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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2021

Commission File Number: 000-54986

ARCH THERAPEUTICS, INC.

(Exact name of registrant as specified in its charter)

Nevada

 

46-0524102

(State or other jurisdiction of incorporation or
organization)

 

(I.R.S. Employer Identification No.)

 

235 Walnut Street, Suite 6

 

Framingham, MA

 

01702

(Address of principal executive offices)

 

(Zip Code)

(617) 431-2313

Registrant’s telephone number, including area code

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

N|A

N|A

N|A

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act

Large accelerated filer

Accelerated filer

 

 

Non-accelerated filer

Smaller reporting company

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  No 

As of August 12, 2021, 236,719,770 shares of the registrant’s common stock were outstanding.

Table of Contents

ARCH THERAPEUTICS, INC.

Quarterly Report on Form 10-Q

For the Three Months ended June 30, 2021

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

 

 

 

Item 1. Financial Statements

 

 

 

Consolidated Balance Sheets as of June 30, 2021 (unaudited) and September 30, 2020

3

 

 

Consolidated Statements of Operations for the Three and Nine Months ended June 30, 2021 and June 30, 2020 (unaudited)

4

 

 

Consolidated Statements of Changes in Stockholders’ Equity (Deficit) for the Three and Nine Months ended June 30, 2021 and June 30, 2020 (unaudited)

5

 

 

Consolidated Statements of Cash Flows for the Nine Months ended June 30, 2021 and June 30, 2020 (unaudited)

7

 

 

Notes to Consolidated Financial Statements (unaudited)

8

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

21

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

30

 

 

Item 4. Controls and Procedures

30

 

 

PART II - OTHER INFORMATION

30

 

 

Item 1. Legal Proceedings

30

 

 

Item 1A. Risk Factors

30

 

 

Item 6. Exhibits

33

- 2 -

Table of Contents

Arch Therapeutics, Inc.and Subsidiaries

Consolidated Balance Sheets

As of June 30, 2021 (Unaudited) and September 30, 2020

June 30, 

September 30, 

ASSETS

    

2021

    

2020

Current assets:

Cash

$

3,779,190

$

959,309

Inventory

828,220

967,993

Prepaid expenses and other current assets

 

378,808

 

215,673

Total current assets

 

4,986,218

 

2,142,975

Long-term assets:

 

 

  

Property and equipment, net

 

6,039

 

4,552

Other assets

 

3,500

 

3,500

Total long-term assets

 

9,539

 

8,052

Total assets

$

4,995,757

$

2,151,027

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

 

 

  

Current liabilities:

 

 

  

Accounts payable

$

277,197

$

342,050

Accrued expenses and other liabilities

 

168,644

 

248,968

Current portion of derivative liability

1,000,000

Current portion of PPP Loan

37,442

Total current liabilities

 

1,445,841

 

628,460

Long-term liabilities:

 

 

  

Long-term portion of PPP loan

138,858

Series 1 convertible notes

550,000

550,000

Series 2 convertible notes

 

1,050,000

 

Accrued interest

126,808

17,781

Derivative liability

1,207,475

2,316,419

Total long-term liabilities

 

2,934,283

 

3,023,058

Total liabilities

 

4,380,124

 

3,651,518

Commitments and contingencies

 

Stockholders’ equity (deficit):

 

 

  

Common stock, $0.001 par value, 800,000,000 shares authorized as of June 30, 2021 and September 30, 2020, 236,719,770 and 193,044,766 shares issued and outstanding as of June 30, 2021 and September 30, 2020

 

236,720

 

193,045

Additional paid-in capital

 

48,410,655

 

41,862,901

Accumulated deficit

 

(48,031,742)

 

(43,556,437)

Total stockholders’ equity (deficit)

 

615,633

 

(1,500,491)

Total liabilities and stockholders’ equity (deficit)

$

4,995,757

$

2,151,027

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

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Arch Therapeutics, Inc.and Subsidiaries

Consolidated Statements of Operations (Unaudited)

For the Three and Nine Months Ended June 30, 2021 and 2020

Three Months

Three Months

Nine Months

Nine Months

Ended

Ended

Ended

Ended

June 30, 

June 30, 

June 30, 

June 30, 

    

2021

    

2020

    

2021

    

2020

Revenue

$

$

$

10,000

$

Operating expenses:

Cost of revenues

10,102

Selling, general and administrative expenses

 

1,370,395

 

854,626

 

3,600,419

 

2,722,596

Research and development expenses

 

297,553

 

382,847

 

1,051,755

 

1,289,013

Total costs and expenses

 

1,667,948

 

1,237,473

 

4,662,276

 

4,011,609

Loss from operations

 

(1,667,948)

 

(1,237,473)

 

(4,652,276)

 

(4,011,609)

Other income (expense):

 

 

 

 

Interest expense

(40,186)

(4,227)

(110,202)

(4,227)

Gain on forgiveness of loan

178,229

178,229

Decrease to fair value of derivative

 

 

337,333

 

108,944

 

719,831

Total other income

 

138,043

 

333,106

 

176,971

 

715,604

Net loss

$

(1,529,905)

$

(904,367)

$

(4,475,305)

$

(3,296,005)

Loss per share - basic and diluted

 

 

 

 

Net loss per common share - basic and diluted

$

(0.01)

$

$

(0.02)

$

(0.02)

Weighted common shares - basic and diluted

 

236,719,770

 

188,340,505

 

214,289,567

 

186,438,587

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

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Arch Therapeutics, Inc.and Subsidiaries

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

For the Three and Nine Months Ended June 30, 2021 and 2020

Additional

Total

Common Stock

Paid-in

Accumulated

Stockholders'

Three Months Ended June 30, 2020

    

Shares

    

Amount

    

Capital

    

Deficit

    

Equity (Deficit)

Balance at March 31, 2020

 

186,897,947

$

186,898

$

40,534,282

$

(41,256,698)

$

(535,518)

Net loss

 

 

 

 

(904,367)

 

(904,367)

Shares issued for the exercise of warrants

 

5,181,819

 

5,182

 

927,546

 

 

932,728

Stock-based compensation expense

183,976

183,976

Balance at June 30, 2020

 

192,079,766

$

192,080

$

41,645,804

$

(42,161,065)

$

(323,181)

Additional

Total

Common Stock

Paid-in

Accumulated

Stockholders'

Three Months Ended June 30, 2021

    

Shares

    

Amount

    

Capital

    

Deficit

    

Equity (Deficit)

Balance at March 31, 2021

 

236,719,770

$

236,720

$

48,316,799

$

(46,501,837)

$

2,051,682

Net loss

 

 

 

 

(1,529,905)

 

(1,529,905)

Stock-based compensation expense

93,856

93,856

Balance at June 30, 2021

 

236,719,770

$

236,720

$

48,410,655

$

(48,031,742)

$

615,633

Additional

Total

Common Stock

Paid-in

Accumulated

Stockholders'

Nine Months Ended June 30, 2020

    

Shares

    

Amount

    

Capital

    

Deficit

    

Equity (Deficit)

Balance at September 30, 2019

 

172,612,233

$

172,612

$

37,885,151

$

(38,865,060)

$

(807,297)

Net loss

 

 

 

 

(3,296,005)

 

(3,296,005)

Shares issued for the exercise of warrants

5,181,819

5,182

927,546

932,728

Issuance of common stock and warrants, net of financing costs

14,285,714

14,286

2,152,876

2,167,162

Stock-based compensation expense

 

 

 

680,231

 

 

680,231

Balance at June 30, 2020

 

192,079,766

$

192,080

$

41,645,804

$

(42,161,065)

$

(323,181)

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Additional

Total

Common Stock

Paid-in

Accumulated

Stockholders'

Nine Months Ended June 30, 2021

    

Shares

    

Amount

    

Capital

    

Deficit

    

Equity (Deficit)

Balance at September 30, 2020

 

193,044,766

$

193,045

$

41,862,901

$

(43,556,437)

(1,500,491)

Net loss

 

 

 

 

(4,475,305)

 

(4,475,305)

Issuance of common stock and warrants, net of financing costs

43,125,004

43,125

6,176,108

6,219,233

Issuance of restricted stock

 

550,000

 

550

 

(550)

 

 

Stock-based compensation expense

 

 

 

372,196

 

 

372,196

Balance at June 30, 2021

 

236,719,770

$

236,720

$

48,410,655

$

(48,031,742)

$

615,633

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

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Arch Therapeutics, Inc.and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

For the Nine Months Ended June 30, 2021 and 2020

Nine Months

Nine Months

Ended

Ended

June 30, 

June 30, 

    

2021

    

2020

Cash flows from operating activities:

Net loss

$

(4,475,305)

$

(3,296,005)

Adjustments to reconcile net loss to cash used in operating activities:

 

 

Depreciation

 

1,788

 

5,466

Stock-based compensation

 

372,196

 

680,231

Decrease to fair value of derivative

 

(108,944)

 

(719,831)

Inventory obsolescence charge

181,988

95,637

Gain on forgiveness of loan

(178,229)

Changes in operating assets and liabilities:

 

 

(Increase) decrease in:

 

 

Inventory

(42,215)

(726,586)

Prepaid expenses and other current assets

 

(163,135)

 

196,399

Increase (decrease) in:

 

 

Accounts payable

 

(64,853)

 

(231,254)

Accrued interest

110,956

Accrued expenses and other liabilities

 

(80,324)

 

4,755

Net cash used in operating activities

 

(4,446,077)

 

(3,991,188)

Cash flows from investing activities:

 

 

Purchases of property and equipment

 

(3,275)

 

(2,455)

Net cash used in investing activities

 

(3,275)

 

(2,455)

Cash flows from financing activities:

 

 

Proceeds received from convertible notes

1,050,000

550,000

Proceeds received from PPP loan

176,300

Proceeds from issued common stock and warrants, net of financing costs

6,219,233

2,167,162

Proceeds from exercise of warrants

932,728

Net cash provided by financing activities

 

7,269,233

 

3,826,190

Net increase (decrease) in cash

 

2,819,881

 

(167,453)

Cash, beginning of year

 

959,309

 

2,180,329

Cash, end of period

$

3,779,190

$

2,012,876

Non-cash financing activities:

 

 

Issuance of restricted stock for services

$

103,750

$

Series J Warrants cost

$

$

219,737

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

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ARCH THERAPEUTICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1.BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS

Organization and Description of Business

Arch Therapeutics, Inc., (together with its subsidiary, the “Company” or “Arch”) was incorporated under the laws of the State of Nevada on September 16, 2009, under the name “Almah, Inc.”. Effective June 26, 2013, the Company completed a merger (the “Merger”) with Arch Biosurgery, Inc. (formerly known as Arch Therapeutics, Inc.), a Massachusetts corporation (“ABS”), and Arch Acquisition Corporation (“Merger Sub”), the Company’s wholly owned subsidiary formed for the purpose of the transaction, pursuant to which Merger Sub merged with and into ABS and ABS thereby became the wholly owned subsidiary of the Company. As a result of the acquisition of ABS, the Company abandoned its prior business plan and changed its operations to the business of a biotechnology company. Our principal offices are located in Framingham, Massachusetts.

For financial reporting purposes, the Merger represented a “reverse merger”. ABS was deemed to be the accounting acquirer in the transaction and the predecessor of Arch. Consequently, the accumulated deficit and the historical operations that are reflected in the Company’s consolidated financial statements prior to the Merger are those of ABS. All share information has been restated to reflect the effects of the Merger. The Company’s financial information has been consolidated with that of ABS after consummation of the Merger on June 26, 2013, and the historical financial statements of the Company before the Merger have been replaced with the historical financial statements of ABS before the Merger in this report.

ABS was incorporated under the laws of the Commonwealth of Massachusetts on March 6, 2006 as Clear Nano Solutions, Inc. On April 7, 2008, ABS changed its name from Clear Nano Solutions, Inc. to Arch Therapeutics, Inc. Effective upon the closing of the Merger, ABS changed its name from Arch Therapeutics, Inc. to Arch Biosurgery, Inc.

The Company only recently commenced commercial sales of our first product, AC5® Advanced Wound System, and have devoted substantially all of our operational effort to the research, development and regulatory programs necessary to turn our core technology into commercial products. To date, the Company has principally raised capital through debt borrowings, the issuance of convertible debt, and the issuance of units consisting of common stock and warrants.

The Company expects to incur substantial expenses for the foreseeable future relating to research, development and commercialization of its potential products. However, there can be no assurance that the Company will be successful in securing additional resources when needed, on terms acceptable to the Company, if at all. Therefore, there exists substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments related to the recoverability of assets that might be necessary despite this uncertainty.

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying unaudited interim consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). The interim consolidated financial statements included herein are unaudited; however, they contain all normal recurring accruals and adjustments that, in the opinion of management, are necessary to present fairly our results of operations and financial position for the interim periods.

Although the Company believes that the disclosures in these unaudited interim consolidated financial statements are adequate to make the information presented not misleading, certain information normally included in the footnotes prepared in accordance with US GAAP has been omitted as permitted by the rules and regulations of the Securities and Exchange Commission (“SEC”). These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2020, filed with the SEC on December 11, 2020.

For a complete summary of the Company’s significant accounting policies, please refer to Note 2 included in Item 8 of our Form 10-K for the fiscal year ended September 30, 2020. There have been no material changes to our significant accounting policies during the nine months ended June 30, 2021.

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Basis of Presentation

The consolidated financial statements include the accounts of Arch Therapeutics, Inc. and its wholly owned subsidiary, Arch Biosurgery, Inc., a biotechnology company. All intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

Management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates.

Recently Issued and Adopted Accounting Guidance

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

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

Cash and Cash Equivalents

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

Inventories

Inventories are stated at the lower of cost or net realizable value. The cost of inventories comprises expenditures incurred in acquiring the inventories, the cost of conversion and other costs incurred in bringing them to their existing location and condition. The cost of raw materials, goods-in-process and finished goods are determined on a First in First out (FiFo) basis. When determining net realizable value, appropriate consideration is given to obsolescence, excessive levels, deterioration, and other factors.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of cash. The Company maintains its cash in bank deposits accounts, which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to any significant credit risk on cash.

Property and Equipment

Property and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful life of the related asset. Upon sale or retirement, the cost and accumulated depreciation are eliminated from their respective accounts, and the resulting gain or loss is included in income or loss for the period. Repair and maintenance expenditures are charged to expense as incurred.

Impairment of Long-Lived Assets

Long-lived assets are reviewed for impairment when circumstances indicate the carrying value of an asset may not be recoverable in accordance with ASC 360, Property, Plant and Equipment. For assets that are to be held and used, impairment is recognized when the

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estimated undiscounted cash flows associated with the asset or group of assets is less than their carrying value. If impairment exists, an adjustment is made to write the asset down to its fair value, and a loss is recorded as the difference between the carrying value and fair value. Fair values are determined based on quoted market values, discounted cash flows or internal and external appraisals, as applicable. Assets to be disposed of are carried at the lower of carrying value or estimated net realizable value. For the nine months ended June 30, 2021 and 2020 there has not been any impairment of long-lived assets.

Leases

The Company determines if an arrangement is a lease at its inception. Operating lease right-of-use (“ROU”) assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As our lease does not provide an implicit interest rate, the Company used an incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. Lease expense for lease payments is recognized on a straight-line basis over the lease term. As of June 30, 2021 and September 30, 2020, our ROU asset is included in prepaid expenses and other current assets and the lease obligations is included in accrued expenses and other current liabilities on our consolidated balance sheets. As of June 30, 2021 and September 30, 2020, ROU asset of approximately $10,000 and $39,000, respectively, represents our right to use an underlying asset for the lease term and the lease liabilities of approximately $10,000 and $39,000, respectively, represents our obligation to make lease payments arising from the lease.

Income Taxes

In accordance with FASB ASC 740, Income Taxes, the Company recognizes deferred tax assets and liabilities for the expected future tax consequences or events that have been included in our consolidated financial statements and/or tax returns. Deferred tax assets and liabilities are based upon the differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities and for loss and credit carryforwards using enacted tax rates expected to be in effect in the years in which the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized.

The Company provides reserves for potential payments of tax to various tax authorities related to uncertain tax positions when management determines that it is more likely than not that a loss will be incurred related to these matters and the amount of the loss is reasonably determinable.

Revenue

In accordance with FASB ASC 606, Revenue Recognition, the Company recognizes revenue through a five-step process: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) a performance obligation is satisfied.

The Company’s source of revenue is product sales. Contracts with customers contain a single performance obligation and the Company recognizes revenue from product sales when the Company has satisfied our performance obligation by transferring control of the product to the customers. Control of the product transfers to the customer upon shipment from the Company’s third-party warehouse.

Cost of Revenues

Cost of revenues includes product costs, warehousing, overhead allocation and royalty expenses.

Research and Development

The Company expenses internal and external research and development costs, including costs of funded research and development arrangements, in the period incurred.

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Accounting for Stock-Based Compensation

The Company accounts for stock-based compensation in accordance with the guidance of FASB ASC Topic 718, Compensation-Stock Compensation (“FASB ASC Topic 718”), which requires all share-based payments be recognized in the consolidated financial statements based on their fair values. In accordance with FASB ASC Topic 718, the Company has elected to use the Black-Scholes option pricing model to determine the fair value of options granted and recognizes the compensation cost of share-based awards on a straight-line basis over the vesting period of the award.

The determination of the fair value of share-based payment awards utilizing the Black-Scholes model is affected by the fair value of the common stock and a number of other assumptions, including expected volatility, expected life, risk-free interest rate and expected dividends. The expected life for awards uses the simplified method for all “plain vanilla” options, as defined in ASC 718-10-S99 and the contractual term for all other employee and non-employee awards. The risk-free interest rate assumption is based on observed interest rates appropriate for the terms of our awards. The dividend yield assumption is based on history and the expectation of paying no dividends. Stock-based compensation expense, when recognized in the consolidated financial statements, is based on awards that are ultimately expected to vest.

Fair Value Measurements

The Company measures both financial and nonfinancial assets and liabilities in accordance with FASB ASC Topic 820, Fair Value Measurements and Disclosures, including those that are recognized or disclosed in the consolidated financial statements at fair value on a recurring basis. The standard created a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels as follows: Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and Level 3 inputs are unobservable inputs that reflect the Company’s own views about the assumptions market participants would use in pricing the asset or liability.

At June 30, 2021 and September 30, 2020, the carrying amounts of cash, accounts payables and accrued expenses and other liabilities approximate fair value because of their short-term nature. The carrying amounts for the PPP Loan, if applicable, and the Convertible Notes approximate fair value because borrowing rates and term are similar to comparable market participants.

Derivative Liabilities

The Company accounts for its warrants and other derivative financial instruments as either equity or liabilities based upon the characteristics and provisions of each instrument, in accordance with FASB ASC Topic 815, Derivatives and Hedging. Warrants classified as equity are recorded at fair value as of the date of issuance on the Company’s consolidated balance sheets and no further adjustments to their valuation are made. Warrants classified as derivative liabilities and other derivative financial instruments that require separate accounting as liabilities are recorded on the Company’s consolidated balance sheets at their fair value on the date of issuance and will be revalued on each subsequent balance sheet date until such instruments are exercised or expire, with any changes in the fair value between reporting periods recorded as other income or expense. Management estimates the fair value of these liabilities using option pricing models and assumptions that are based on the individual characteristics of the warrants or instruments on the valuation date, as well as assumptions for future financings, expected volatility, expected life, yield, and risk-free interest rate.

Financial Statement Reclassification

Certain balances in the prior year consolidated financial statements have been reclassified for comparison purposes to conform to the presentation in the current period consolidated financial statements.

Subsequent Events

The Company evaluated all events or transactions through August 12, 2021 the date which these unaudited interim consolidated financial statements were issued. There were no material subsequent events.

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Going Concern Basis of Accounting

As reflected in the consolidated financial statements, the Company has an accumulated deficit, has suffered significant net losses and negative cash flows from operations, only recently commenced generating limited operating revenues, and has limited working capital. The continuation of the Company’s business as a going concern is dependent upon raising additional capital, the ability to successfully market and sell its product and eventually attaining and maintaining profitable operations. In particular, as of June 30, 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, and therefore there is substantial doubt about the Company’s ability to continue as a going concern. The Company expects to incur substantial expenses into the foreseeable future for the research, development and commercialization of its current and potential products. In addition, the Company will require additional financing in order to seek to license or acquire new assets, research and develop any potential patents and the related compounds, and obtain any further intellectual property that the Company may seek to acquire. Finally, some of our product candidates or the materials contained therein (such as the Active Pharmaceutical Ingredients (“APIs”) for our AC5® product line), are manufactured from facilities in areas impacted by the outbreak of the coronavirus, which could result in shortages due to ongoing efforts to address the outbreak. Historically, the Company has principally funded operations through debt borrowings, the issuance of convertible debt, and the issuance of units consisting of common stock and warrants. Provisions in the Securities Purchase Agreements that the Company entered into on February 20, 2017 (“2017 SPA”) and on June 28, 2018 (“2018 SPA”) restrict the Company’s ability to effect or enter into an agreement to effect any issuance by the Company or its subsidiary of Common Stock or securities convertible, exercisable or exchangeable for Common Stock (or a combination of units thereof) involving a Variable Rate Transaction (as defined in the 2017 SPA and 2018 SPA) including, but not limited to, an equity line of credit or “At-the-Market” financing facility until the three lead investors in the 2017 Financing and the institutional investors in the 2018 SPA collectively own less than 20% of the Series F Warrants and the Series G Warrants purchased by them pursuant to the 2017 SPA and 2018 SPA, respectively.

The continued spread of coronavirus and uncertain market conditions may also limit the Company’s ability to access capital. If the Company is unable to obtain adequate capital, the Company may be required to reduce the scope, delay, or eliminate some or all of its planned activities. These conditions, in the aggregate, raise substantial doubt as to the Company’s ability to continue as a going concern.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. The consolidated financial statements do not include any adjustments that might result from this uncertainty.

3.PROPERTY AND EQUIPMENT

At June 30, 2021 and September 30, 2020, property and equipment consisted of:

    

Estimated

    

    

Useful

June 30, 

September 30, 

    

Life

    

2021

    

2020

Computer equipment

 

3 years

$

14,416

$

11,141

Furniture and fixtures

5 years

9,357

9,357

Leasehold improvements

 

Life of Lease

 

8,983

 

8,983

Lab equipment

 

5 years

 

1,000

 

1,000

 

33,756

 

30,481

Less – accumulated depreciation

 

27,717

 

25,929

Property and equipment, net

$

6,039

$

4,552

For the three months ended June 30, 2021 and 2020 depreciation expense recorded was $799 and $1,765, respectively. For the nine months ended June 30, 2021 and 2020 depreciation expense was $1,788 and $5,466, respectively.

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4.INVENTORIES

Inventories consist of the following:

    

June 30, 

    

September 30, 

    

2021

    

2020

Finished Goods

$

249,696

$

Goods-in-process

578,524

967,993

Total

$

828,220

$

967,993

The Company capitalizes inventory that has been produced for commercial sale and has been determined to have a probable future economic benefit. The determination of whether or not the inventory has a future economic benefit requires estimates by management. To the extent that inventory is expected to expire prior to being sold or used for research and development or used for samples, the Company will write down the value of inventory. The decrease in inventory as of June 30, 2021 of $139,773 to $828,220 from $967,993 as of September 30, 2020 is primarily attributed to an inventory obsolescence charge for shelf-life and product to be used for research and development and samples partially offset by an increase in costs to complete the manufacturing process.

5.STOCK-BASED COMPENSATION

2013 Stock Incentive Plan

On June 18, 2013, the Company established the 2013 Stock Incentive Plan (the “2013 Plan”). Under the 2013 Plan, during the fiscal year ended September 30, 2020, a maximum number of 28,114,256 shares of the Company’s authorized and available common stock could be issued in the form of options, stock appreciation rights, sales or bonuses of restricted stock, restricted stock units or dividend equivalent rights, and an award may consist of one such security or benefit, or two or more of them in any combination or alternative. The 2013 Plan provides that on the first business day of each fiscal year commencing with fiscal year 2014, the number of shares of our common stock reserved for issuance under the 2013 Plan for all awards except for incentive stock option awards will be subject to increase by an amount equal to the lesser of (A) 3,000,000 Shares, (B) four (4) percent of the number of shares outstanding on the last day of the immediately preceding fiscal year of the Company, or (C) such lesser number of shares as determined by the Company’s Board of Directors (the “Board”). The exercise price of each option shall be the fair value as determined in good faith by the Board at the time each option is granted. On October 1, 2020, the aggregate number of authorized shares under the Plan was further increased by 3,000,000 shares to a total of 31,114,256 shares.

As of June 30, 2021, a total of 19,899,212 options had been issued to employees and directors and 9,492,500 options had been issued to consultants. The exercise price of each option is equal to the closing price of a share of our common stock on the date of grant.

Share-based awards

During the nine months ended June 30, 2021, the Company granted 720,000 options to employees and directors and 1,775,000 options to consultants to purchase shares of common stock under the 2013 Plan.

Share-based compensation expense for awards granted during the nine months ended June 30, 2021 was based on the grant date fair value estimated using the Black-Scholes Option Pricing Model. The following assumptions were used to calculate the fair value of share-based compensation for the nine months ended June 30, 2021; expected volatility, risk-free interest rate, expected dividend yield, 0%, expected term, 5.6 years.

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Common Stock Options

Stock compensation activity under the 2013 Plan for the nine months ended June 30, 2021 follows:

Weighted

Weighted

Average

Option

Average

Remaining

Aggregate

Shares

Exercise

Contractual

Intrinsic

    

Outstanding

    

Price

    

Term (years)

    

Value

Outstanding at September 30, 2020

 

18,248,346

$

0.36

 

2.59

$

79,330

Awarded

 

2,495,000

0.15

 

 

Forfeited/Cancelled

 

(213,348)

0.44

 

 

Outstanding at June 30, 2021

 

20,529,998

0.34

 

2.15

247,403

Vested at June 30, 2021

 

17,608,293

0.36

 

2.38

97,368

Vested and expected to vest at June 30, 2021

 

20,529,998

$

0.34

 

2.15

$

247,403

As of June 30, 2021, 4,918,356 shares are available for future grants under the 2013 Plan. Share-based compensation expense recorded in the Company’s Consolidated Statements of Operations for the three months ended June 30, 2021 and 2020 resulting from stock options awarded to the Company’s employees, directors and consultants was approximately $94,000 and $145,000, respectively. Of this amount during the three months ended June 30, 2021 and 2020, $35,000 and $56,000, respectively, were recorded as research and development expenses, and $59,000 and $89,000, respectively were recorded as general and administrative expenses in the Company’s Consolidated Statements of Operations. Share-based compensation expense recorded in the Company’s Consolidated Statements of Operations for the nine months ended June 30, 2021 and 2020 resulting from stock options awarded to the Company’s employees, directors and consultants was approximately $269,000 and $561,000, respectively. Of this amount during the nine months ended June 30, 2021 and 2020, $89,000 and $243,000, respectively, were recorded as research and development expenses, and $180,000 and $318,000, respectively were recorded as general and administrative expenses in the Company’s Consolidated Statements of Operations.

During the nine months ended June 30, 2021 and 2020, no stock options awarded were exercised.

As of June 30, 2021, there is approximately $218,000 of unrecognized compensation expense related to unvested stock-based compensation arrangements granted under the 2013 Plan. That cost is expected to be recognized over a weighted average period of 1.23 years.

Restricted Stock

On October 14, 2020, the Company awarded 50,000 shares of Restricted Stock to a consultant. The shares subject to this grant were awarded under the 2013 Plan and vested 90 days from the date of the award. On January 27, 2021, the Company awarded 500,000 shares of Restricted Stock to a consultant. The shares subject to this grant were awarded under the 2013 Plan and vested immediately.

On July 19, 2018, the Company awarded 745,000 shares of Restricted Stock to members of the Board of Directors and management and 220,000 shares of Restricted Stock to a consultant. The shares subject to this grant were awarded under the 2013 Plan and vested on the second anniversary of the date of grant. In addition, in the event of a Change of Control (as such term is defined in the 2013 Plan), 100% of the grants will immediately vest. As of September 30, 2020, all restricted shares have vested.

Restricted stock activity in shares under the 2013 Plan for the nine months ended June 30, 2021 and 2020 follows:

    

2020

    

2019

Non Vested at September 30, 2020 and 2019

 

 

965,000

Awarded

 

550,000

 

Vested

 

(550,000)

 

Forfeited

 

 

Non Vested at June 30, 2021 and 2020

 

 

965,000

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The weighted average restricted stock award date fair value information for the nine months ended June 30, 2021 and 2020 follows:

    

2020

    

2019

Non Vested at September 30, 2020 and 2019

$

$

0.57

Awarded

 

0.19

 

Vested

 

(0.19)

 

Forfeited

 

 

Non Vested at June 30, 2021 and 2020

$

$

0.57

For the three months ended June 30, 2021 and 2020 compensation expense recorded for the restricted stock awards was approximately $0 and $39,000, respectively. For the nine months ended June 30, 2021 and 2020 compensation expense recorded for the restricted stock awards was approximately $104,000 and $119,000, respectively.

6.Issuance and Treatment of the Series D, Series and Series J Warrants

Beginning June 22, 2015 and through June 30, 2015, the Company entered into a series of substantially similar subscription agreements (each a “Subscription Agreement”) with 20 accredited investors (collectively, the “2015 Investors”) providing for the issuance and sale by the Company to the 2015 Investors, in a private placement, of an aggregate of 14,390,754 Units (“Unit”) at a purchase price of $0.22 per Unit (the “2015 Private Placement Financing”). Each Unit consisted of a share of Common Stock (the “2015 Shares”) and a Series D Warrant to purchase a share of Common Stock at an exercise price of $0.25 per share at any time prior to the fifth anniversary of the issuance date of the Series D Warrant (the “Series D Warrants” and the shares issuable upon exercise of the Series D Warrants, collectively, the "2015 Warrant Shares”). The Company did not engage any underwriter or placement agent in connection with the 2015 Private Placement Financing, and the aggregate gross proceeds raised by the Company in the 2015 Private Placement Financing totaled approximately $3,200,000.

Beginning May 24, 2016 and through May 26, 2016, we entered into a series of substantially similar subscription agreements (each a “2016 Subscription Agreement”) with 18 accredited investors (collectively, the “2016 Investors”) providing for the issuance and sale by the Company to the 2016 Investors, in a private placement, of an aggregate of 9,418,334 Units at a purchase price of $0.36 per Unit (the “2016 Private Placement Financing”). Each Unit consisted of a share of Common Stock, and a Series E Warrant to purchase 0.75 shares of Common Stock at an exercise price of $0.4380 per share at any time prior to the fifth anniversary of the issuance date of the Series E Warrant (the “Series E Warrants” and the shares issuable upon exercise of the Series E Warrants, collectively, the “Series E Warrant Shares”). The exercise price of the Series E Warrants was set to equal the closing price of our Common Stock on the date of their issuance (May 26, 2016), which was $0.4380, and therefore the Series E Warrants were not issued at a discount to the market price of our Common Stock as of such date. The gross proceeds to Arch were approximately $3.4 million before deducting financing costs of approximately $281,000.

On June 3, 2020, the Company entered into an agreement (the “Agreement”) with the holders of a majority (the “Majority Holders”) of the outstanding Series D Warrants (the “Warrant”) resulting in approximately $850,000 of proceeds as a result of the full exercise of their Warrants. The Agreement provides for the reduction of the Series D Warrant exercise price from $0.25 to $0.18 per share, and the elimination of a provision that prevents the Series D Warrants from being exercised if the holder’s beneficial ownership would exceed 4.9% as a result. Under the terms of the Agreement, in exchange for fully exercising their remaining Warrants for 4,727,273 shares of common stock on June 4, 2020, the Majority Holders were issued Series J Warrants to purchase 3,545,454 shares of common stock at an exercise price of $0.25 over a 1 year term.

On June 22, 2020, the Company entered into a Series J Warrant Issuance Agreement (the “Keyes Sulat Agreement”) with the Keyes Sulat Revocable Trust (the “Trust”), also a holder of outstanding Series D Warrants, resulting in approximately $82,000 of proceeds as a result of the full exercise of the Trust’s Warrants. Under the terms of the Keyes Sulat Agreement, in exchange for fully exercising the Trust’s remaining Warrants for 454,546 shares of common stock on June 22, 2020, the Trust was issued Series J Warrants to purchase 340,910 shares of common stock at an exercise price of $0.25 over a 1 year term. James R. Sulat, a member of the Board, is a co-trustee of the Trust, of which members of Mr. Sulat’s immediate family are beneficiaries. Mr. Sulat disclosed his interest in the Trust to the Board prior to its approval of the transaction and abstained from voting on the transaction.

On November 6, 2020, as consideration for investment in the Convertible Notes, the Company entered into that certain Amendment to Series J Warrant to Purchase Common Stock, a holder of a Series J Warrant exercisable for up to 3,375,000 shares of Common Stock, to extend the term of the Series J Warrant from one (1) year to thirty (30) months.

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During the year ended September 30, 2020, Series D Warrants had been exercised on a cash basis for an aggregate issuance of 5,181,819 shares of the Company’s common stock resulting in gross proceeds to the Company of $932,728. As of September 30, 2020, 3,792,570 Series D Warrants expired. During the three and nine months ended June 30, 2021 and 2020, no Series E and Series J Warrants have been exercised. As of June 30, 2021, 4,214,582 Series E Warrants expired.

Equity Value of Warrants

The Company accounted for the Series D, Series E and Series J Warrants in accordance with ASC 815-40, Derivatives and Hedging. Because the Series D, Series E and Series J Warrants are indexed to the Company’s stock, they are classified within stockholders’ equity (deficit) in the accompanying consolidated financial statements.

7.REGISTERED DIRECT OFFERINGS

On September 30, 2016, the Company filed a registration statement with the SEC utilizing a “shelf” registration process, which was subsequently declared effective by the SEC on October 20, 2016 (such registration statement, the “Shelf Registration Statement”). Under the Shelf Registration Statement, the Company may offer and sell any combination of its Common Stock, warrants, debt securities, subscription rights, and/or units comprised of the foregoing to raise up to $50,000,000 in gross proceeds

On February 20, 2017, the Company entered into Securities Purchase Agreement (the “2017 SPA”) with 6 accredited investors (collectively, the “2017 Investors”) providing for the issuance and sale by the Company to the 2017 Investors of an aggregate of 10,166,664 units at a purchase price of $0.60 per Unit in a registered offering (the “2017 Financing”). The securities comprising the units sold in the 2017 Financing were issued under the Shelf Registration Statement, and consisted of a share of Common Stock, a Series F Warrant equal to 55% of the shares of Common Stock at an exercise price of $0.75 per share at any time prior to the fifth anniversary of the issuance date of the Series F Warrant subject to certain restrictions on exercise (the “2017 Warrants” and the shares issuable upon exercise of the 2017 Warrants, collectively, the “2017 Warrant Shares”).

On June 28, 2018, the Company entered into a Securities Purchase Agreement (“2018 SPA”) with 8 accredited investors (“2018 Investors”) providing for the issuance and sale by the Company to the 2018 Investors of an aggregate of 9,070,000 units at a purchase price of $0.50 per Unit in a registered offering (“2018 Financing”). The securities comprising the units sold in the 2018 Financing were issued under the Shelf Registration Statement, and consisted of a share of Common Stock, a Series G Warrant to purchase up to a number of shares of our common stock equal to 75% of the shares of Common Stock at an exercise price of $0.70 per share at any time prior to the fifth anniversary of the issuance date of the Series G Warrant subject to certain restrictions on exercise (“2018 Warrants”) and the shares issuable upon exercise of the 2018 Warrants.

On May 12, 2019, the Company entered into a Securities Purchase Agreement (“2019 SPA”) with 5 accredited investors (“2019 Investors”) providing for the issuance and sale by the Company to the 2019 Investors of an aggregate of 8,615,384 units at a purchase price of $0.325 per Unit in a registered offering (“2019 Financing"). The securities comprising the units sold in the 2019 Financing were issued under the Shelf Registration Statement, and consisted of a share of Common Stock, and a Series H Warrant to purchase one share of Common Stock at an exercise price of $0.40 per share at any time prior to the fifth anniversary of the issuance date of the Series H Warrant subject to certain restrictions on exercise (“the 2019 Warrant Shares”) and the shares issuable upon exercise of the 2019 Warrants, (“2019 Warrant Shares”).

During the nine months ended June 30, 2021 and 2020, no Series F, Series G and Series H Warrants had been exercised. As of June 30, 2021, up to 5,591,664, 6,802,500 and 8,615,384 shares may be acquired upon the exercise of the Series F, Series G and Series H Warrants, respectively.

8.DERIVATIVE LIABILITIES

The Company accounted for the Series F Warrants relating to the 2017 Financing, the Series G Warrants relating to the 2018 Financing and the Series H Warrants relating to the 2019 Financing in accordance with ASC 815-10, Derivatives and Hedging. Since the Company may be required to purchase its Series F, Series G and Series H Warrants for an amount of cash equal to $0.18, $0.11 and $0.0533, respectively for each share of Common Stock (“Minimum”) and the underlying Series F, Series G and Series H Warrants are not classified within stockholders’ equity (deficit), they are recorded as liabilities at the greater of the minimum or fair value. They are marked to market each reporting period through the consolidated statement of operations.

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On the respective closing dates, the Series F, Series G and Series H derivative liabilities were recorded at an aggregate fair value of $1,628,113. Given that the fair value of the derivative liabilities were less than the net proceeds, the remaining proceeds were allocated to Common Stock and additional-paid-in-capital. During the three months ended June 30, 2021 and 2020, $0 and $337,333 was recorded to decrease the fair value of derivative liability, respectively. During the nine months ended June 30, 2021 and 2020, $108,944 and $719,831 was recorded to decrease the fair value of derivative liability, respectively.

Fair Value Measurements Using Significant Unobservable Inputs - June 30, 2021

    

    

 

(Level 3)

    

Series F

    

Series G

    

Series H

Beginning balance at September 30, 2020

$

1,000,000

$

748,275

$

568,144

Issuances

Adjustments to estimated fair value

 

 

(108,944)

Ending balance at June 30, 2021

$

1,000,000

$

748,275

$

459,200

Fair Value Measurements Using Significant Unobservable Inputs - September 30, 2020

    

    

 

(Level 3)

    

Series F

    

Series G

    

Series H

Beginning balance at September 30, 2019

$

1,000,000

$

748,275

$

1,247,415

Issuances

Adjustments to estimated fair value

 

 

(679,271)

Ending balance at September 30, 2020

$

1,000,000

$

748,275

$

568,144

The derivative liabilities were valued as of June 30, 2021 using the Black Scholes Model with the following assumptions:

    

Series F

    

Series G

    

Series H

Closing price per share of common stock

$

0.095

$

0.095

$

0.095

Exercise price per share