technology and intended use, as well as on FDA processes and
procedures, seeking and obtaining a 510(k) can be a lengthy process.
A PMA, which is required for most Class III medical devices,
must be submitted to the FDA if a device cannot be cleared through another approval process or is not otherwise exempt from the
FDA’s premarket clearance requirements. The PMA approval process can be lengthy and expensive. A PMA must generally be supported
by extensive data, including without limitation technical, preclinical, clinical trial, manufacturing and labeling data, to demonstrate
to the FDA’s satisfaction the safety and efficacy of the device for its intended use. Clinical trials for a Class III
medical device typically require an application for an investigational device exemption (“IDE”), which would need to
be approved in advance by the FDA for a specified number of patients and study sites. Clinical trials are subject to extensive
monitoring, recordkeeping and reporting requirements, and must be conducted under the oversight of an institutional review board
(“IRB”) for the relevant clinical trial sites and comply with applicable FDA regulations, including those relating
to good clinical practices (“GCP”).
The PMA process is estimated to take from one to three years
or longer, from the time the PMA application is submitted to the FDA until an approval is obtained. During the review period, the
FDA will typically request additional information or clarification of the information previously provided. Also, experts from outside
the FDA may be convened to review and evaluate the PMA and provide recommendations to the FDA as to the approvability of the device,
although the FDA may or may not accept any such recommendations. In addition, the FDA will generally conduct a pre-approval inspection
of the manufacturing facility or facilities involved with producing the device to ensure compliance with the cGMP regulations.
Upon approval of a PMA, the FDA may require that certain conditions of approval, such as conducting a post-market approval clinical
trial, be met.
Further, if post-approval modifications are made, including,
for example, certain types of modifications to the device’s indication for use, manufacturing process, labeling or design,
then new PMAs or PMA supplements would be required. PMA supplements often require submission of the same type of information as
a PMA, except that the supplement is typically limited to information needed to support the changes from the device covered by
the original PMA and accordingly may not require as extensive clinical and other data.
We have not submitted to the FDA a PMA or commenced the required
clinical trials for an internal use product. Even if we conduct successful preclinical and clinical studies and submit a PMA for
an approval or premarket application for clearance, the FDA may not permit commercialization of our product candidate for the desired
internal use indications, on a timely basis, or at all. Our inability to achieve regulatory approval for AC5 in the United States
for an internal use product, a large market for hemostatic products, would materially adversely affect our ability to grow our
business.
European Union Marketing Authorization (CE Mark) Process
A notified body is a private commercial entity designated by
the national government of a European Union (“EU”) member state as being competent to make independent judgments about
whether a medical device complies with applicable regulatory requirements in the EU. Our notified body is The British Standards
Institution (“BSI”).
The EU has adopted numerous directives and standards regulating
the design, manufacture, clinical trials, labeling, and adverse event reporting for medical devices, and it has further revised
its rules and regulations with increasingly stringent requirements. Each EU member state has implemented legislation applying
these directives and standards at a national level. Many countries outside of the EU have also voluntarily adopted laws and regulations
that mirror those of the EU with respect to medical devices, potentially increasing the time and cost necessary to potentially
achieve an approval in different jurisdictions.
Devices
that comply with the requirements of the laws of the selected member state applying the applicable EU directive are entitled to
bear a CE (Conformité Européenne) mark and can be distributed throughout the member states of the EU, as well
as in other countries that have mutual recognition agreements with the EU or have adopted the EU’s regulatory standards.
Under applicable European Medical Device Directives (MDD), a
CE mark is a symbol placed on a product that declares that the product is compliant with the essential requirements of applicable
EU health, safety and environmental protection legislation. In order to receive a CE mark for a product candidate, the company
producing the product candidate must select a country in which to apply. Each country in the EU has one competent authority (“CA”)
that implements the national regulations by interpreting the EU directives. CAs also designate and regulate Notified Bodies. An
assessment by a notified body in the selected country within the EU is required in order to commercially distribute the device.
In addition, compliance with ISO 13485 issued by the International Organization for Standardization, among other standards, establishes
the presumption of conformity with the essential requirements for CE mark. Certification to the ISO 13485 standard demonstrates
the presence of a quality management system that can be used by a manufacturer for design and development, production, installation
and servicing of medical devices and the design, development and provision of related services.
While there are many similarities between the processes required
to obtain marketing authorization in the United States and Europe, there are several key differences between the jurisdictions,
as well. Obtaining a CE mark is not equivalent to obtaining FDA clearance or approval. For instance, FDA requirements for products
typically vary based on whether the submission is for a premarket notification (510(k)) or a premarket approval (PMA) whereas EU
requirements for product submissions are primarily based on class. Furthermore, EU submissions must meet precise essential requirements,
although the data demonstrating such compliance can vary by class of device. Additionally, a CE mark affixed to a product serves
as a declaration by the responsible party that the product conforms to applicable provisions and that relevant conformity assessment
procedures have been completed with respect to the product.
In 2017, the European Union regulatory bodies finalized a new
Medical Device Regulation (“MDR”). The MDR changes several aspects of the existing regulatory framework, such as clinical
data requirements, and introduces new ones, such as Unique Device Identification (“UDI”). We, and the Notified Bodies
who will oversee compliance to the new MDR, face uncertainties in the upcoming years as the MDR is rolled out and enforced, creating
risks in several areas, including the CE mark process, data transparency and application review timetables. The MDR was to
be implemented on May 25, 2020, however, the implementation date has been postponed to May 26, 2021 due to the effects
of Covid-19.
Post-Approval Regulation
After
a medical device obtains approval from the applicable regulatory agency and is launched in the market, numerous post-approval regulatory
requirements would apply. Many of those requirements are similar among the United States and EU member states and include:
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product listing and establishment registration;
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requirements that manufacturers, including third-party manufacturers, follow stringent design, testing, control, documentation
and other quality assurance procedures during all aspects of the design and manufacturing process;
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labeling and other advertising regulations, including prohibitions against the promotion of products for uncleared, unapproved
or off-label use or indication;
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approval of product modifications that affect the safety or effectiveness of any of our devices that may achieve approval;
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post-approval restrictions or conditions, including post-approval study commitments;
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post-market surveillance regulations, which apply, when necessary, to protect the public health or to provide additional safety
and effectiveness data for the device;
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the recall authority of the applicable government agency and regulations pertaining to voluntary recalls; and
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reporting requirements, including reports of incidents in which a product may have caused or contributed to a death or serious
injury or in which a product malfunctioned, and notices of corrections or removals.
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Failure by us, our third-party manufacturers or our other suppliers
to comply with applicable regulatory requirements could result in enforcement action by various regulatory authorities, which may
result in monetary fines, the imposition of operating restrictions, product recalls, criminal prosecution or other sanctions.
Regulation by Other Foreign Agencies
International sales of medical devices outside the EU may be
subject to government regulations in each country in which the device is marketed and sold, which vary substantially from country
to country. The time required to obtain approval by a non-EU foreign country may be longer or shorter than that required for FDA
or CE mark clearance or approval, and the requirements may substantially differ.
Marketing Authorization (510k) for AC5 Advanced Wound System
in the United States
On July 25, 2017, we announced that we had made a 510(k) submission
to the FDA for AC5 Topical Gel. On December 18, 2017, we voluntarily withdrew the application
after receiving questions from the FDA for which an adequately comprehensive response could not be provided within the FDA’s
congressionally-mandated 90-day review period. On October 1, 2018, we announced that we both completed the necessary
steps required to file a new 510(k) submission to the FDA for AC5 Topical Gel and filed that 510(k) submission during
the third calendar quarter. As previously disclosed, these steps included developing a required study protocol and submitting it
to the FDA in a pre-submission letter in the first calendar quarter, completing the pre-submission process, initiating the study
in the second calendar quarter of 2018 and completing the study. On December 17, 2018, we announced
that the 510(k) premarket notification for AC5 Topical Gel had
been reviewed and cleared by the FDA, allowing for the product to be marketed.
In line with plans to better harmonize our United States and
European product supply chains by using an additional supplier and additional manufacturing processes in the production of AC5
Topical Gel, Arch filed documentation with the FDA seeking such clearance in the United States for these additions, each of which
had been incorporated into the technical documentation for the European CE mark filing. On March 23, 2020, we announced that
the 510(k) premarket notification for AC5 Topical Gel had been reviewed and cleared by the FDA, allowing for the product to
be marketed in the United States with the aforementioned additions. AC5 Topical Gel was subsequently renamed to AC5 Advanced Wound
System in the United States.
Marketing Authorization (CE mark) for AC5 Topical Hemostat
in Europe
On November 28, 2018 we announced that we had submitted
the required documents for AC5 Topical Hemostat to its notified body seeking a CE mark. On August 5, 2019, we announced that
during the review period, we had received and responded to customary written and verbal questions related to the technical file,
and that BSI had recently indicated that the responses provided and assessed during the review period were acceptable so far. In
that announcement, we further expressed our belief that the delay by the regulatory authority in completing the CE mark technical
file review appeared to be due to a backlog of work for EU notified bodies related to both Brexit and the implementation of the
new EU Medical Devices Regulation.
On
April 13, 2020, the Company announced that receipt of the CE (Conformité Européenne) mark for AC5 Topical
Hemostat, allowing for commercialization in Europe as a dressing and to control bleeding in external skin wounds in both out-patient
and in-patient settings.
Commercialization Strategy
Our commercialization efforts are currently focused on our Dermal
Sciences products, AC5 Advanced Wound System in the United States and AC5 Topical Hemostat in Europe. The indication for use, or
purpose, for each product follows:
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Under the supervision of a health care professional, AC5 Advanced Wound System is a topical dressing used for the management
of partial and full-thickness wounds, such as pressure sores, leg ulcers, diabetic ulcers, and surgical wounds.
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AC5 Topical Hemostat is intended for use locally as a dressing and to control mild to moderate bleeding, each during the management
of injured skin and the micro-environment of an acute surgical wound.
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We announced receipt of the CE mark for AC5 Topical Hemostat
on April 13, 2020. We announced receipt of 510(k) premarket notification clearances for AC5 Advanced Wound System on
December 17, 2018, providing marketing authorization, and on March 23, 2020, clearing use of an additional supplier and
additional manufacturing processes.
The Covid-19 pandemic environment has introduced new challenges
related to product launch, marketing and sales, as clinicians and facilities are increasingly focused on managing resources, the
disease, or its potential spread. We believe that these challenges may present an opportunity for our new technology to address
certain poorly met needs. We have observed that:
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the volume of elective surgical procedures has been constrained, with many institutions indefinitely suspending or eliminating
such procedures, as the United States and Europe appear to be heading into a worsening phase of the pandemic;
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healthcare facilities often have been required to ration staff and resources, including ventilators, personal protective equipment
(“PPE”), and operating rooms, thereby negatively impacting the focus on wound care;
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clinicians often have been required to divert their time and resources to urgent Covid-19 needs;
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clinicians often have been required to quarantine due to exposure to a Covid-19 positive individual or isolate because of contracting
symptomatic or asymptomatic Covid-19 disease;
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some institutions have been periodically designated “Covid Hospitals”;
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administrators who may be required to facilitate or approve new product intake are constrained by new and other pressing priorities;
and
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both clinicians and patients often try to minimize possible Covid-19 exposure, resulting in reduced access to healthcare system
and essential care treatments and services.
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Wound interventions are too often considered to be elective
procedures instead of being treated essentially or emergently as National Pressure Ulcer Advisory Panel guidelines and others recommend,
resulting in a projected increased risk to limb and life while elective procedures are delayed and not prioritized. Furthermore,
the implications of these delays are a growing backlog of chronic wounds awaiting care and a worsening of such wounds, leading
to greater morbidity, such as infection, necrosis, and amputation, and potentially mortality.
While highlighted by the Covid-19 pandemic, we also believe
that these challenges reveal an underlying problem in the healthcare system–clinicians and other providers are being asked
to accomplish more in less time with fewer resources. These resources may include higher acuity settings, such as operating rooms;
expensive wound care products that may not work as well as desired; nursing time to change wound dressings; and surgeon time for
managing wounds during debridement; repeat patient visits over months and often years, and others. Our discussions with surgeons,
economic stakeholders and other decision-making personnel often include whether AC5 Advanced Wound System may enable them to accomplish
more for their patients while deploying overall fewer resources and achieving desired outcomes.
We expect our Dermal Sciences product commercialization to be
gradual, initially, and moderately accelerate into new market channels. In addition to identifying and encouraging product use
by key opinion leaders and early adopters, we will prioritize our focus on private and government facilities. Hospitals in the
Veterans Health Administration (“VA Hospitals”), for example, tend to have many patients whose needs we believe we
can help address. We prioritized the launch of AC5 Advanced Wound System in the United States over that of AC5 Topical Hemostat
in Europe to maximize operational efficiencies in light of the Covid-19 pandemic.
We have engaged and continue to engage third parties in the
United States and abroad to advise on and/or perform certain sales and marketing activities, typically with assistance from our
team. These third parties can include contract organizations, consultants, advisors, scientists, clinicians, and/or other collaborators.
While our core team oversees initial inventory distribution
from the warehouse to the customer, our sales and marketing plans include entering into collaboration agreements with contract
sales partners and/or strategic partners to commercialize our products in both domestic and international markets
We are committed to continuous improvement processes. We will
collect feedback and data when feasible and appropriate to help us better serve patients and doctors; to develop our marketing
messages; to learn about product use; to evaluate product performance in different settings; to improve our products; to address
reimbursement needs, and to support collaborations that we may have or may establish. Data will be collected by informal feedback,
observational case reports and/or clinical trials. We anticipate seeking reimbursement via codes based upon Current Procedural
Terminology (CPT), hospital Diagnosis-related Groups (DRG) and Ambulatory Payment Classifications (APC).
We envision adding additional resources to our team to help
commercialize the Dermal Sciences products. Our Biosurgery products for internal use will require additional preclinical and clinical
testing before we seek marketing authorization to commercialize them.
Manufacturing
We work with contract manufacturing and related organizations,
including those operating under current good manufacturing practices (“cGMP”), as is required by applicable regulatory
agencies for production of product that can be used for preclinical and human testing as well as for commercial use. We also have
engaged and continue to engage other third parties in the United States and abroad to advise on and/or perform certain manufacturing
and related activities, typically with assistance from our team. These third parties include academic institutions, consultants,
advisors, scientists, and/or other collaborators. The activities include development of our primary product candidates, as well
as generation of appropriate analytical methods, scale-up, and other procedures for use by manufacturers and/or other members of
our supply chain to produce or process our products at current and/or larger scale quantities for preclinical and clinical testing
and ultimately, as required marketing authorizations are obtained, commercialization.
Our products are regulated as medical devices, and as such,
many of our activities have focused on optimizing traditional parameters to target specifications, biocompatibility, physical appearance,
stability, and handling characteristics, among other metrics, in order to achieve the desired product. We and our partners intend
to continue to monitor manufacturing processes and formulation methods closely, as success or failure in establishing and maintaining
appropriate specifications may directly impact our ability to conduct additional preclinical and clinical trials and/or deliver
commercial product.
We believe that the manufacturing methods used for a product,
including the type and source of ingredients and the burden of waste byproduct elimination, are important determinants of its opportunity
for profitability. Industry participants are keenly aware of the downsides of products that rely on expensive biotechnology techniques
and facilities for manufacture, onerous and expensive programs to eliminate complex materials, or ingredients that are sourced
from the complicated process of human or other animal plasma separation, since those products typically are expensive, burdensome
to produce, and at greater risk for failing regulatory oversight.
The manufacturing methods that we intend to use to produce our
current and potential future product candidates rely on detailed, complex and difficult to manage synthetic organic chemistry processes.
Although use of those methods requires that we engage manufacturers that possess the expertise, skill and know-how involved with
those methods, the required equipment to use those methods is widely available. Furthermore, improvements in relevant synthetic
manufacturing techniques over the past two decades have reduced their complexity and cost, while increasing large-scale cGMP capacity.
Moreover, our current products and currently planned product candidates will be synthesized from naturally occurring ingredients
that are not sourced from humans or other animals but do exist in their natural state in humans. That type of ingredient may be
more likely to be categorized as “generally recognized as safe”, or “GRAS”, by the FDA.
Industry and Competition
Arch is developing technology for Dermal Sciences and Biosurgery
applications, including wound care, surgical procedures on and in the body, and endoscopic gastrointestinal procedures, and others.
Our initial clinical trial for safety and performance assessed use in an external application. Additional human studies are intended
to follow. We seek to provide a product set with broad utility in external and internal applications. Features of the technology
highlight its potential utility in a range of settings, including traditional open procedures and the often more challenging minimally
invasive surgeries.
Common features of our current and planned products, as described
herein, are driven by the mechanism of action, which itself is derived from the underlying physicochemical properties or our self-assembling
peptide technology and our product safety and performance specifications. Those features, which include, among others, that they
possess barrier properties and can create an environment permissive to healing, can deliver a benefit in the treatment of external
and internal wounds that are open, exposed, bleeding, leaking, and/or at risk for excessive inflammation or contamination.
Dermal Sciences
We have received marketing authorizations for AC5 Advanced Wound
System in the United States and AC5 Topical Hemostat in Europe. Compared to most other advanced wound dressings on the market,
ours can be used throughout all phases of wound healing (i.e., inflammatory, proliferative, and remodeling).
Wounds can vary widely in terms of degree of bleeding and oozing,
chronicity, acuity, complications, anatomic location, biochemistry, micromilieu, bioburden and other factors that may inhibit an
ideal response. Patients can also vary widely in terms of co-morbidities, compliance, setting of their care, ability to contribute
to their own care, and other risk factors. And the approach by surgeons to clinical practice can vary widely in terms of debridement
strategy, timing and or use of advanced modalities, choice and use of consumables, follow-up and dressing change frequency, and
more. Our products are designed to self-assemble on the wound site despite these diverse situations in order to provide greater
utility to clinicians and enable better outcomes for patients.
According to a 2018 report produced by iData Research, in the
United States, advanced wound dressings account for approximately $2 billion in annual revenues. The true cost to care for wounds,
including chronic wounds, such as venous leg ulcers, diabetic foot ulcers, and pressure ulcers, remains unknown. However, a 2018
report by Nussbaum et al., data from calendar year 2014 estimates that total Medicare spending for all wound types ranges from
$28.1 to $96.8 billion and that 14.5% (8.2 million) of Medicare beneficiaries were diagnosed with at least one type of wound or
wound-related infection. Many surgeons believe that chronic wounds are essentially chronic infections that must be aggressively
debrided in order to heal. Furthermore, a 2017 report by Chan et al., indicates that the mean one year cost of care from a health-care
public payer perspective was $44,200 for a diabetic foot ulcer, $15,400 for a pressure ulcer and $11,000 for a leg ulcer. The Agency
for Healthcare Research & Quality estimates that 2.5 million Americans develop pressure ulcers annually.
We believe that these disease and economic burdens highlight
potential needs and opportunities for our products.
While the wound care opportunity is large for safe, efficacious,
and novel products, the competitive landscape is also crowded and challenging. For instance, while many of the commercially marketed
advanced wound dressing provide some utility and possess some novel features, surgeons often describe an inability to differentiate
them from one another. Additionally, many advanced products are both expensive and require other interventions to the wound plus
a passage of time for the wound bed to adequately be prepared before they can be used, adding additional burden to their use.
We believe that our product is sufficiently differentiated to
replace certain products, complement other products by potentially enabling the wound bed to be ready sooner, and by enabling more
procedures to be done sooner and/or in settings where they could not be performed easily before.
Biosurgery
We are developing Biosurgery products for internal use, including
for hemostasis and sealant applications, gastrointestinal endoscopic mucosal resections and endoscopic submucosal dissections,
and others.
According to a 2012 report produced by MedMarket Diligence,
LLC, approximately 114 million surgical and procedure-based wounds occur annually worldwide, including 36 million from surgery
in the United States. Available data indicates that there may be increased pressure to perform more complex surgeries at reduced
costs, including conducting operations in less expensive outpatient settings. Although accurate current statistics are difficult
to obtain, a National Health Statistics Report from 2006 and updated in 2009 indicates that outpatient surgery volume was increasing
by approximately 5% annually, and a 2009 report covering surgical procedures in the United States suggests that inpatient surgery
volume was declining 1% per year. We believe that a motivating factor of this trend may be the increased costs associated with
hospital inpatient procedures performed in operating rooms, which, according to MedMarket Diligence, have been estimated to cost
between $2,000 and $10,000 per hour. These costs likely drive the desire for increased operating room throughput and increased
volume of procedures performed in outpatient settings. Both of those trends highlight the need for highly effective products that
can decrease operating room time for inpatient procedures and help to increase the safety of performing more types of procedures
in less expensive outpatient settings.
Since the early days of modern minimally invasive surgery (“MIS”)
in the 1990s, the percent of surgeries performed minimally invasively has increased significantly, such that it is now widespread
and common. Laparoscopic surgery is among the most commonly recognized types of MIS, although there are many additional types.
Advantages of MIS tends to include less scarring, less post-operative pain, less need for pain medications, shorter recovery times,
and faster discharge times. However, such procedures often present the surgeon with less margin for error and less capacity to
deal with certain risks, such as excessive bleeding, without converting the surgery to a traditional open procedure.
A fairly recent trend to make traditional minimally invasive
surgery even less invasive is known as Natural Orifice Translumenal Endoscopic Surgery, commonly referred to as NOTES. In NOTES
procedures, an endoscope is passed through a natural orifice, such as the mouth, urethra, anus, or vagina, and then through
an internal incision in the stomach, vagina, bladder or colon. NOTES advantages include those of MIS to a potentially even greater
degree, as well as the lack of external incisions and external scars, improved visibility, and the possibility to avoid managing
potential obstacles to surgery, such as extensive adhesions from prior procedures. However, compared to MIS, margin for error in
NOTES is even less. NOTES may be performed by surgeons or endoscopists, yet the techniques can be challenging to learn and are
in their early stages of development. Practitioners seek additional tools, including Biosurgery products where relevant, to enable
them to operate efficiently, effectively, and safely.
We
believe that our technology will be useful in addressing the constant demand for better performance and safety in MIS, traditional
surgery, NOTES, and other procedures. Additional general long term trends that may support a demand for products include:
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increasing surgical procedure volume growth, including ambulatory same day procedures;
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efforts to reduce operating room use and time; and
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increased use of anticoagulants, which predispose patients to bleeding.
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In
the course of developing our products, we engaged commercial strategy and marketing consultants and communicated directly with
care providers to understand the needs of potential customers and to assess product feature preferences. Surgeons, operating room
managers, sales representatives and hospital decision-makers identified a number of characteristics deemed desirable, including
that a product is:
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able to protect the wounds in tissues and organs where used;
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easily handled and applied;
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able to promote a clear field of vision and not obstruct view;
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non-sticky (to tissue or equipment);
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permits normal healing;
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agnostic to the presence of antithrombotic medications (“blood thinners”) to whether the patient has bleeding abnormalities;
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not sourced from human or other animal blood or tissue components.
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We carefully consider these items while developing our Biosurgery
products with the objective of meeting these needs.
We are developing products for hemostasis and sealant applications.
Many of the hemostasis products currently available do not possess certain features and handling characteristics that are ideal
for use in a laparoscopic setting. For instance, many available products are difficult to use in MIS or NOTES because they tend
to be sticky, powdery, fabric-based or are otherwise difficult to insert into and control through the small gauge yet long catheters
used during these procedures. We believe that the novel features and differentiating characteristics of our Biosurgery products
will make them more suitable for such surgeries compared to many or most of the presently available alternatives.
According to a 2015 MedMarket Diligence, LLC report, the market
for hemostatic agents and sealants achieved approximately $4.2 billion in worldwide sales in 2015 and was projected to reach $4.8
billion in 2017 and surpass $7.5 billion in 2022. While the majority of those sales are for hemostats, we believe that the projected
growth rate for sealants in multiple applications, such as the gastrointestinal track, could become greater as additional products
become available.
In spite of the large size of the market for these products,
many available hemostatic agents and sealants possess a combination of limitations, including slow onset of action, general unreliability,
user-unfriendliness, and risk for adverse effects, such as healing problems, adhesion formation, infection and other safety concerns.
Many of the deficiencies of currently available hemostatic agents and sealants are comparable to those of their earlier-generation
counterparts, as revolutionary advances in underlying technologies have been elusive.
Commercially available products in the hemostasis field with
which we expect our products to compete if they obtain required regulatory approvals can cost between $50 and $500 per procedure,
with the higher value added products generally priced at the upper end of that range.
Participants in the hemostatic and sealant market currently
include large companies, such as Johnson & Johnson and its affiliated companies, Becton Dickinson and its C. R. Bard unit,
Baxter International Inc., as well as various smaller companies. Certain companies in other sectors, such as pharmaceuticals, wound
care, and orthopedics, among others, are also interested in these markets.
We are also developing products for gastrointestinal and NOTES
procedures, endoscopic mucosal resections (“EMR”) and endoscopic submucosal dissections (“ESD”). Surgical
endoscopists are removing more complicated tumors and lesions from the gastrointestinal via EMR and ESD, which are endoscopic techniques
to remove early-stage cancer and precancerous growths from the lining of the digestive tract through long narrow equipment which
consist of ports, catheters, lights, monitors, and video cameras. This represents the least invasive interventional approach known.
The EMR/ESD market is immature and growing, driven by an increasing
elderly population and incidence of gastrointestinal malignancies. While comprehensive data is not readily available, a report
by Persistence Market Research projects global revenues in EMR of approximately $2.5 billion in 2025, with ESD representing additional
opportunity. Persistence Market Research further projects share of EMR procedures to be approximately 42% for colon cancer, 30%
for stomach cancer, and 20% for esophageal cancer. The opportunity is noteworthy in North America, Europe, and also Asia, where
a higher prevalence of certain gastrointestinal malignancies and lower screening rates leads to later discovery and removal of
tumors than desired
A particular need for which we are developing AC5-G is a product
that provides both a durable and safe lift while being inherently hemostatic. The concept is to inject AC5-G beneath a polyp or
tumor to be resected or dissected, thus creating separation between the lesion and the underlying healthy tissue.
Incomplete lesion removal, bleeding and perforation are known
challenges and risks of EMR/ESD. The objective of a lift is to minimize the risk for perforation into the peritoneum, which can
cause significant morbidity and mortality, and increase the probability of visualizing and removing the entire desired lesion.
The lift should also be durable, potentially lasting at least two hours, such that the frequency of repeat injections and perforation
risk is minimized. Normal and abnormal tissues can also bleed during these procedures, and it can be challenging and time consuming
to stop. Surgeons have expressed desire for an agent that can prophylactically or actively address such bleeding. Surgeons have
further expressed interest in sealant properties in the event that a perforation occurs during the procedure.
Several companies, including Boston Scientific, have products
that provide either a lift or are hemostatic, but not both. AC5-G was featured in a video presentation during the Emerging Technology
Session of the Society of American Gastrointestinal and Endoscopic Surgeons (SAGES) 2020 Annual Meeting, which took place from
August 11-13, 2020.
Potential Disadvantages of our Current and Planned Products
Compared to the Competition
Some potential disadvantages of our products compared to currently
marketed products follow:
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The favorable handling characteristics of AC5 Devices result, in part, from their non-sticky and non-glue-like nature. However,
if a surgeon or healthcare provider requires a product to adhere tissues together, or provide similar glue-like action, then AC5
Devices in their current form would not achieve that effect.
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While we project that our products will be sufficiently economical to manufacture at scale, they may not be able to compete
from a price perspective with inexpensive products.
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We have not yet generated significant efficacy or economic data in humans, unlike many successful products in the Dermal Sciences
or Biosurgery categories.
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While we believe that the flowable nature of our products before they assemble into a dense nanofiber network can provide a
meaningful advantage, some surgeons may prefer a solid product in certain applications.
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Other Governmental Regulations and Environmental Matters
We are or may become subject to various laws and regulations
regarding laboratory practices and the use of animals in testing, as well as environmental laws and regulations governing, among
other things, any use and disposal by us of hazardous or potentially hazardous substances in connection with our research. At this
time, costs attributable to environmental compliance are not material. In each of these areas, applicable U.S. and foreign government
agencies have broad regulatory and enforcement powers, including, among other things, the ability to levy fines and civil penalties,
suspend or delay issuance of approvals, seize or recall products, and withdraw approvals, any one or more of which could have a
material adverse effect on our business. Additionally, if we are able to successfully obtain approvals for and commercialize our
product candidates, then the Company and our products may become subject to various federal, state and local laws targeting fraud,
abuse, privacy and security in the healthcare industry.
Intellectual Property
We are focused on the development of self-assembling compositions,
particularly self-assembling peptide compositions, and methods of making and using such compositions primarily in healthcare applications.
Suitable applications of these compositions include limiting or preventing the movement of bodily fluids and contaminants within
or on the human body, preventing adhesions, treatment of leaky or damaged tight junctions, and reinforcement of weak or damaged
vessels, such as aneurysms. Our strategy to date has been to develop an intellectual property portfolio in high-value jurisdictions
that tend to uphold intellectual property rights.
As of December 2, 2020, we either own or license from others
a number of U.S. patents, U.S. patent applications, foreign patents and foreign patent applications.
Six patent portfolios assigned to Arch Biosurgery, Inc.
include a total of 40 patents and pending applications in a total of nine jurisdictions, including twelve patents and pending applications
in the US. These portfolios cover self-assembling peptides, formulations and methods of use thereof and self-assembling peptidomimetics
and methods of use thereof, including seven issued US patents (US 9,415,084; US 9,162,005; US 9,789,157; US 9,821,022; US 9,339,476;
US 10,314,886; and US 10,682,386) that expire between 2026 and 2034 (absent patent
term extension), as well as fifteen patents that have been either allowed, issued or granted in foreign jurisdictions.
We have also entered into a license agreement with Massachusetts
Institute of Technology and Versitech Limited (“MIT”) pursuant to which we have been granted exclusive rights under
two portfolios of patents and non-exclusive rights under another three portfolios of patents.
The two portfolios exclusively licensed from MIT include a total
of 22 patents and pending applications drawn to self-assembling peptides, formulations and methods of use thereof and self-assembling
peptidomimetics and methods of use thereof in a total of nine jurisdictions. The portfolios include five issued US patents (US
9,511,113; US 9,084,837; US 10,137,166; US 9,327,010; and US 9,364,513) that expire between 2026 and 2027 (absent patent term extension),
as well as fourteen patents that have been either allowed, issued or granted in foreign jurisdictions.
The three portfolios non-exclusively licensed from MIT include
a number of US and foreign applications, including four issued US patents (US 7,449,180; US 7,846,891; US 7,713,923; and US 8,901,084)
that expire between 2021 and 2024 (absent patent term extension), as well as five patents that have been either allowed, issued
or granted in foreign jurisdictions.
Our license agreement with MIT imposes or imposed certain
diligence, capital raising, and other obligations on us, including obligations to raise certain amounts of capital by
specific dates. Additionally, we are responsible for all patent prosecution and maintenance fees under that agreement. Our
breach of any material terms of our license agreement with MIT could permit the counterparty to terminate the agreement,
which could result in our loss of some or all of our rights to use certain intellectual property that is material to our
business and our lead product candidate. Our loss of any of the rights granted to us under our license agreement with MIT
could materially harm our product development efforts and could cause our business to fail.
AC5, AC5-G, AC5-V, AC5-P, Crystal Clear Surgery, NanoDrape and
NanoBioBarrier and associated logos are trademarks and/or registered trademarks of Arch Therapeutics, Inc. and its subsidiary.
Employees
We presently have seven full-time employees and make extensive
use of third party contractors, consultants, and advisors to perform many of our present activities. We expect to increase the
number of our employees as we increase our operations.
ITEM 1A. RISK FACTORS
Investment in our Common Stock involves a high degree of
risk. You should carefully consider the risks that are summarized below and discussed in greater detail in the following pages before
making an investment decision. If any of the following risks and uncertainties actually occur, our business, financial condition,
and results of operations could be negatively impacted and you could lose all or part of your investment.
Risk Factor Summary
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There is substantial doubt about our ability to continue as a going concern. We have not generated any revenue from operations
since inception, and we believe that our current cash on hand will meet our anticipated cash requirements only into the second
quarter of fiscal 2021.
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We have incurred significant losses since inception, we expect to continue to incur losses for the foreseeable future, and
we may never generate revenue or achieve or maintain profitability.
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Given our lack of revenue, we may need to raise additional capital, which may not be available to us on acceptable terms, or
at all.
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Our business may be materially adversely affected by the coronavirus (COVID-19) pandemic. Should the pandemic or its aftereffects
continue, our business operations could and will likely be delayed or interrupted.
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Applications for regulatory marketing authorization for commercialization of our products or elements of our supply chain may
not be accepted, or if accepted, may be voluntarily withdrawn or eventually rejected, and the future success of our business is
significantly dependent on the success of our being able to obtain regulatory marketing authorization for our development stage
candidates.
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Our principal product candidates are inherently risky because they are based on novel technologies and thus create significant
challenges with respect to product development and optimization, engineering, manufacturing, scale-up, quality systems, pre-clinical
in vitro and in vivo testing, government regulation and approval, third-party reimbursement and market acceptance.
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Any changes in our supply chain, including to the third party contract manufacturers, service providers, or other vendors,
or in the processes that they employ, could adversely affect us.
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If the FDA or similar foreign agencies or intermediaries impose requirements or an alternative product classification more
onerous than we anticipate, our business could be adversely affected.
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We are subject to extensive and dynamic medical device regulations outside of the United States, which may impede or hinder
the approval, marketing authorization or sale of our products and, in some cases, may ultimately result in an inability to obtain
approval of certain products or may result in the recall or seizure of previously approved or authorized products.
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Any clinical trials that are planned or are conducted on our product candidates may not start or may fail. Clinical trials
are lengthy, complex and extremely expensive processes with uncertain expenditures and results and frequent failures.
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We cannot market and sell any product candidate in the United States or in any other country or region if we fail to obtain
the necessary marketing authorization, clearances or certifications from applicable government agencies.
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Any product for which we obtain required regulatory marketing authorization could be subject to post-approval regulation, and
we may be subject to penalties if we fail to comply with such post-approval requirements.
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Use of third parties to manufacture our product candidates may increase the risk that preclinical development, clinical development
and potential commercialization of our product candidates could be delayed, prevented or impaired.
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We face competition from companies that have greater resources than we do, and we may not be able to effectively compete against
these companies.
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If others claim we and/or the parties from who we license some of our intellectual property are infringing on their intellectual
property rights, we may be subject to costly and time-consuming litigation.
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There is not now, and there may not ever be, an active market for our Common Stock, which trades in the over-the-counter market
in low volumes and at volatile prices.
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The market price of our Common Stock is and is expected to continue to be in the near term, less than $5.00 per share and is
therefore a “penny stock.” Brokers and dealers effecting transactions in “penny stock” must disclose certain
information concerning the transaction, obtain a written agreement from the purchaser and determine that the purchaser is reasonably
suitable to purchase the securities.
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AC5, AC5-G, AC5-V, AC5-P, Crystal Clear Surgery, NanoDrape and
NanoBioBarrier and associated logos are trademarks and/or registered trademarks of Arch Therapeutics, Inc. and subsidiary.
For purposes herein, references to regulatory approval and marketing authorization may be used interchangeably.
Risks Related to our Business
Our business may be materially adversely affected by the
recent coronavirus (COVID-19) outbreak.
COVID-19 is the disease caused by a coronavirus discovered in
2019 called SARS-CoV-2. It has evolved into a global pandemic, having spread to many regions of the world. The extent to which
COVID-19 impacts our business and operating results will depend on future developments that are highly uncertain and cannot be
accurately predicted, including new information that may emerge concerning the coronavirus and the actions to contain the coronavirus
or treat its impact, among others.
Should the coronavirus continue to spread, our business operations
could and will likely be delayed or interrupted. For instance, clinical use may be delayed due to, among other items, availability
of clinicians, follow-up by patients, availability of facility administrators to coordinate product evaluations and intake, and
the inability to ship product to clinical sites. Site initiation, participant recruitment and enrollment, participant dosing, distribution
of clinical trial materials, study monitoring and data analysis may be paused or delayed due to changes in hospital or university
policies, federal, state or local regulations, prioritization of hospital resources toward pandemic efforts, or other reasons related
to the pandemic. Some participants and clinical investigators may not be able to comply with clinical trial protocols. For example,
quarantines or other travel limitations (whether voluntary or required) may impede participant movement, affect sponsor access
to study sites, or interrupt healthcare services, and we may be unable to conduct our clinical trials. Furthermore, if the spread
of the coronavirus pandemic continues and our operations are adversely impacted, we risk a delay, default and/or nonperformance
under existing agreements which may increase our costs. These cost increases may not be fully recoverable or adequately covered
by insurance.
Infections, deaths and resource constraints due to the pandemic
may disrupt the United States and/or other healthcare and healthcare regulatory systems. Such disruptions could divert healthcare
resources away from evaluating and/or using our products, materially delay FDA and/or other regulatory agency review and/or approval
with respect to our current and future preclinical development plans, clinical trials and requests for marketing authorizations.
It is unknown how long these disruptions could continue, were they to occur. Any elongation or de-prioritization of our clinical
trials or delay in regulatory review resulting from such disruptions could and will materially affect the development and study
of our product candidates.
We currently utilize third parties to, among other things, manufacture
raw materials. If any third-party involved in the production of our products, product candidates, or raw materials are adversely
impacted by restrictions resulting from the coronavirus outbreak, our supply chain may be disrupted, limiting our ability to manufacture
products for research and development operations, clinical trials and, in the case of AC5® Topical Gel (renamed
AC5 Advanced Wound System) and AC5 Topical Hemostat, commercialization.
Finally, while we believe that we currently have sufficient
supply of our products to continue commercialization efforts, our products and 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 coronavirus, which could result in shortages due to ongoing efforts to address the outbreak. If any of
the foregoing were to occur, it could materially adversely affect our future revenues, financial condition, profitability, and
cash flows.
In the event of a shelter-in-place order or other mandated
local travel restrictions, our employees conducting research and development or manufacturing activities may not be able to access
their laboratory or manufacturing space, and our core activities may be significantly limited or curtailed, possibly for an extended
period of time.
The spread of the coronavirus, which has had a broad negative
global impact, including restrictions on travel and quarantine policies put into place by businesses and governments, may have
a material economic effect on our business. This may also limit the ability of physicians to perform procedures in which our products
could be used.
In addition, and as noted elsewhere, we believe that our current
cash on hand will meet our anticipated cash requirements into the second quarter of fiscal 2021. Accordingly, while the potential
economic impact brought by and the duration of the pandemic may be difficult to assess or predict, it has already caused, and is
likely to result in further, significant disruption of global financial markets, which may reduce our ability to access capital
either at all or on favorable terms. In addition, a recession, depression or other sustained adverse market event resulting from
the spread of the coronavirus could materially and adversely affect our business and the value of our common stock.
The ultimate impact of the current pandemic, or any other health
epidemic, is highly uncertain and subject to change. We do not yet know the full extent of potential delays or impacts on our business,
our clinical trials, our research programs, healthcare systems or the global economy as a whole. However, these effects could have
a material impact on our operations, and we will continue to monitor the situation closely.
There is substantial doubt about our ability to continue
as a going concern.
Our
initial product candidates are currently being used by clinicians and to date we have not generated any revenue and we have incurred
substantial net losses as a result. As of December 10, 2020, we believe that our current cash will meet anticipated requirements
into the second quarter of fiscal 2021 and we will need to raise additional capital before then.
During the first quarter of Fiscal 2020, the third quarter of
fiscal 2020 and the first quarter of fiscal 2021, we obtained additional cash to continue operations and fund our planned future
operations, which include research and development of our product candidates, steps related to seeking regulatory marketing authorization
for our initial product candidates, and planning for their commercialization in the U.S. and Europe. Even with the additional funds
received from the 2019 SPA and the October 2019 SPA the Series 1 convertible promissory notes and the Series 2 convertible promissory
notes there exists substantial doubt about our ability to continue, as a going concern.
We have incurred significant losses since inception. We
expect to continue to incur losses for the foreseeable future, and we may never generate revenue or achieve or maintain profitability.
As noted above under the risk factor entitled “There
is substantial doubt about our ability to continue as a going concern,” we have not generated any product
revenue to-date. Consequently, we have incurred losses in each year since our inception and we expect that losses will continue
to be incurred in the foreseeable future in the operation of our business. To date, we have financed our operations entirely through
equity and debt investments by founders, other investors and third parties, and we expect to continue to rely on these sources
of funding, to the extent available in the foreseeable future. Losses from operations have resulted principally from costs incurred
in research and development programs and from general and administrative expenses, including significant costs associated with
establishing and maintaining intellectual property rights, significant legal and accounting costs incurred in connection with both
the closing of the Merger and complying with public company reporting and control obligations, and personnel expenses. We have
devoted much of our operational effort to date to the research and development of our core technology, including selecting our
initial product composition, conducting safety and other related tests, conducting a human trial for safety and performance, developing
methods for manufacturing scale-up, reproducibility and validation, and developing and protecting the intellectual property rights
underlying our technology platform.
We expect to continue to incur significant expenses and anticipate
that those expenses and losses may increase in the foreseeable future as we:
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develop our principal product candidates, and the underlying technology, including advancing applications and conducting biocompatibility
and other preclinical studies;
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raise capital needed to fund our operations;
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enhance investor relations and corporate communications capabilities;
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conduct clinical trials on products and product candidates;
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attempt to obtain regulatory marketing authorizations for product candidates;
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build relationships with additional contract manufacturing partners, and invest in product and process development through
such partners;
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maintain, expand and protect our intellectual property portfolio;
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advance additional product candidates and technologies through our research and development pipeline;
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seek to commercialize selected product candidates, which may require regulatory marketing authorization; and
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hire additional regulatory, clinical, quality control, scientific, financial, and management, consultants and advisors.
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To become and remain profitable, we must succeed in developing
and eventually commercializing product candidates with significant market potential. This will require us to be successful in a
number of challenging activities, including successfully completing preclinical testing and clinical trials of product candidates,
obtaining regulatory marketing authorization for our product candidates and manufacturing, marketing and selling any products for
which we have or may obtain marketing authorization. We are only in the preliminary stages of many of those activities. We may
never succeed in those activities and may never generate operating revenues or achieve profitability. Even if we do generate operating
revenues sufficient to achieve profitability, we may not be able to sustain or increase profitability. Our failure to generate
operating revenues or become and remain profitable would impair our ability to raise capital, expand our business or continue our
operations, all of which would depress the price of our Common Stock. A further decline or lack of increase in the prices of our
Common Stock could cause our stockholders to lose all or a part of their investment in the Company.
We will need substantial additional funding and may be
unable to raise capital when needed, which would force us to delay, reduce or eliminate our product development programs or commercialization
efforts and could cause our business to fail.
Based on our current operating expenses and working capital
requirements, as of December 10, 2020, we believe that our current cash on hand will meet our anticipated cash requirements into
the second quarter of fiscal 2021. Notwithstanding that, depending upon additional input from EU and US regulatory authorities,
we may need to raise additional capital before then. For example, on December 18, 2017, we voluntarily withdrew a 510(k) notification
for AC5 Topical Gel after receiving questions from the FDA for which an adequately comprehensive response could not be provided
within the FDA’s congressionally-mandated 90-day review period. While on October 1, 2018, we announced that we both completed
the necessary steps required to refile our 510(k) submission for AC5 Topical Gel and filed a 510(k) submission during the third
calendar quarter of 2018, the resubmission process required us to expend a minimum of $100,000 that we had not anticipated spending
and delayed the clearance of our 510(k) submission.
During
the first quarter of Fiscal 2020, the third quarter of Fiscal 2020 and the first quarter of Fiscal 2021, we obtained additional
cash to continue operations and fund our planned future operations, including the continuation of our ongoing research and development
efforts, the licensing or acquisition of new assets, and researching and developing any potential patents, the related compounds
and any further intellectual property that we may acquire. In addition, our plans may change and/or we may use our capital resources
more rapidly than we currently anticipate. We presently expect that our expenses will increase in connection with our ongoing activities
to support our business operations, inclusive of regulatory submissions, marketing authorization, and commercialization of our
product candidates and products, and, therefore, we will require additional funding.
Our future capital requirements will depend on many factors,
including:
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the scope, progress and results of our research and development collaborations;
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the extent of potential direct or indirect grant funding for our research and development activities;
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the scope, progress, results, costs, timing and outcomes of any regulatory process and clinical trials conducted for any of
our product candidates;
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the timing of entering into, and the terms of, any collaboration agreements with third parties relating to any of our product
candidates;
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the timing of and the costs involved in obtaining regulatory marketing authorization for our product candidates;
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the costs of operating, expanding and enhancing our operations to support our clinical activities and, if our product candidates
are approved, commercialization activities;
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the costs of maintaining, expanding and protecting our intellectual property portfolio, including potential litigation costs
and liabilities;
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the costs associated with maintaining and expanding our product pipeline;
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the costs associated with expanding our geographic focus;
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operating revenues, if any, received from sales of our product candidates, if any are approved by the FDA or other applicable
regulatory agencies;
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the cost associated with being a public company, including obligations to regulatory agencies, and increased investor relations
and corporate communications expenses; and
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the costs of additional general and administrative personnel, including accounting and finance, legal and human resources employees.
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We intend to obtain additional financing for our business through
public or private securities offerings, the incurrence of additional indebtedness, or some combination of those sources. We may
also seek funding through collaborative arrangements with strategic partners if we determine them to be necessary or appropriate,
although these arrangements could require us to relinquish rights to our technology or product candidates and could result in our
receipt of only a portion of any revenues associated with the partnered product. We cannot provide any assurance that additional
financing from these sources will be available on favorable terms, if at all.
In addition, we are bound by certain contractual terms and obligations
that may limit or otherwise impact our ability to raise additional funding in the near-term including, but not limited to, provisions
in the Securities Purchase Agreements that we entered into on February 20, 2017 (the “2017 SPA”) and June 28,
2018 (the “2018 SPA”) in connection with the registered direct financings that closed on February 24, 2017 (the
“2017 Financing”) and July 2, 2018 (the “2018 Financing”), respectively, in each case as described
in greater detail in the risk factor entitled “The terms of the 2017 Financing and 2018 Financing could impose additional
challenges on our ability to raise funding in the future ” below.
These restrictions and provisions could make it more challenging
for us to raise capital through the incurrence of additional debt or through future equity issuances. Further, if we do raise capital
through the sale of equity, or securities convertible into equity, the ownership of our then existing stockholders would be diluted,
which dilution could be significant depending on the price at which we may be able to sell our securities. Also, if we raise additional
capital through the incurrence of indebtedness, we may become subject to covenants restricting our business activities, and the
holders of debt instruments may have rights and privileges senior to those of our equity investors. Finally, servicing the interest
and principal repayment obligations under any debt facilities that we may enter into in the future could divert funds that would
otherwise be available to support research and development, clinical or commercialization activities.
If we are unable to obtain adequate financing on a timely basis
or on acceptable terms in the future, we would likely be required to delay, reduce or eliminate one or more of our product development
activities, which could cause our business to fail.
The terms of the 2017 Financing and 2018 Financing could
impose additional challenges on our ability to raise funding in the future.
In particular, both the 2017 SPA and 2018 SPA contain provisions
that provide that until such time as the three lead investors in the 2017 Financing and 2018 Financing, respectively, collectively
own less than 20% of the Series F Warrants or Series G Warrants as applicable, purchased by them pursuant to the 2017
SPA or 2018 SPA, as applicable, the Company is prohibited from effecting or entering into an agreement to effect any issuance by
the Company or 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 including, but not limited to, an equity line of credit or “At-the-Market”
financing facility.
As of December 10, 2020, none of the lead investors for
either the 2017 Financing or 2018 Financing have exercised or transferred any of their Series F Warrants and Series G
Warrants. As defined in the 2017 SPA and 2018 SPA, Variable Rate Transaction means a transaction in which the Company (a) issues
or sells any debt or equity securities that are convertible into, exchangeable or exercisable for, or include the right to receive
additional shares of Common Stock either (A) at a conversion price, exercise price or exchange rate or other price that is
based upon and/or varies with the trading prices of or quotations for the shares of Common Stock at any time after the initial
issuance of such debt or equity securities, or (B) with a conversion, exercise or exchange price that is subject to being
reset at some future date after the initial issuance of such debt or equity security or upon the occurrence of specified or contingent
events directly or indirectly related to the business of the Company or the market for the Common Stock (excluding adjustments
under customary anti-dilution provisions) or (b) enters into, or effects a transaction under, any agreement, including, but
not limited to, an equity line of credit, whereby the Company may issue securities at a future determined price. These provisions
could make our securities less attractive to investors and could limit our ability to obtain adequate financing on a timely basis
or on acceptable terms in the future, which could have significant harmful effects on our financial condition and business and
could include substantial limitations on our ability to continue to conduct operations.
Our short operating history may hinder our ability to
successfully meet our objectives.
We are transitioning from being strictly a development stage
company subject to the risks, uncertainties and difficulties frequently encountered by early-stage companies in evolving markets.
Our operations to date have been primarily limited to organizing and staffing, developing and securing our technology and undertaking
funding preclinical studies of our lead product candidates, and funding one clinical trial. We have not demonstrated our ability
to successfully complete large-scale, pivotal clinical trials, reliably obtain regulatory marketing authorizations, manufacture
a commercial scale product or arrange for a third-party to do so on our behalf, or conduct sales and marketing activities necessary
for successful product commercialization.
Because of our limited operating history, we have limited insight
into trends that may emerge and affect our business, and errors may be made in developing an approach to address those trends and
the other challenges faced by development stage companies. Failure to adequately respond to such trends and challenges could cause
our business, results of operations and financial condition to suffer or fail. Further, our limited operating history may make
it difficult for our stockholders to make any predictions about our likelihood of future success or viability.
If we are not able to attract and retain qualified management
and scientific personnel, we may fail to develop our technologies and product candidates.
Our future success depends to a significant degree on the skills,
experience and efforts of the principal members of our scientific and management personnel. These members include Terrence Norchi,
MD, our President and Chief Executive Officer. The loss of Dr. Norchi or any of our other key personnel could harm our business
and might significantly delay or prevent the achievement of research, development or business objectives. Further, our operation
as a public company will require that we attract additional personnel to support the establishment of appropriate financial reporting
and internal controls systems. Competition for personnel is intense. We may not be able to attract, retain and/or successfully
integrate qualified scientific, financial and other management personnel, which could materially harm our business.
If we fail to properly manage any growth we may experience,
our business could be adversely affected.
We anticipate increasing the scale of our operations as we seek
to develop our product candidates, including hiring and training additional personnel and establishing appropriate systems for
a company with larger operations. The management of any growth we may experience will depend, among other things, upon our ability
to develop and improve our operational, financial and management controls, reporting systems and procedures. If we are unable to
manage any growth effectively, our operations and financial condition could be adversely affected.
If we fail to maintain appropriate internal controls in
the future, we may not be able to report our financial results accurately, which may adversely affect our stock price and our business.
Our efforts to comply with Section 404 of the Sarbanes-Oxley
Act of 2002 and the related regulations regarding our required assessment of our internal controls over financial reporting requires
the commitment of significant financial and managerial resources. Internal control over financial reporting has inherent limitations,
including human error, the possibility that controls could be circumvented or become inadequate because of changed conditions,
and fraud. If we are unable to maintain effective internal controls, we may not have adequate, accurate or timely financial information,
and we may be unable to meet our reporting obligations as a publicly traded company or comply with the requirements of the SEC
or the Sarbanes-Oxley Act of 2002. This could result in a restatement of our financial statements, the imposition of sanctions,
including the inability of registered broker dealers to make a market in our stock, or investigation by regulatory authorities.
Any such action or other negative results caused by our inability to meet our reporting requirements or comply with legal and regulatory
requirements or by disclosure of an accounting, reporting or control issue could adversely affect the trading price of our stock
and our business.
We rely significantly on information technology and any
failure, inadequacy, interruption or security lapse of that technology, including any cybersecurity incidents, could harm our ability
to operate our business effectively.
We maintain sensitive data pertaining to our Company on our
computer networks, including information about our research and development activities, our intellectual property and other proprietary
business information. Our internal computer systems and those of third parties with which we contract may be vulnerable to damage
from cyber-attacks, computer viruses, unauthorized access, natural disasters, terrorism, war and telecommunication and electrical
failures, despite the implementation of security measures. System failures, accidents or security breaches could cause interruptions
to our operations, including material disruption of our research and development activities, result in significant data losses
or theft of our intellectual property or proprietary business information, and could require substantial expenditures to remedy.
To the extent that any disruption or security breach were to result in a loss of, or damage to, our data or applications or inappropriate
disclosure of confidential or proprietary information, we could incur liability and our research and development programs could
be delayed, any of which would harm our business and operations.
Risks Related to Our Business, Financial Position and
Capital Requirements - Legal, political and economic uncertainty surrounding the exit of the United Kingdom from the European Union
is a source of instability and uncertainty.
Legal, political and economic uncertainty surrounding the exit
of the United Kingdom from the European Union is a source of instability and uncertainty.
The uncertainty concerning the U.K’s legal, political
and economic relationship with the E.U. after the Transition Period may be a source of instability in the international markets,
create significant currency fluctuations, and/or otherwise adversely affect trading agreements or similar cross-border co-operation
arrangements (whether economic, tax, fiscal, legal, regulatory or otherwise).
These developments, or the perception that any of them could
occur, have had, and may continue to have, a significant adverse effect on global economic conditions and the stability of global
financial markets, and could significantly reduce global market liquidity and limit the ability of key market participants to operate
in certain financial markets. In particular, it could also lead to a period of considerable uncertainty in relation to the U.K.
financial and banking markets, as well as on the regulatory process in Europe. Asset valuations, currency exchange rates and credit
ratings may also be subject to increased market volatility.
If the U.K. and the E.U. are unable to negotiate acceptable
trading and customs terms or if other E.U. Member States pursue withdrawal, barrier-free access between the U.K. and other E.U.
Member States or among the European Economic Area (“E.E.A.”) overall could be diminished or eliminated. The long-term
effects of Brexit will depend on any agreements (or lack thereof) between the U.K. and the E.U. and, in particular, any
arrangements for the U.K. to retain access to E.U. markets after the Transition Period. Such a withdrawal from the E.U. is unprecedented,
and it is unclear how the U.K. access to the European single market for goods, capital, services and labor within the E.U., or
single market, and the wider commercial, legal and regulatory environment, will impact our U.K. operations.
We may also face new regulatory costs and challenges that could
have an adverse effect on our operations and development programs. For example, the U.K. could lose the benefits of global trade
agreements negotiated by the E.U. on behalf of its members, which may result in increased trade barriers that could make our doing
business in the E.U. and the E.E.A. more difficult. There may continue to be economic uncertainty surrounding the consequences
of Brexit, which could adversely affect our financial condition, results of operations, cash flows and market price of our
common stock.
Risks Related to the Development and
Commercialization of our Product Candidates
Applications for regulatory marketing authorization for
commercialization of our products or elements of our supply chain may not be accepted, or if accepted, may be voluntarily withdrawn
or eventually rejected, and the future success of our business is significantly dependent on the success of our being able to obtain
regulatory marketing authorization for our development stage candidates.
For example, on July 17, 2017, we filed a 510(k) notification
with the FDA for AC5 Topical Gel. As previously announced on December 18, 2017, we voluntarily withdrew the submission after
receiving a communication from the FDA near the end of the agency’s 90-day review period for a final decision on 510(k) notifications.
The communication contained questions for which a comprehensive response could not be provided in the limited review time remaining
on the submission. Given that it was not possible to respond in the time available, the Company made the decision to withdraw the
510(k) notification but noted at the time that it remained committed to continued collaboration with the FDA to appropriately
address the outstanding questions and planned to submit a new 510(k) notification as soon as possible following further discussion
with the agency. On March 12, 2018, we announced that we were utilizing the FDA’s pre-submission process to submit a
proposed development strategy to the FDA to address the agency’s comments on our 510(k) notification. As indicated in
that March 12, 2018 announcement, we determined that providing additional data to the FDA would be the most expeditious path
forward for addressing the FDA’s comments, subject to any further comments that we may receive from the FDA.
On May 8, 2018, the Company announced that it would initiate
the previously disclosed study designed to address FDA comments on Arch’s previous 510(k) notification for its AC5 Topical
Gel. The agency provided feedback via the pre-submission process and indicated that the proposed study design was acceptable to
support the Company’s future marketing application. On June 15, 2018, the Company further announced that it completed
enrollment for its human skin sensitization study and that applications of the Company’s AC5 Topical Gel were underway for
all subjects.
On October 1, 2018 the Company announced that it submitted
a 510(k) notification to the FDA for its AC5 Topical Gel (AC5) and received acknowledgement from the FDA that the submission
has been received. On December 17, 2018, we announced that the 510(k) premarket notification for AC5 Topical Gel
has been reviewed and cleared by the FDA.
Our business plan is dependent on the success of our development
stage product candidates.
Our business is currently focused almost entirely on the development
and commercialization of our initial product candidates and products (“AC5 Devices”). Our reliance on AC5 Devices means
that, if we are not able to obtain both regulatory marketing authorization and market acceptance of those product candidates, our
chances for success will be significantly reduced. We are also less likely to withstand competitive pressures if any of our competitors
develop and obtain regulatory marketing authorization for similar products or for products that may be more attractive to the market.
Our current dependence on AC5 Devices increases the risk that our business will fail if our development efforts for those products
experience delays or other obstacles or are otherwise not successful.
The Chemistry, Manufacturing and Control (“CMC”)
process may be challenging.
Because of the complexity of our lead product candidates, the
CMC process, including but not limited to product scale-up activities and cGMP manufacturing for human use, may be difficult to
complete successfully within the parameters required by the FDA or its foreign counterparts. Peptide formulation optimization is
particularly challenging, and any delays could negatively impact our ability to conduct clinical trials and our subsequent commercialization
timeline. Furthermore, we have, and the third parties with whom we may establish relationships may also have, limited experience
with attempting to commercialize a self-assembling peptide as a medical device, which increases the risks associated with completing
the CMC process successfully, on time, or within the projected budget. Failure to complete the CMC process successfully would impact
our ability to complete product development activities, such as conducting clinical trials and submitting applications for regulatory
approval, which could affect the long-term viability of our business.
Our principal product candidates are inherently risky
because they are based on novel technologies.
We are subject to the risks of failure inherent in the development
of products based on new technologies. The novel nature of the AC5 Devices creates significant challenges with respect to product
development and optimization, engineering, manufacturing, scale-up, quality systems, pre-clinical in vitro and in vivo testing,
government regulation and approval, third-party reimbursement and market acceptance. Our failure to overcome any one of those challenges
could harm our operations, ability to complete additional clinical trials, and overall chances for success.
Any changes in our supply chain, including to the third
party contract manufacturers, service providers, or other vendors, or in the processes that they employ could adversely affect
us.
We are dependent on third-parties in our supply chain, including
manufacturers, service providers, and other vendors, and the processes that they employ to make major and minor components of our
products, and this dependence exposes us to risks associated with regulatory requirements, delivery schedules, manufacturing capability,
quality control, quality assurance and costs. We make periodic changes within our supply chain, for example, as our business needs
evolve; and/or if a third party does not perform as agreed or desired; and/or if we decide to add an additional manufacturer, service
provider, or vendor where we were previously single sourced; and/or if processes are altered to meet evolving scale requirements.
For instance, the Company harmonized its US and European product supply chains by adding a supplier and additional manufacturing
processes to the list of approved suppliers and processes for the production of the AC5 Topical Advanced Wound System that is commercially
available in the United States. The Company filed documentation with the FDA related to these supply chain changes and announced
on March 23, 2020 that the FDA provided the required clearance to market with the supply
chain and manufacturing process changes. We cannot yet provide assurance that the changes or
resulting product will prove acceptable to us.
The manufacturing, production, and sterilization methods
that we intend to be utilized are detailed and complex and are a difficult process to manage.
We intend to utilize third-party manufacturers to manufacture
and sterilize our products. We believe that our proposed manufacturing methods make our choice of manufacturer and sterilizer critical,
as they must possess sufficient expertise in synthetic organic chemistry and device manufacturing. If such manufacturers are unable
to properly manufacture to product specifications or sterilize our products adequately, that could severely limit our ability to
market our products.
Compliance with governmental regulations regarding the
treatment of animals used in research could increase our operating costs, which would adversely affect the commercialization of
our technology.
The Animal Welfare Act (“AWA”) is the federal law
that covers the treatment of certain animals used in research. Currently, the AWA imposes a wide variety of specific regulations
that govern the humane handling, care, treatment and transportation of certain animals by producers and users of research animals,
most notably relating to personnel, facilities, sanitation, cage size, and feeding, watering and shipping conditions. Third parties
with whom we contract are subject to registration, inspections and reporting requirements under the AWA. Furthermore, some states
have their own regulations, including general anti-cruelty legislation, which establish certain standards in handling animals.
Comparable rules, regulations, and or obligations exist in many foreign jurisdictions. If our contractors or we fail to comply
with regulations concerning the treatment of animals used in research, we may be subject to fines and penalties and adverse publicity,
and our operations could be adversely affected.
If the FDA or similar foreign agencies or intermediaries
impose requirements or an alternative product classification more onerous than we anticipate, our business could be adversely affected.
The FDA and other regulatory authorities or related bodies separately
determine the classification of our products and product candidates. The development plan for our lead product candidates is based
on our anticipation of pursuing the medical device regulatory pathway, and in February 2015 we received confirmation from
The British Standards Institution (“BSI”), a European notified body (which is a private commercial entity designated
by the national government of a European Union (“EU”) member state as being competent to make independent judgments
about whether a medical device complies with applicable regulatory requirements), confirmed that AC5 Topical Hemostat fulfills
the definition of a medical device within the EU and it was classified as such in consideration of the CE mark, receipt of which
was announced by the Company on April 13, 2020. The FDA also determined AC5 Topical Gel, which was later renamed AC5 Advanced
Wound System, to be a medical device. If the FDA or similar foreign agencies or intermediaries deem our products to be a member
of a category other than a medical device, such as a drug or biologic, or impose additional requirements on our pre-clinical and
clinical development than we presently anticipate, financing needs would increase, the timeline for product approval would lengthen,
the program complexity and resource requirements world increase, and the probability of successfully commercializing a product
would decrease. Any or all of those circumstances would materially adversely affect our business.
We are subject to extensive and dynamic medical device
regulations outside of the United States, which may impede or hinder the approval
or sale of our products and, in some cases, may ultimately
result in an inability to obtain approval of certain products or may result in the recall or seizure of products that were previously
approved.
In
the European Union, we are required to comply with applicable medical device directives, including the Medical Devices Directive,
and obtain CE mark in order to market medical device products. The CE mark is applied following approval from an independent notified
body or declaration of conformity. As is the case in the United States, the process of obtaining marketing approval or clearance
from comparable agencies in foreign countries for new products, or with respect to enhancements or modifications to existing
products, could:
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take a significant period of time;
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require the expenditure of substantial resources;
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involve rigorous pre-clinical and clinical testing;
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require extensive post-marketing surveillance;
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require changes to products; and
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result in limitations on the indicated uses of products.
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In addition, exported devices are subject to the regulatory
requirements of each country to which the device is exported. Most foreign countries possess medical devices regulations and require
that they be applied to medical devices before they can be commercialized. There can be no assurance that we will receive the required
approvals for our products on a timely basis or that any approval will not be subsequently withdrawn or conditioned upon extensive
post-market study requirements.
Our global regulatory environment is becoming increasingly stringent
and unpredictable, which could increase the time, cost and complexity of obtaining marketing authorization for our products, as
well as the clinical and regulatory costs of supporting those approvals. Several countries that did not have regulatory requirements
for medical devices have established such requirements in recent years and other countries have expanded existing regulations.
Certain regulators are exhibiting less flexibility by requiring, for example, the collection of local preclinical and/or clinical
data prior to approval. While harmonization of global regulations has been pursued, requirements continue to differ significantly
among countries. We expect the global regulatory environment to continue to evolve, which could impact our ability to obtain future
approvals for our products and increase the cost and time to obtain such approvals. By way of example, the European Union regulatory
bodies recently finalized a new Medical Device Regulation (“MDR”). The MDR changes several aspects of the existing
regulatory framework, such as clinical data requirements, and introduces new ones, such as Unique Device Identification (“UDI”).
We, and the Notified Bodies who will oversee compliance to the new MDR, face uncertainties in the upcoming years as the MDR is
rolled out and enforced, creating risks in several areas, including the CE mark process, data transparency and application review
timetables. The MDR was to be implemented on May 25, 2020, however, the implementation date has been postponed till May 26,
2021 due to the effects of Covid-19.
If we are not able to secure and maintain relationships
with third parties that are capable of conducting clinical trials on our product candidates and support our regulatory submissions,
our product development efforts, and subsequent marketing authorization could be adversely impacted.
Our management has limited experience in conducting preclinical
development activities and clinical trials. As a result, we have relied and will need to continue to rely on third-party research
institutions, organizations and clinical investigators to conduct our preclinical and clinical trials and support our regulatory
submissions. If we are unable to reach agreement with qualified research institutions, organizations and clinical investigators
on acceptable terms, or if any resulting agreement is terminated prior to the completion of our clinical trials, then our product
development efforts could be materially delayed or otherwise harmed. Further, our reliance on third parties to conduct our clinical
trials and support our regulatory submissions will provide us with less control over the timing and cost of those trials, the ability
to recruit suitable subjects to participate in the trials, and the timing, cost, and probability of success for the regulatory
submissions. Moreover, the FDA and other regulatory authorities require that we comply with standards, commonly referred to as
good clinical practices (“GCP”), for conducting, recording and reporting the results of our preclinical development
activities and our clinical trials, to assure that data and reported results are credible and accurate and that the rights, safety
and confidentiality of trial participants are protected. Additionally, both we and any third-party contractor performing preclinical
and clinical studies are subject to regulations governing the treatment of human and animal subjects in performing those studies.
Our reliance on third parties that we do not control does not relieve us of those responsibilities and requirements. If those third
parties do not successfully carry out their contractual duties, meet expected deadlines or conduct our preclinical development
activities or clinical trials in accordance with regulatory requirements or stated protocols, we may not be able to obtain, or
may be delayed in obtaining, marketing authorization for our product candidates and will not be able to, or may be delayed in our
efforts to, successfully commercialize our product candidates. Any of those circumstances would materially harm our business and
prospects.
Any clinical trials that are planned or are conducted
on our products and product candidates may not start or may fail.
Clinical
trials are lengthy, complex and extremely expensive processes with uncertain expenditures and results and frequent failures. While
the Company has completed its first clinical trial in Western Europe, clinical trials that are planned or which have or shall commence
for any of our product candidates could be delayed or fail for a number of reasons, including if:
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FDA or other regulatory authorities, or other relevant decision-making bodies do not grant permission to proceed or place a
trial on clinical hold due to safety concerns or other reasons;
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sufficient suitable subjects do not enroll, enroll more slowly than anticipated or remain in our trials;
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we fail to produce necessary amounts of the product or product candidate;
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subjects experience an unacceptable rate of efficacy of the product or product candidate;
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subjects experience an unacceptable rate or severity of adverse side effects, demonstrating a lack of safety of the product
or product candidate;
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any portion of the trial or related studies produces negative or inconclusive results or other adverse events;
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reports from preclinical or clinical testing on similar technologies and products raise safety and/or efficacy concerns;
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third-party clinical investigators lose their licenses or permits necessary to perform our clinical trials, do not perform
their clinical trials on the anticipated schedule or consistent with the clinical trial protocol, GCP or regulatory requirements,
or other third parties do not perform data collection and analysis in a timely or accurate manner;
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inspections of clinical trial sites by the FDA or an institutional review board (“IRB”) or other applicable regulatory
authorities find violations that require us to undertake corrective action, suspend or terminate one or more testing sites, or
prohibit us from using some or all of the resulting data in support of our marketing applications with the FDA or other applicable
agencies;
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manufacturing facilities of our third-party manufacturers are ordered by the FDA or other government or regulatory authorities
to temporarily or permanently shut down due to violations of current good manufacturing practices (“cGMP”) or other
applicable requirements;
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third-party contractors become debarred or suspended or otherwise penalized by the FDA or other government or regulatory authorities
for violations of regulatory requirements;
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the FDA or other regulatory authorities impose requirements on the design, structure or other features of the clinical trials
for our product candidates that we and/or our third-party contractors are unable to satisfy;
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one or more IRB refuses to approve, suspends or terminates a trial at an investigational site, precludes enrollment of additional
subjects, or withdraws its approval of the trial;
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the FDA or other regulatory authorities seek the advice of an advisory committee of physician and patient representatives that
may view the risks of our product candidates as outweighing the benefits;
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the FDA or other regulatory authorities require us to expand the size and scope of the clinical trials, which we may not be
able to do; or
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the FDA or other regulatory authorities impose prohibitive post-marketing restrictions on any of our product candidates that
attain marketing authorization.
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Any delay or failure of one or more of our clinical trials may
occur at any stage of testing. Any such delay could cause our development costs to materially increase, and any such failure could
significantly impair our business plans, which would materially harm our financial condition and operations.
We cannot market and sell any product candidate in the
U.S. or in any other country or region if we fail to obtain the necessary marketing authorization, clearances or certifications
from applicable government agencies.
We cannot sell our product candidates in any country until regulatory
agencies grant marketing approval, clearance or other required certification. The process of obtaining such approval is lengthy,
expensive and uncertain. If we are able to obtain such approvals for our lead product candidate or any other product candidate
we may pursue, which we may never be able to do, it would likely be a process that takes many years to achieve.
To obtain marketing approvals in the U.S. for our product candidates,
we believe that we must, among other requirements, complete carefully controlled and well-designed clinical trials sufficient to
demonstrate to the FDA that the product candidate is safe and effective for each indication for which we seek approval. As described
above, many factors could cause those trials to be delayed or to fail.
We believe that the pathway to marketing approval in the U.S.
for our lead product candidate for internal use will likely be classified as a Class III medical device and require the process
of FDA Premarket Approval (“PMA“). This approval pathway can be lengthy and expensive and is estimated to take from
one to three years or longer from the time the PMA application is submitted to the FDA until approval is obtained, if approval
can be obtained at all.
Similarly, to obtain approval to market our product candidates
outside of the U.S., we will need to submit clinical data concerning our product candidates to and receive marketing approval or
other required certifications from governmental or other agencies in those countries, which in certain countries includes approval
of the price we intend to charge for a product. For instance, in order to obtain the certification needed to market our lead product
candidate in the EU, we believe that we will need to obtain a CE mark for the product, which entails scrutiny by applicable regulatory
agencies and bears some similarity to the PMA process, including completion of one or more successful clinical trials.
We may encounter delays or rejections if changes occur in regulatory
agency policies, if difficulties arise within regulatory or related agencies such as, for instance, any delays in their review
time, or if reports from preclinical and clinical testing on similar technology or products raise safety and/or efficacy concerns
during the period in which we develop a product candidate or during the period required for review of any application for marketing
approval or certification.
Any difficulties we encounter during the approval or certification
process for any of our product candidates would have a substantial adverse impact on our operations and financial condition and
could cause our business to fail.
We cannot guarantee that we will be able to effectively
market our product candidates.
A significant part of our success depends on the various marketing
strategies we plan to implement. Our business model has historically focused solely on product development, and we have never attempted
to commercialize any product. There can be no assurance as to the success of any such marketing strategy that we develop or that
we will be able to build a successful sales and marketing organization. If we cannot effectively market those products we seek
to commercialize directly, such products’ prospects will be harmed.
Any product for which we obtain required regulatory marketing
authorization could be subject to post-approval regulation, and we may be subject to penalties if we fail to comply with such post-approval
requirements.
Any
product for which we are able to obtain marketing approval or other required certifications, and for which we are able to obtain
approval of the manufacturing processes, post-approval clinical data, labeling, advertising and promotional activities for such
product, will be subject to continual requirements of and review by the FDA and comparable foreign regulatory authorities, including
through periodic inspections. These requirements include, without limitation, submissions of safety and other post-marketing information
and reports, registration requirements, cGMP requirements relating to quality control, quality assurance and corresponding maintenance
of records and documents. Maintaining compliance with any such regulations that may be applicable to us or our product candidates
in the future would require significant time, attention and expense. Even if marketing approval of a product is granted, the approval
may be subject to limitations on the indicated uses for which the product may be marketed or other conditions of approval or may
contain requirements for costly and time consuming post-marketing approval testing and surveillance to monitor the safety or efficacy
of the product. Discovery after approval of previously unknown problems with any approved product candidate or related manufacturing
processes, or failure to comply with regulatory requirements, may result in consequences to us such as:
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restrictions on the marketing or distribution of a product, including refusals to permit the import or export of the product;
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the requirement to include warning labels on the products;
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withdrawal or recall of the products from the market;
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refusal by the FDA or other regulatory agencies to approve pending applications or supplements to approved applications that
we may submit;
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suspension of any ongoing clinical trials;
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fines, restitution or disgorgement of profits or revenue;
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suspension or withdrawal of marketing approvals or certifications; or
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civil or criminal penalties.
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If any of our product candidates achieves required regulatory
marketing approvals or certifications in the future, the subsequent occurrence of any such post-approval consequences would materially
adversely affect our business and operations.
Current or future legislation may make it more difficult
and costly for us to obtain marketing approval or other certifications of our product candidates.
In 2007, the Food and Drug Administration Amendments Act of
2007 (“FDAAA”) was adopted. This legislation grants significant powers to the FDA, many of which are aimed at assuring
the safety of medical products after approval. For example, the FDAAA grants the FDA authority to impose post-approval clinical
study requirements, require safety-related changes to product labeling and require the adoption of complex risk management plans.
Pursuant to the FDAAA, the FDA may require that a new product be used only by physicians with specialized training, only in specified
health care settings, or only in conjunction with special patient testing and monitoring. The legislation also includes requirements
for disclosing clinical study results to the public through a clinical study registry, and renewed requirements for conducting
clinical studies to generate information on the use of products in pediatric patients. Under the FDAAA, companies that violate
these laws are subject to substantial civil monetary penalties. The requirements and changes imposed by the FDAAA, or any other
new legislation, regulations or policies that grant the FDA or other regulatory agencies additional authority that further complicates
the process for obtaining marketing approval and/or further restricts or regulates post-marketing approval activities, could make
it more difficult and more costly for us to obtain and maintain approval of any of our product candidates.
Public perception of ethical and social issues may limit
or discourage the type of research we conduct.
Our clinical trials will involve human subjects, and third parties
with whom we contract also conduct research involving animal subjects. Governmental authorities could, for public health or other
purposes, limit the use of human or animal research or prohibit the practice of our technology. Further, ethical and other concerns
about our or our third-party contractors’ methods, particularly the use of human subjects in clinical trials or the use of
animal testing, could delay our research and preclinical and clinical trials, which would adversely affect our business and financial
condition.
Use of third parties to manufacture our product candidates
may increase the risk that preclinical development, clinical development and potential commercialization of our product candidates
could be delayed, prevented or impaired.
We have limited personnel with experience in medical device
development and manufacturing, do not own or operate manufacturing facilities, and generally lack the resources and the capabilities
to manufacture any of our product candidates on a clinical or commercial scale. We currently intend to outsource all or most of
the clinical and commercial manufacturing and packaging of our product candidates to third parties. However, we have not established
long-term agreements with any third-party manufacturers for the supply of any of our product candidates. There are a limited number
of manufacturers that operate under cGMP regulations and that are capable of and willing to manufacture our lead product candidates
utilizing the manufacturing methods that are required to produce our product candidates, and our product candidates will compete
with other product candidates for access to qualified manufacturing facilities. If we have difficulty locating third-party manufacturers
to develop our product candidates for preclinical and clinical work, then our product development programs will experience delays
and otherwise suffer. We may also be unable to enter into agreements for the commercial supply of products with third-party manufacturers
in the future or may be unable to do so when needed or on acceptable terms. Any such events could materially harm our business.
Reliance on third-party manufacturers entails risks to our business,
including without limitation:
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the failure of the third-party to maintain regulatory compliance, quality assurance, and general expertise in advanced manufacturing
techniques and processes that may be necessary for the manufacture of our product candidates;
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limitations on supply availability resulting from capacity and scheduling constraints of the third parties;
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failure of the third-party manufacturers to meet the demand for the product candidate, either from future customers or for
preclinical or clinical trial needs;
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the possible breach of the manufacturing agreement by the third-party; and
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the possible termination or non-renewal of the agreement by the third-party at a time that is costly or inconvenient for us.
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The failure of any of our contract manufacturers to maintain
high manufacturing standards could result in harm to clinical trial, participants or patients using the products. Such failure
could also result in product liability claims, product recalls, product seizures or withdrawals, delays or failures in testing
or delivery, cost overruns or other problems that could seriously harm our business or profitability. Further, our contract manufacturers
will be required to adhere to FDA and other applicable regulations relating to manufacturing practices. Those regulations cover
all aspects of the manufacturing, testing, quality control and recordkeeping relating to our product candidates and any products
that we may commercialize in the future. The failure of our third-party manufacturers to comply with applicable regulations could
result in sanctions being imposed on us, including fines, injunctions, civil penalties, failure of regulatory authorities to grant
marketing approval or other required certifications of our product candidates, delays, suspension or withdrawal of approvals, license
revocation, seizures or recalls of product candidates, operating restrictions and criminal prosecutions, any of which could significantly
and adversely affect our business, financial condition and operations.
Materials necessary to manufacture our product candidates
may not be available on time, on commercially reasonable terms, or at all, which may delay or otherwise hinder the development
and commercialization of those product candidates.
We will rely on the manufacturers of our product candidates
to purchase from third-party suppliers the materials necessary to produce the compounds for preclinical and clinical studies and
may continue to rely on those suppliers for commercial distribution if we obtain marketing approval or other required certifications
for any of our product candidates. The materials to produce our products may not be available when needed or on commercially reasonable
terms, and the prices for such materials may be susceptible to fluctuations. We do not have any control over the process or timing
of the acquisition of these materials by our manufacturers. Moreover, we currently do not have any agreements relating to the commercial
production of any of these materials. If these materials cannot be obtained for our preclinical and clinical studies, product testing
and potential regulatory marketing authorization of our product candidates will be delayed, which would significantly impact our
ability to develop our product candidates and materially adversely affect our ability to meet our objectives and obtain operations
success.
We may not be successful in maintaining or establishing
collaborations, which could adversely affect our ability to develop and, if required regulatory authorizations are obtained, commercialize
our product candidates.
If required regulatory authorizations are obtained to market
any of our product candidates, then we may consider entering into additional collaboration arrangements with medical technology,
pharmaceutical or biotechnology companies and/or seek to establish strategic relationships with marketing partners for the development,
sale, marketing and/or distribution of our products within or outside of the U.S. If we elect to expand our current relationships
or seek additional collaborators in the future but are unable to reach agreements with such other collaborators, as applicable,
then we may fail to meet our business objectives for the affected product or program. Moreover, collaboration arrangements are
complex and time consuming to negotiate, document and implement, and we may not be successful in our efforts, if any, to establish
and implement additional collaborations or other alternative arrangements. The terms of any collaboration or other arrangements
that we establish may not be favorable to us, and the success of any such collaboration will depend heavily on the efforts and
activities of our collaborators. Any failure to engage successful collaborators could cause delays in our product development and/or
commercialization efforts, which could harm our financial condition and operational results.
We compete with other pharmaceutical and medical device
companies, including companies that may develop products that make our product candidates less attractive or obsolete.
The medical device, pharmaceutical and biotechnology industries
are highly competitive. If our product candidates become available for commercial sale, we will compete in that competitive marketplace.
There are several products on the market or in development that could be competitors with our lead product candidates. Further,
most of our competitors have greater resources or capabilities and greater experience in the development, approval and commercialization
of medical devices or other products than we do. We may not be able to compete successfully against them. We also compete for funding
with other companies in our industry that are focused on discovering and developing novel improvements in surgical bleeding prevention.
We anticipate that competition in our industry will increase.
In addition, the healthcare industry is characterized by rapid technological change, resulting in new product introductions and
other technological advancements. Our competitors may develop and market products that render our lead product candidate or any
future product candidate we may seek to develop non-competitive or otherwise obsolete. Any such circumstances could cause our operations
to suffer.
If we fail to generate market acceptance of our product
candidates and establish programs to educate and train surgeons as to the distinctive characteristics of our product candidates,
we will not be able to generate revenues on our product candidates.
Acceptance in the marketplace of our lead product candidates
depends in part on our and our third-party contractors’ ability to establish programs for the training of surgeons in the
proper usage of those product candidates, which will require significant expenditure of resources. Convincing surgeons to dedicate
the time and energy necessary to properly train to use new products and techniques is challenging, and we may not be successful
in those efforts. If surgeons are not properly trained, they may ineffectively use our product candidates. Such misuse could result
in unsatisfactory patient outcomes, patient injury, negative publicity or lawsuits against us. Accordingly, even if our product
candidates are superior to alternative treatments, our success will depend on our ability to gain and maintain market acceptance
for those product candidates among certain select groups of the population and develop programs to effectively train them to use
those products. If we fail to do so, we will not be able to generate revenue from product sales and our business, financial condition
and results of operations will be adversely affected.
We face uncertainty related to pricing, reimbursement
and healthcare reform, which could reduce our potential revenues.
If our product candidates are approved for commercialization,
any sales will depend in part on the availability of direct or indirect coverage and reimbursement from third-party payers such
as government insurance programs, including Medicare and Medicaid, private health insurers, health maintenance organizations and
other healthcare related organizations. If our product candidates obtain marketing approval, pricing and reimbursement may be uncertain.
Both the federal and state governments in the U.S. and foreign governments continue to propose and pass new legislation affecting
coverage and reimbursement policies, which are designed to contain or reduce the cost of healthcare. Further, federal, state and
foreign healthcare proposals and reforms could limit the prices that can be charged for the product candidates that we may develop,
which may limit our commercial opportunity. Adoption of our product candidates by the medical community may be limited if doctors
and hospitals do not receive adequate partial or full reimbursement for use of our products or procedures in which our products
are used, if any are commercialized. In some foreign jurisdictions, marketing approval or allowance could be dependent upon pre-marketing
price negotiations. As a result, any denial of private or government payer coverage or inadequate reimbursement for procedures
performed using our products, before or upon commercialization, could harm our business and reduce our prospects for generating
revenue.
In addition, the U.S. Congress periodically adopts and changes
legislation regarding health insurance. As a result, substantial changes to the system for paying for healthcare in the U.S. may
include some combination of modifications to the existing system of private payers and government programs, such as Medicare, Medicaid
and State Children’s Health Insurance Program, as well as other changes. Restructuring the coverage of medical care in the
U.S. could impact reimbursement for medical devices such as our product candidates. If reimbursement for our products, if any,
is substantially less than we expect, or rebate obligations associated with them are substantially increased, our business could
be materially and adversely impacted.
The use of our product candidates in human subjects may
expose us to product liability claims, and we may not be able to obtain adequate insurance or otherwise defend against any such
claims.
We face an inherent risk of product liability claims and currently
have clinical trial liability coverage. We will need to obtain additional product liability insurance coverage if and when we begin
commercialization of any of our product candidates. If claims against us exceed any applicable insurance coverage we may obtain,
then our business could be adversely impacted. Regardless of whether we would be ultimately successful in any product liability
litigation, such litigation could consume substantial amounts of our financial and managerial resources, which could significantly
harm our business.
Risks Related to our Intellectual
Property
If we are unable to obtain and maintain protection for
intellectual property rights that we own, seek, or have licensed from other parties, the value of our technology and products will
be adversely affected.
Our success will depend in large part on our ability to obtain
and maintain protection in the U.S. and other countries for the intellectual property rights covering or incorporated into our
technology and products. The ability to obtain patents covering technology in the field of medical devices generally is highly
uncertain and involves complex legal, technical, scientific and factual questions. We may not be able to obtain and maintain patent
protection relating to our technology or products. Many of our owned or licensed patent applications are pending. Even if issued,
patents issued or licensed to us may be challenged, narrowed, invalidated, held to be unenforceable or circumvented, or determined
not to cover our product candidates or our competitors’ products, which could limit our ability to stop competitors from
marketing identical or similar products. Because our patent portfolio includes certain patents and applications that are in-licensed
on a non-exclusive basis, other parties may be able to develop, manufacture, market and sell products with similar features covered
by the same patent rights and technologies, which in turn could significantly undercut the value of any of our product candidates
and adversely affect our business. Our licensed MIT European patent No. 1879606 was opposed; however, this patent was maintained
in amended form following an administrative hearing. Both parties have appealed this decision. A decision is not expected before
the end of 2020. If the Opponents prevail in the appeal, European Patent No. 1879606 will be fully or partially invalidated,
resulting in potential loss of rights. European patent No. 2581097 was opposed. The Opposition Division revoked the patent.
This decision was appealed. If the Opponent prevails in the appeal, European Patent No. 2581097 could be fully or partially
invalidated, resulting in potential loss of rights. Further, we cannot be certain that we were the first to make the inventions
claimed in the patents we own or license, or that protection of the inventions set forth in those patents was the first to be filed
in the U.S. Third parties that have filed patents or patent applications covering similar technologies or processes may challenge
our claim of sole right to use the intellectual property covered by the patents we own or exclusively license. Moreover, changes
in applicable intellectual property laws or interpretations thereof in the U.S. and other countries may diminish the value of our
intellectual property rights or narrow the scope of our patent protection. Any failure to obtain or maintain adequate protection
for our intellectual property would materially harm our business, product development programs and prospects. In addition, our
proprietary information, trade secrets and know-how are important components of our intellectual property rights. We seek to protect
our proprietary information, trade secrets, know-how and confidential information, in part, with confidentiality agreements with
our employees, corporate partners, outside scientific collaborators, sponsored researchers, consultants and other advisors. We
also have invention or patent assignment agreements with our employees and certain consultants and advisors. If our employees or
consultants breach those agreements, we may not have adequate remedies for any of those breaches. In addition, our proprietary
information, trade secrets and know-how may otherwise become known to or be independently developed by others. Enforcing a claim
that a party illegally obtained and/or for which a party is using our proprietary information, trade secrets and/or know-how is
difficult, expensive and time consuming, and the outcome is unpredictable. In addition, courts outside the U.S. may be less willing
to protect trade secrets. Costly and time-consuming litigation could be necessary to seek to defend, enforce and/or determine the
scope of our intellectual property rights, and failure to obtain or maintain protection thereof could adversely affect our competitive
business position and results of operations.
Many of our owned patent applications are pending, and
our patent portfolio includes certain patents and applications that are in-licensed on a non-exclusive basis
As of December 2, 2020, we either own or license from others
a number of U.S. patents, U.S. patent applications, foreign patents and foreign patent applications.
Six patent portfolios assigned to Arch Biosurgery, Inc.
include a total of 40 patents and pending applications in a total of nine jurisdictions, including twelve patents and pending applications
in the US. These portfolios cover self-assembling peptides, formulations and methods of use thereof and self-assembling peptidomimetics
and methods of use thereof, including seven issued US patents (US 9,415,084; US 9,162,005; US 9,789,157; US 9,821,022; US 9,339,476;
US 10,314,886; and US 10,682,386) that expire between 2026 and 2034 (absent patent
term extension) as well as fifteen patents that have been either allowed, issued or granted in foreign jurisdictions.
We have entered into a license agreement with Massachusetts
Institute of Technology and Versitech Limited (“MIT”) pursuant to which we have been granted exclusive rights under
two portfolios of patents and non-exclusive rights under another three portfolios of patents.
The two portfolios exclusively licensed from MIT include a total
of 22 patents and pending applications drawn to self-assembling peptides, formulations and methods of use thereof and self-assembling
peptidomimetics and methods of use thereof in a total of nine jurisdictions. The portfolios include five issued US patents (US
9,511,113; US 9,084,837; US 10,137,166; US 9,327,010; and US 9,364,513) that expire between 2026 and 2027 (absent patent term extension),
as well as fourteen patents that have been either allowed, issued or granted in foreign jurisdictions.
If we lose certain intellectual property rights owned
by third parties and licensed to us, our business could be materially harmed.
We have entered into certain in-license agreements with MIT
and with certain other third parties and may seek to enter into additional in-license agreements relating to other intellectual
property rights in the future. To the extent we and our product candidates rely heavily on any such in-licensed intellectual property,
we are subject to our and the counterparty’s compliance with the terms of such agreements in order to maintain those rights.
Presently, we, our lead product candidates and our business plans are dependent on the patent and other intellectual property rights
that are licensed to us under our license agreement with MIT. Although that agreement has a durational term through the life of
the licensed patents, it also imposes or imposed certain diligence, capital raising, and other obligations on us, our breach of
which could permit MIT to terminate the agreement. Further, we are responsible for all patent prosecution and maintenance fees
under that agreement, and a failure to pay such fees on a timely basis could also entitle MIT to terminate the agreement. Any failure
by us to satisfy our obligations under our license agreement with MIT or any other dispute or other issue relating to that agreement
could cause us to lose some or all of our rights to use certain intellectual property that is material to our business and our
lead product candidates, which would materially harm our product development efforts and could cause our business to fail.
If we infringe or are alleged to infringe the intellectual
property rights of third parties, our business and financial condition could suffer.
Our research, development and commercialization activities,
as well as any product candidates or products resulting from those activities, may infringe or be accused of infringing a patent
or other intellectual property under which we do not hold a license or other rights. Third parties may own or control those patents
or other rights in the U.S. or abroad and could bring claims against us that would cause us to incur substantial time, expense,
and diversion of management attention. If a patent or other intellectual property infringement suit were brought against us, we
could be forced to stop or delay research, development, manufacturing or sales, if any, of the applicable product or product candidate
that is the subject of the suit. In order to avoid or settle potential claims with respect to any of the patent or other intellectual
property rights of third parties, we may choose or be required to seek a license from a third-party and be required to pay license
fees or royalties or both. Any such license may not be available on acceptable terms, or at all. Even if we or our future collaborators
were able to obtain a license, the rights granted to us or them could be non-exclusive, which could result in our competitors gaining
access to the same intellectual property rights and materially negatively affecting the commercialization potential of our planned
products. Ultimately, we could be prevented from commercializing one or more product candidates, or be forced to cease some aspects
of our business operations, if, as a result of actual or threatened infringement claims, we are unable to enter into licenses on
acceptable terms or at all or otherwise settle such claims. Further, if any such claims were successful against us, we could be
forced to pay substantial damages. Any of those results could significantly harm our business, prospects and operations.
Risks Related to Ownership of our
Common Stock
There is not now, and there may not ever be, an active
market for our Common Stock, which trades in the over-the-counter market in low volumes and at volatile prices.
There currently is a limited market for our Common Stock. Although
our Common Stock is quoted on the OTCQB, an over-the-counter quotation system, trading of our Common Stock is extremely limited
and sporadic and generally at very low volumes. Further, the price at which our Common Stock may trade is volatile and we expect
that it will continue to fluctuate significantly in response to various factors, many of which are beyond our control. The stock
market in general, and securities of small-cap companies driven by novel technologies in particular, has experienced extreme price
and volume fluctuations in recent years. Continued market fluctuations could result in further volatility in the price at which
our Common Stock may trade, which could cause its value to decline. To the extent we seek to raise capital in the future through
the issuance of equity, those efforts could be limited or hindered by low and/or volatile market prices for our Common Stock.
We do not now meet the initial listing standards of the Nasdaq
Stock Market or any other national securities exchange. We presently anticipate that our Common Stock will continue to be quoted
on the OTCQB or another over-the-counter quotation system. In those venues, our stockholders may find it difficult to obtain accurate
quotations as to the market value of their shares of our Common Stock and may find few buyers to purchase their stock and few market
makers to support its price.
A more active market for our Common Stock may never develop.
As a result, investors must bear the economic risk of holding their shares of our Common Stock for an indefinite period of time.
Our Common Stock is a “penny stock.”
The SEC has adopted regulations that generally define “penny
stock” as an equity security that has a market price of less than $5.00 per share, subject to specific exemptions. The market
price of our Common Stock is and is expected to continue to be in the near term, less than $5.00 per share and is therefore a “penny
stock.” Brokers and dealers effecting transactions in “penny stock” must disclose certain information concerning
the transaction, obtain a written agreement from the purchaser and determine that the purchaser is reasonably suitable to purchase
the securities. Those rules may restrict the ability of brokers or dealers to sell our Common Stock and may affect the ability
of our stockholders to sell their shares of our Common Stock. In addition, if our Common Stock continues to be quoted on the OTCQB
as we expect, then our stockholders may find it difficult to obtain accurate quotations for our stock and may find few buyers to
purchase our stock and few market makers to support its price.
If we issue additional shares in the future, including
issuances of shares upon exercise of the Series J Warrants, Series I Warrants, Placement Agent Warrants, Series H
Warrants, Series G Warrants, Series F Warrants, Series E Warrants and our Series 1 and Series 2 Convertible
Notes, our existing stockholders will be diluted.
As of July 1, 2020, our articles of incorporation authorize
the issuance of up to 800,000,000 shares of Common Stock. In June 2020, we issued certain of holders of our Series D
Warrants Series J Warrants to acquire up to 3,886,364 shares of our Common Stock at an initial exercise price of $0.25 per
share as consideration for those holders exercising their Series D Warrants in full to acquire 5,181,819 shares of our Common
Stock at $0.18 per share. As of December 10, 2020, up to 3,886,364 shares may be acquired upon the exercise of the Series J
Warrants.
In connection with the October 2019 Financing that closed
on October 18, 2019, we issued an aggregate of 14,285,714 shares of our Common Stock, which equaled approximately 8% of the
173,577,233 shares of our Common Stock that were issued and outstanding immediately prior to the commencement of the October 2019
Financing. Upon the closing of the October 2019 Financing, we also issued Series I Warrants to acquire up to an additional
14,285,714 shares of our Common Stock at an initial exercise price of $0.22 per share and additional warrants to acquire up to
an additional 1,071,429 shares of our Common Stock at an initial exercise price of $0.21875 per share to designees of H.C. Wainwright &
Co., LLC, the placement agent that the Company engaged in connection with the October 2019 Financing (the “Placement
Agent Warrants”). As of December 10, 2020, up to 14,285,714 shares may be acquired upon the exercise of the Series I
Warrants and up to 1,071,429 shares may be acquired upon the exercise of the Placement Agent Warrants.
In connection with the financing that closed on May 14,
2019 (the “2019 Financing”), we issued an aggregate of 8,615,384 shares of our Common Stock, which equaled approximately
5% of the 164,961,849 shares of our Common Stock that were issued and outstanding immediately prior to the commencement of the
2019 Financing. Upon the closing of the 2019 Financing, we also issued Series H Warrants to acquire up to an additional 8,615,384
shares of our Common Stock at an initial exercise price of $0.40 per share. As of December 10, 2020, up to 8,615,384 shares
may be acquired upon the exercise of the Series H Warrants.
In connection with the 2018 Financing that closed on July 2,
2018, we issued an aggregate of 9,070,000 shares of our Common Stock, which equaled approximately 6% of the 154,052,013 shares
of our Common Stock that were issued and outstanding immediately prior to the commencement of the 2018 Financing. Upon the closing
of the 2018 Financing, we also issued Series G Warrants to acquire up to an additional 6,802,500 shares of our Common Stock
at an initial exercise price of $0.70 per share. As of December 10, 2020, up to 6,802,500 shares may be acquired upon the
exercise of the Series G Warrants.
In connection with the 2017 Financing that closed on February 24,
2017, we issued an aggregate of 10,166,664 shares of our Common Stock, which equaled approximately 7% of the 136,745,712 shares
of our Common Stock that were issued and outstanding immediately prior to the commencement of the 2017 Financing. Upon the closing
of the 2017 Financing, we also issued Series F Warrants to acquire up to an additional 5,591,664 shares of our Common Stock
at an initial exercise price of $0.75 per share. As of December 10, 2020, up to 5,591,664 shares may be acquired upon the
exercise of the Series F Warrants.
In connection with the 2016 Private Placement Financing that
closed on May 26, 2016, we issued an aggregate of 9,418,334 shares of our Common Stock, which equaled approximately 8% of
the 118,592,070 shares of our Common Stock that were issued and outstanding immediately prior to the commencement of the 2016 Private
Placement Financing. Upon the closing of the 2016 Private Placement Financing, we also issued Series E Warrants to acquire
up to an additional 7,063,748 shares of our Common Stock at an initial exercise price of $0.4380 per share. As of December 10,
2020, up to 4,214,582 shares may be acquired upon the exercise of the Series E Warrants.
In addition to the aforementioned warrants, in June 2020
and November 2020, we issued $550,000 and $1,050,000 in aggregate principal amount of our Series 1 Unsecured Convertible
Promissory Notes and Series 2 Unsecured Convertible Promissory Notes, respectively (collectively, the “Convertible Notes”).
The Convertible Notes (i) have a three year term; (ii) accrue interest on the unpaid principal balance at a rate equal
to ten percent (10.0%), and (iii) can be converted into shares of our Common Stock at a conversion price of $0.27 per share
and $0.25 per share, respectively. At maturity, at our sole option, we may convert the principal and accrued interest under the
Convertible Notes (the “Note Obligations”) into shares of our Common Stock at the applicable conversion price in lieu
of repaying the Convertible Notes; provided, however, in the event we exercise this option, the Note Obligations will be deemed
to equal the product of 1.35 and the outstanding Note Obligations.
Additionally, as of December 10, 2020, 6,868,356 shares
of Common Stock were reserved for future issuance under the 2013 Plan, of which 19,129,998 shares are subject to outstanding option
awards granted under the 2013 Plan at exercise prices ranging from $0.17 to $0.65 per share and with a weighted average exercise
price of $0.36 per share and the numbers issuable under the 2013 Plan will increase by up to 3 million shares on the first business
day of each following fiscal year as set forth in the 2013 Plan. Finally, in addition to the Series J Warrants, Series I
Warrants, Placement Agent Warrants, Series H Warrants granted in connection with the 2019 Financing, the Series G Warrants
granted in connection with the 2018 Financing, the Series F Warrants granted in connection with the 2017 Financing, the Series E
Warrants granted in connection with the 2016 Private Placement Financing and the shares of Common Stock potentially issuable under
the Convertible Notes there are currently outstanding warrants to acquire up to 145,985 shares of our Common Stock which are related
to the Massachusetts Life Sciences Center (“MSLC”) note. Any future grants of options, warrants or other securities
exercisable or convertible into our Common Stock, or the exercise or conversion of such shares, and any sales of such shares in
the market, could have an adverse effect on the market price of our Common Stock.
In addition to capital raising activities, other possible business
and financial uses for our authorized Common Stock include, without limitation, future stock splits, acquiring other companies,
businesses or products in exchange for shares of Common Stock, issuing shares of our Common Stock to partners in connection with
strategic alliances, attracting and retaining employees by the issuance of additional securities under our various equity compensation
plans, compensating consultants by issuing shares or options to purchase shares of our Common Stock, or other transactions and
corporate purposes that our Board of Directors deems are in the Company’s best interest. By way of example, on (i) August 9,
2016, we issued 225,000 shares of restricted stock and options to purchase up to an additional 375,000 shares of Common Stock at
an exercise price of price of $0.72 per share in connection with our entrance into a consulting agreement with Acorn Management
Partners, LLC (“Acorn”) in consideration of the services to be provided under and in accordance with the terms of such
consulting agreement; and (ii) August 6, 2015, we issued an aggregate of 600,000 shares of restricted stock in connection
with our entrance into separate consulting agreements with two investor relations firms, Excelsior Global Advisors LLC and Acorn,
in each case in consideration of the services to be provided under and in accordance with the terms of each consulting agreement.
Additionally, shares of Common Stock could be used for anti-takeover purposes or to delay or prevent changes in control or management
of the Company. We cannot provide assurances that any issuances of Common Stock will be consummated on favorable terms or at all,
that they will enhance stockholder value, or that they will not adversely affect our business or the trading price of our Common
Stock. The issuance of any such shares will reduce the book value per share and may contribute to a reduction in the market price
of the outstanding shares of our Common Stock. If we issue any such additional shares, such issuance will reduce the proportionate
ownership and voting power of all current shareholders. Further, such issuance may result in a change of control of our corporation.
Future sales of our Common Stock or rights to purchase
Common Stock, or the perception that such sales could occur, could cause our stock price to fall.
As noted above under the risk factor entitled, “We
will need substantial additional funding and may be unable to raise capital when needed, which would force us to delay, reduce
or eliminate our product development programs or commercialization efforts and could cause our business to fail,”
as of December 10, 2020 we believe that our current cash on hand will meet our anticipated cash requirements into the second
quarter of fiscal 2021. To raise capital, we may sell Common Stock, convertible securities or other equity securities in one or
more transactions at prices and in a manner we determine from time to time. Any such sales of our Common Stock by us or resale
of our Common Stock by our existing stockholders could cause the market price of our Common Stock to decline.
Financial Industry Regulatory Authority (“FINRA”)
sales practice requirements may limit a stockholder’s ability to buy and sell our stock.
In addition to the “penny stock” rules described
above, FINRA has adopted rules that require that, in recommending an investment to a customer, a broker-dealer must have reasonable
grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low-priced securities
to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s
financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA has indicated
its belief that there is a high probability that speculative low-priced securities will not be suitable for at least some customers.
These FINRA requirements make it more difficult for broker-dealers to recommend that at least some of their customers buy our Common
Stock, which may limit the ability of our stockholders to buy and sell our Common Stock and could have an adverse effect on the
market for our shares.
There may be additional risks because we completed a reverse
merger transaction in June 2013.
Additional risks may exist because we completed a “reverse
merger” transaction in June 2013. Securities analysts of major brokerage firms may not provide coverage of the Company
because there may be little incentive to brokerage firms to recommend the purchase of our Common Stock. There may also be increased
scrutiny by the SEC and other government agencies and holders of our securities due to the nature of the transaction, as there
has been increased focus on transactions such as the Merger in recent years. Further, since the Company existed as a “shell
company” under applicable rules of the SEC up until the closing of the Merger on June 26, 2013, there will be certain
restrictions and limitations on the Company going forward relating to any potential future issuances of additional securities to
raise funding and compliance with applicable SEC rules and regulations.
Certain of our directors and officers own a significant
percentage of our capital stock and are able to exercise significant influence over the Company.
Certain of our directors and executive officers own a significant
percentage of our outstanding capital stock. As of December 10, 2020, Dr. Terrence W. Norchi, our Chairman of the Board,
President and Chief Executive Officer, James R. Sulat, a director and Punit Dhillon, a director beneficially own (as determined
under Section 13(d) of the Exchange Act and the rules and regulations thereunder) approximately 11% of our
shares of Common Stock. Accordingly, these members of our Board of Directors and management team have substantial voting power
to approve matters requiring stockholder approval, including without limitation the election of directors, and have significant
influence over our affairs. This concentration of ownership could have the effect of delaying or preventing a change in control
of our Company, even if such a change in control would be beneficial to our stockholders.
The elimination of monetary liability against our directors
and officers under Nevada law and the existence of indemnification rights held by our directors, officers and employees may result
in substantial expenditures by us and may discourage lawsuits against our directors, officers and employees.
Our articles of incorporation eliminate the personal liability
of our directors and officers to our Company and our stockholders for damages for breach of fiduciary duty as a director or officer
to the extent permissible under Nevada law. Further, our amended and restated bylaws provide that we are obligated to indemnify
any of our directors or officers to the fullest extent authorized by Nevada law and, subject to certain conditions, advance the
expenses incurred by any director or officer in defending any action, suit or proceeding prior to its final disposition.
Those indemnification obligations could result in our Company
incurring substantial expenditures to cover the cost of settlement or damage awards against our directors or officers, which we
may be unable to recoup. These provisions and resultant costs may also discourage us from bringing a lawsuit against any of our
current or former directors or officers for breaches of their fiduciary duties and may similarly discourage the filing of derivative
litigation by our stockholders against our directors and officers even if such actions, if successful, might otherwise benefit
us or our stockholders.
We are subject to the reporting requirements of federal
securities laws, compliance with which involves significant time, expense and expertise.
We are a public reporting company in the U.S., and, accordingly,
are subject to the information and reporting requirements of the Exchange Act and other federal securities laws, including the
obligations imposed by the Sarbanes-Oxley Act. The costs associated with preparing and filing annual, quarterly and current reports,
proxy statements and other information with the SEC in the ordinary course, as well as preparing and filing audited financial statements,
has caused, and could continue to cause, our operational expenses to remain at higher levels or continue to increase.
Shares of our Common Stock that have not been registered
under federal securities laws are subject to resale restrictions imposed by Rule 144. In addition, any shares of our Common
Stock that are held by affiliates, including any that are registered, will be subject to the resale restrictions of Rule 144.
Rule 144 imposes requirements on us and our stockholders
that must be met in order to effect a sale thereunder. As a result, it will be more difficult for us to raise funding to support
our operations through the sale of debt or equity securities unless we agree to register such securities under the Securities Act,
which could cause us to expend significant additional time and cash resources and which we presently have no intention to pursue.
Further, it may be more difficult for us to compensate our employees and consultants with our securities instead of cash. We were
a shell company prior to the closing of the Merger, and such status could also limit our use of our securities to pay for any acquisitions
we may seek to pursue in the future (although none are currently planned) and could cause the value of our securities to decline.
In addition, any shares held by affiliates, including shares received in any registered offering, will be subject to certain additional
requirements in order to effect a sale of such shares under Rule 144.
We do not intend to pay cash dividends on our capital
stock in the foreseeable future.
We have never declared or paid any dividends on our shares and
do not anticipate paying any such dividends in the foreseeable future. Any future payment of cash dividends would depend on our
financial condition, contractual restrictions, solvency tests imposed by applicable corporate laws, results of operations, anticipated
cash requirements and other factors and will be at the discretion of our Board of Directors.
We are at risk of securities class action litigation that
could result in substantial costs and divert management’s attention and resources.
In the past, securities class action litigation has been brought
against companies following periods of volatility of its securities in the marketplace, particularly following a company’s
initial public offering. Due to the volatility of our stock price, we could be the target of securities litigation in the future.
Securities litigation could result in substantial costs and divert management’s attention and resources.